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FISCAL POLICY Question 1 If a country's central bank were to engage in stabilization policy using fiscal policy, what would be the response by this country's central bank for the following events and why? a) The unrest in Iraq has put supplies of oil at risk which pushes its price higher. b) In UK, income rose an average of 10.5 per cent in the first quarter of the 2018-19 financial year across the top 100 firms. C) A collapse in share prices in the United States has the potential to cause widespread economic disruption. d) On March 11, 2019, a devastating 9.0 earthquake struck Japan's east coast, followed minutes later by a massive tsunami with 100-foot waves had caused a massive disaster where 138,000 buildings were destroyed and $360 billion in economic losses were incurred.Question 2 Highlights of the Malaysian Budget 2019 On 2 November 2018, the Malaysian Budget 2019 ("Budget") was unveiled by the Finance Minister, YB Tuan Lim Guan Eng. The Budget 2019 carries the theme "Credible Malaysia, Dynamic Economy, Prosperous Rakyat". The Budget focuses on three key areas: (@) implementing institutional reforms; () ensuring the socio-economic well-being of Malaysians; and (iii) fostering an entrepreneurial economy. The detailed highlights as follows: The government's real debt and liability as at June 2018 was at RM1,065bil, RM350bil higher than the amount by the previous Government. Government expects GDP to grow 4.9% in 2019 despite uncertainties in the global economy. Government noticed the previous administration secretly paid RM7bil of 1MDB debt as at April 30, 2018. Government may need to pay as much as RM43.9bil to settle 1MDB debts. Government to table Fiscal Responsibility Act by 2021 to avoid uncontrolled spending. 0 As at Oct 15, international reserves amounted to US$102.8bil or RM426bil, sufficient to cover 7.4 months of retained imports. The inflation rate remained low at 1.2% for the period January to September 2018. 0 Fiscal deficit in 2018 to reach 3.7%. The increase was due to expenditure commitment by the previous administration. Pakatan administration committed to implement fiscal consolidation steps to reduce deficit to 3.4% of the GDP in 2019, 3% by 2020 and 2.8% in 2021. 0 Government to establish Debt Management Office (Pejabat Pengurusan Hutang) to review and check government debts and liability. 0 For 2019, Federal Government's official debt as a percentage of GDP to reach 51.8% while total liability expected to lower to 73.5%. Government will continue the LRT3 project with a savings of 47% from the initial estimated cost of RM31.6bil to RM16.6bil. Government will be able to save RM15bil based on the announcement The MRT2 will also continue with a savings of 22.4% from the initial estimated cost of RM39.3bil to RM30.5bil. O The RM5.2bil Klang Valley Double Tracking Project will be re-tendered through open tender and is expected to provide substantial cost savings J Under the GST, 545 goods were zero-rated while under SST, almost 10 times more the items were exempted from SST. O Based on preliminary studies by the Ministry of Domestic Trade and Consumer Affairs, 70% or 291 of the 417 products and services that have been inspected saw prices drop in September 2018. 0 Government to create a Real Estate Investment Trust (REIT) for its airports. Through this initiative, the government is expected to rake in RM4bil, disposing 30% of the REIT equity. 0 Government will introduce a credit system for sales tax deduction from January next year. The credit system will avoid double taxation and lower business costs O Effective Jan 1, 2019, the government will grant SST exemptions to specific services provided by registered businesses to other registered businesses0 The finance minister says the government will also introduce a tax cut credit system for small manufacturers who purchase source materials from importers and not registered factories. The Inland Revenue Board (LHDN) to look into and investigate "extraordinary wealth" such as owning luxurious goods including jewellery watches, handbags, luxury cars or real estates. Starting Jan 1, 2019, the government will tax imported services to ensure that local service providers such as architects, graphic designers, software developers can compete more competitively. J Online services imported by users will also be required to register with the Customs Department from Jan 1, 2020. This includes software, music, videos, or any digital advertising The Government will launch a Special Voluntary Disclosure Programme, giving taxpayers an opportunity to voluntarily declare any unreported income O After successfully re-introducing SST, Customs Department will beef up enforcement on smuggling of cigarettes 0 Government to impose levy for all passengers travelling overseas via air routes starting June 1, 2019, RM20 for passengers travelling to Asean countries and RM40 for other countries. 0 For companies, non-citizens and non-PR holders, real property gains tax will be increased from 5% to 10%. For citizens and those with PR, real property gains tax will be increased from 0% to 5%. 0 Government hopes to get back at least RM1bil from efforts to combat smuggling and fraudulent activities that were previously unrecoverable. 0 Stamp duties for property transfers worth more than RM1mil will be raised by 1 percentage point from 3% to 4%. 0 Casino licence will be increased from RM120mil to RM150mil annually; casino duty will be raised to 35% on gross income. O In 2019, the Federal Government is expected to collect revenue of RM261.8bil, comprising a special dividend of RM30bil from Petronas. Government will subsidise RON 95 petrol for those with cars with the engine capacity of 1,500cc, and under, and those with motorcycles with engine capacity of 125cc and under. 0 Subsidy will be RM0.30 per litre and capped at 100 litres a month for cars and 40 litres a month for motorcycles. Price of RON 95 will be floated after subsidy is put in place. Government will allocate RM10mil to work with NGOs and social enterprises to help underprivileged communities. O Minimum wage to increase to RM1,100 nationwide starting Jan 1, 2019 O Government will continue and improve the financial aid (Baptuan Sara Hidup) to the 840 group by providing more targeted assistance. Households with monthly income of RM2,000 and below will receive RM1,000 Monthly income from RM2,001 to RM3,000 and below will receive a total of RM750 OO OO Monthly income from RM3,001 to RM4,000 will receive a total of RM500. Government will introduce an additional aid (BSH) of RM120 for each child aged 18 years and below, to be limited to four persons, except disabled persons (OKU) with no age limit. It is estimated that 4.1 million households will continue to receive financial assistance from the government with a total allocation of RM5bil. O Government to spend RM1.5bil on affordable housing. To help those earning no more than RM2,300, a fund will be set up byb, Bank Negara for homes up to RM150,000 at interest rate of 3.5% through selected banks.J Monthly electricity subsidy will be given to the poor and hardcore poor registered with the e-Kasih program, the subsidy rate is increased to RM40 per month and will benefit 185,000 accounts. An allocation of RM80 million will be provided. B40 National Health Protection Fund - Protection for four major critical illnesses up to RM8,000 and maximum 14 days of replacement income during hospital treatment at RM50 /day or equivalent to RM700 /year. 3 From Jan 1, 2019, no tolls for motorcycles on the First and Second Penang Bridge and the Second Link in Johor 3 Real Estate and Housing Developers' Association Malaysia (Rebda) agrees to reduce house prices as much as 10% for houses which are not subject to price control for new projects. RM5.9bil allocation earmarked for Defence Ministry and Home Ministry. OO RM50mil set aside to treat patients with rare diseases, Hepatitis C and other initiatives. Labour laws to be reviewed to improve labour market, ensure workers' well-being and prevent discrimination by employers. A one-off assistance of RM500 will be paid to pensioners who are receiving pensions of less than RM1,000. Public transportation users can buy RM100 monthly passes for unlimited trips on RapidKI. rail or bus services starting from January 2019. There is also a RM50 monthly pass for those who only use RapidKI busses. This scheme will be expanded to other bus companies in stages. To encourage the hiring of those above the age of 60 who want to work, the government proposes that their mandatory EPF contributions be reduced from 6% to 4% There will also be tax incentives for companies that hire senior citizens, with a salary limit of RM4,000 a month. Government has allocated RM10mil annually to extend medical benefits to parents of contractual civil servants. 3 Contractual civil servants whose children have infectious diseases will be eligible for quarantine leave. Soda Tax - Government to introduce excise duty at 40 cents per litre on two categories of sugary drinks which are manufactured in the form of ready-to-drink packaging. starting April 1, 2019. - Beverages containing sugar or other sweeteners containing sugar exceeding 5 grams per 100ml - Fruit juices and vegetables containing sugar more than 12 grams per 100ml. The Securities Commission has approved the framework for the equity-generation fund platform and P2P lending. To date, a total of RM170mil has been raised by 450 companies from various sectors through these platforms The government will freeze toll charges on all highways in the city in 2019 with an estimated budget RM700mil. To promote digital economy, the government will implement the National Fiber Optic and Connectivity Plan (NFCP) with an allocation of RM1bil. - The plan aims to develop the nation's broadband infrastructure. In addition, the target broadband service speed is 30mbps in rural areas and remote areas within five years to enable Malaysia to achieve world-class infrastructure at an affordable price.The Government will also enforce the Mandatory Standard Access Pricing (MSAP) to reduce fixed line broadband prices by at least 25% by the end of 2018. O Loan deductions for students from B40 households who get first class results. O Government has earmarked 380 acres of land in Pulau Indah as a Free Trade Zone to support and catalyse shipping and logistics activities in Port Klang. 0 Khazanab Nasional will develop 80 acres of land in Subang as a world class aerospace hub. Khazanah will work MARA in producing high-skilled manpower to meet industry needs O Government will implement the Biodiesel B10 Programme (a mixture of 10% palm oil content) for the transport sector and B7 for the industrial sector in 2019. Based on the above: ) which items that can be categorized as government operating expenditure b) What would be the impact to the following party when the government lowering the individual income tax rates? To the households To the government c) which type of discretionary fiscal policy the government is using for the above budget - expansionary fiscal policy or contractionary fiscal policy? Briefly explain your