The middle-class, who are generally “neither rich nor poor”, finds it difficult to sustain their lives. While the poor qualify to receive various benefits from government’s welfare programs, the middle-class on the other hand are considered “too rich” to qualify for any support. According to a Household Income Survey 2022, middle class income (M40) is between RM 5,250 and RM 11,819 which represents the middle 40% of household incomes in Malaysia. Ironically, according to the Department of Statistics Malaysia (DOSM), a family of four members needed at least an average disposable income of RM7000 a month to live within their means in Kuala Lumpur. Thus, if you have a base income of around RM5,000, it is considered low or unsustainable to even have a basic living in Kuala Lumpur.
It is a familiar sight to find an M40 family members often struggles to make ends meet and put food on the table, especially with the rising cost of living (more severe if the M40 has a bigger size household). They are likely to face challenges due to exclusion from state assistance, with now higher utility bills and higher prices of imported goods. Sluggish economic growth in Malaysia will dampen business earnings and lead to slower growth in household incomes which contribute to the stagnation of M40 salaries has put significant financial strain on this income group. The stagnant salaries occur at least for the past 3-4 years from 2019 to 2022 with the income growth rate being lower (8.4%) compared to other income groups.
In Malaysia, policy instruments, i.e subsidies, bear a long history in providing the then prevalent poverty with the objectives to eradicate it. Based on the Ministry of Finance’s (MOF) official portal, in 2022 Malaysia recorded the largest subsidy of RM 77.3 billion (which surged to 2.9% of GDP) just to reduce cost of living for the people. For example, the total subsidies covered by petrol, diesel, and liquefied petroleum gas contributed a quarter from the budget (RM 37.3 billion), more than the total health budget in 2019, over double that of social assistance, and four-fifths for education.
Figure 1 shows the trend of subsidy outlays (2000-2022) in Malaysia which shows a significant increase over the years, with notable fluctuations and peaks in certain periods. This indicates that Malaysia has been allocating substantial funds towards subsidies, particularly for fuel, interest rates, agricultural inputs, cooking oil, electricity, toll compensation and other items. As mentioned above, total subsidies in 2022 is the highest due to COVID-19, geopolitical tensions and climate change impacting global commodity prices.
For decades, while Malaysia was pushing for socio-economic growth to become a more developed and prosperous nation, the subsidy was aimed to improve the well-being and ease the cost of living of the rakyat. During 2012 to 2022, the Government spent RM223.5 billion on subsidies or 8.9% of the total operating expenditure.
On the other hand, the middle class in Malaysia faces a higher tax burden due to the progressive nature of the tax system itself. As their income increases, they are subject to higher tax rates, impacting their take-home pay and financial planning.
Based on the PriceWaterhouseCoopers (PwC) report 2023, before the implementation of tax reduction, the M40 (Level M1 until M3 – income between RM 35,001 and RM 100,000 yearly) are subjected to a tax rate of 8%. The higher tax rate contributed to a significant portion of their income being allocated to taxes, impacting their finances.
In 2023, the tax rate for M40 (Level M1) was reduced to 6%. This contributes to 39.9% (Income Tax) from RM 386,140 million of the total tax revenue in 2023.
Several factors contribute to this issue:
- Subsidies
- Lack of targeted assistance
- Slow income growth
- Taxes
- Income inequality
- Tax Burden