What will happen to Malaysian economy when GST rate reduces to 0%?
Thread on Economic 101
Thread on Economic 101
Theoretically, there will be 2 scenarios. The first one is for short-term (< 1 month) where prices go down, people like you and me will go on a shopping spree. Tambah pula musim nak Raya, mega raya sale + no GST will surely push people to buy things at a massive scale.
When people spend in the economy, it means the economy will grow. For example, if you spend RM10 to buy nasi kerabu from akak at the bazaar, that RM10 is that akak nasi kerabu punya income. That akak will use that RM10 give duit belanja to her son and her son
her son then might use that RM10 to buy chocolate at 7e. Then that RM10 is now at 7e owner and the list will go on. This is what we call as "Multiplier Effect". Whenever people like you and me in the economy is spending, we will create a multiplier effect
and thus with multiplier effect, our economy will grow well. Key point is: Higher consumption means higher economic growth.
The second scenarios is for the longer term (> 1 month). This is a point where we assume seller and businesses not increase their production and will sell whatever stock that they have.
Meaning, assuming a shop selling sports shoe, if they have 100 pairs, they will try to sell all 100 pairs first before re-stock another 100 pairs. So while waiting to restock, they might face too much demand in the economy.
Meaning too many people buying from their businesses and consumer will start to bid for higher prices to get that limited stock. In short, when demand is higher given the supply is fix, prices in the economy will go up.
Okay let's me bring you to a theoretical scenario; Imagine a world where there is only 1 pen exist and is selling by A for RM1. But imagine there are 100 peoples want to buy that 1 pen. Person 1 come to A and offer RM1 to buy.
But then person 2 come to A and offer RM10 to buy that pen, but then person 3 can come to A and offer even higher price. The list will go on until there is no more bidder, as a seller it is normal for them to sell it to the one that can pay highest amount for that pen.
So in the longer term for GST 0% situation, businesses can increase its price due to limited supply but too much demand in the market. In short, higher demand with limited supply will lead to higher prices.
Hence my conclusion for what happen to Malaysian economy when GST reduces to 0% is uncertain. We wouldn't know what will happen since both buyer and seller have their own behaviour that will govern by the market.
If you were ask me, enjoy while you can if you found cheaper goods and services. But remember, there will always a cause and effect in the economy. We have to see what will happen when new government re-introduce consumption tax to replace GST 😉 Cheers!
