Putrajaya urged to reward states that attract investments, grow economies

GEORGE TOWN: States that grow their economies, attract investment and generate more revenue should receive more federal funding, says the technical director of urban transformation organisation Think City.

Speaking at a forum on federal-state relations at the Penang Institute here today, Stuart MacDonald said Malaysia should reduce the states’ dependence on annual decisions or political bargaining for federal funding.

He said states needed greater incentives to expand their economies, because under the current system, most tax revenue goes to the federal government.

He said a better system would allow states to benefit more directly from contributing to national economic growth.

“There would then be an incentive to grow the economy, and everybody would win,” he said.

MacDonald said Malaysia could learn from countries such as Mexico, Brazil and India, which have sought to give states greater fiscal roles after years of strong central control.

He said some countries rewarded states that improved tax collection, attracted investment and expanded local economic activity.

According to MacDonald, Malaysia already had grant mechanisms that could be strengthened to reward states that contributed to economic growth, such as the revenue growth grant, which is meant to reward states when federal revenue rises sharply.

However, he said, the grant had been capped at RM250 million since 2007 and had rarely been used.

He said part of the grant was allocated at ministerial discretion, raising questions over the system’s clarity and transparency.

MacDonald said Putrajaya retained about 90% to 95% of national tax revenue, possibly the highest share among federations in the world, but the exact figure was unclear because the data was not transparent enough.

He said yearly federal decisions made it hard for states to plan ahead, especially for long-term development projects.

MacDonald called for Putrajaya to start with simple reforms, such as making the National Finance Council’s processes more transparent and publishing how federal grants are decided.

He said states should be allowed to generate more of their own revenue, including through tourism levies, congestion charges, vacant property taxes or state development banks.

MacDonald added that all this could be done without amending the Federal Constitution, with states working out agreements with federal ministries to handle certain services at a local level.