INCOME inequality is a pervasive global issue, and Malaysia is no exception. In this Southeast Asian nation, the middle class finds itself wedged between the affluent elite and the lower-income segments of the population, embodying a metaphorical “sandwich”.
Imagine this scenario: You earn a decent income, enough to afford a comfortable life, but you’re far from being classified as wealthy. This is the situation faced by middle-class individuals in Malaysia, often colloquially known as the M40 group.
However, there’s a twist in their story. Unlike bottom 40% (B40) households who receive financial aid and support from the government to alleviate their financial hardships, the M40s do not benefit from these programmes.
At the same time, they don’t enjoy the same privileges and advantages as the affluent top 20% (T20) segment of society.
It’s like being caught in the middle, trying to make ends meet without the safety net of assistance, yet without the benefits of substantial wealth.
Let’s explore three primary factors contributing to the sensation of being economically sandwiched among the M40 group in Malaysia.
The first key factor contributing to the M40’s economic sandwiching is their exclusion from subsidies and financial assistance originally intended for the B40s.
In Malaysia, rightly so, subsidies and financial assistance programmes predominantly target individuals falling below a specified income threshold, particularly the B40 group.
Notwithstanding, as the government prepares to introduce a targeted subsidy programme by next year, the M40s may find themselves excluded from most of these initiatives, thus bearing the full impact of rising prices without government support.
This economic challenge further compounds their predicament, as they grapple with the ever-increasing cost of essential commodities.
The second factor is the taxation policies, which play a pivotal role in generating the sense of being “sandwiched” for Malaysia’s M40s.
Like many countries globally, Malaysia employs a progressive income tax system. This progressive structure implies that as individuals earn more income, they are subject to higher tax rates.
The fundamental premise of progressive taxation is to distribute the tax burden equitably, with those earning more contributing a larger share of their income in taxes.
However, in practice, the M40s often finds itself nudged into higher tax brackets. This occurs because their earnings exceed the lowest tax rates but fall short of reaching the income thresholds that would grant them substantial income tax breaks, which are often enjoyed by higher-income individuals.
In concrete terms, according to the Department of Statistics Malaysia (DOSM), as of 2022, an M40 family in Malaysia will have a combined annual income of RM76,056 (monthly median income of RM6,338).
In this scenario, a substantial portion of their hard-earned income may be siphoned off in taxes.
This financial allocation to taxes renders financial planning and resource allocation for crucial objectives, such as their children’s education or investments in assets like a home, increasingly challenging.
While grappling with the financial implications of tax allocation, the M40s also face third, formidable obstacle: securing affordable housing.
Despite the existence of government initiatives aimed at providing cost-effective housing for low-income families, the M40s are frequently excluded due to their income levels.
This exclusion results in a limited range of housing options, often forcing M40 households into expensive private housing or rental accommodations.
These arrangements significantly increase their financial outflows and further intensify their economic squeeze.
The M40s are consequently faced with the challenging dilemma of either committing a substantial portion of their income to housing expenses or compromising on their living standards.
Additionally, the burden of education weighs heavily on the M40s. While scholarships and financial aid programmes exist for students from the B40 households in Malaysia, M40 households are expected to shoulder most, if not the full burden of tuition fees for their children’s higher education.
This inequality in educational access erects significant barriers to upward mobility and perpetuates the cycle of M40s’ financial strain.
Prosperous M40s, and by extension, middle-income households are essential for a country’s well-being as they contribute to economic stability and growth.
Their financial security and disposable income drive consumer spending, which fuels domestic demand and supports various enterprises, especially small and medium ones, thereby fostering economic expansion and job creation.
Robust middle-income households also enhance social cohesion by reducing income inequality, promoting a more equitable society, and reducing the strain on social safety nets.
For instance, countries like Germany, known for its prosperous middle class, have a strong manufacturing base, a well-functioning social safety net, and a high level of economic competitiveness.
Similarly, Canada’s middle class has contributed to its economic stability and high standard of living, thanks to a combination of factors like resource wealth and a focus on education and social welfare.
Addressing M40s’ predicament necessitates a concerted effort through progressive taxation reforms, targeted subsidies that are going to be enjoyed by the M40s too, and enhanced access to affordable housing and education.
By doing the above, the M40s can be empowered to navigate a path toward prosperity and no longer feel perpetually trapped in the economic “sandwich”. – Oct 12, 2023
The author is a Senior Lecturer at the Department of Finance, Faculty of Business and Economics, Universiti Malaya, and may be reached at [email protected].
The views expressed are solely of the author and do not necessarily reflect those of Focus Malaysia.
Main pic credit: Malay Mail