Kuala Lumpur, 14 December 2018- IDEAS has today published a brief titled: “Potential Deadweight Loss of Departure Levy” The paper warns that the departure levy announced by the government in Budget 2019 will impact tourism in Malaysia, with a knock on impact on the wider economy. The government’s new departure levy will apply to anyone leaving the country via air transport from June 2019. The proposed rate is RM20 for flights within ASEAN, and RM40 to all other international destinations. The paper provides a preliminary analysis and suggests that a throughout impact assessment should be undertaken before the policy is introduced, to avoid creating a “deadweight loss” whereby more damage is done to the economy by the new levy than is raised by the government in new revenue,

The paper estimates that:

• The new levy will widen the competitiveness gap between Malaysia and other destinations in the region, with the additional charges applied to air travel being 7% – 9 % more than for neighbouring counties (Thailand, Indonesia and Singapore) after the levy is introduced;
• The new levy will reduce demand for tourism in Malaysia – based on the price sensitivity calculated by IATA, the new levy will reduce the number of tourists coming to Malaysian by over 500,000 in 2020. This is in addition to slower growth in tourism already predicted by the government;
• Based on the average expenditure by tourists, this will result in nearly RM1.8 billion less being spent in the Malaysian economy by tourists. Significantly less than the roughly RM400 million that will be raised in government by the levy in 2020. This is based on the expected price increase for short haul, intra-Asia flights on Full Service Carrier. It does not include the potential reduction in long haul tourism. This is only a preliminary estimate and should be refined through a thorough impact assessment. Nevertheless it highlights the impact of the proposed levy.
• The air transport sector also supports wider economic development, including promoting trade and attracting investment. These benefits could also be undermined by the increased cost of air transport as a result of the new departure levy.

Given these potential impacts, the paper questions whether introduction of the departure levy is the right move. The paper suggests that a thorough impact assessment be undertaken and that the government rethink its approach.

A full report can be downloaded here