October 6, 2012
A Budget’s responsibility
Last updated on 5 October 2012 – 12:57am
by Tricia Yeoh@www.thesundaily.my
OVER the past two weeks, several documents were unveiled for public scrutiny. Prime Minister Datuk Seri Najib Razak tabled Budget 2013 for debate in Parliament a week ago, and PR Leader Datuk Seri Anwar Ibrahim released the Pakatan Rakyat Shadow Budget 2013 two days earlier.
The budget debate in Parliament has been less than substantive, especially given the fact that no cabinet ministers were in the chambers during Anwar’s response to the budget.
The budget is essentially the key financial document that indicates how much of the national funds will be spent for the following year. Together with the Auditor-General’s Report – traditionally tabled at the same time as the budget but which has been delayed two weeks for the second time running – and the Economic Report, these three documents form the measure against which the public evaluates government performance.
For 2013, the federal government will spend RM251.6 billion, an increase of 2.3% from this year’s budget of RM246 billion (including the supplementary budget amount).
Fiscal responsibility
One main challenge of a budget is to find the right balance between public spending and national savings. Although it is reported that we have accomplished a lower budget deficit of 4.7% of GDP in (the first half of) 2012, the country is running a budget deficit for the 16th consecutive year. More alarmingly, our public debt has grown to RM502.4 billion, 53.7% of GDP, which is the highest in our history and just below the statutory debt limit of 55%.
To exercise fiscal responsibility is to ensure revenue is more than sufficient to 
finance expenditure. But this in itself presents a conundrum. Because oil and gas income contributes more than one third of the Federal government revenue, and these are non-renewable and unsustainable over the long term, alternative revenue streams ought to be solicited.
The generous 100%, 10-year tax holidays given to Tun Razak Exchange (TRX)-status companies and qualified companies in petroleum refinery activities, would certainly not help to generate additional revenue.
Although not directly mentioned, Najib’s budget speech alludes to the introduction of the GST, where “the transition from income-based taxation system to a more comprehensive and fair taxation system will eventually benefit the rakyat”. It is unclear as to when or how this will be executed, and more information would be welcome. It may not, however, be the best time to introduce a steep taxation scale given an unstable global economic outlook which will affect Malaysia.
On the note of transparency, the government has fallen into the practice of tabling exorbitant supplementary budgets during a separate parliamentary sitting. This means actual spending is always higher than the amount tabled during the budget speech each year, an unhealthy practice which should be stopped.
People-friendly
The term “people-friendly budget” has been used almost annually, and this year has been no exception. Given that this is Najib’s final budget before the next general election, there were goodies for selected sectors. For instance, a 73.4% increase of development expenditure is allocated to “agriculture and rural development”. This comes with the knowledge that Barisan Nasional ’s traditional supporters lie in the outskirts and smaller towns.
However, compare this with the significant reduction in development expenditure on “social services”, a fall of 18.5% compared with the year before. Of this, the government will spend RM6.49 billion worth of development expenditure on “education and training” in 2013, 24.1% less than in 2012. Since the government is about to launch fresh programmes stated within the Malaysia Education Blueprint 2013-2025, one would have imagined an even higher increase of development expenditure on education in the coming year.
Much ado has also been made about the Bantuan Rakyat 1Malaysia 2.0 (BR1M), the one-off RM250 cash handout to “single unmarried individuals aged 21 and above and earning not more than RM2,000 a month”. The government will spend RM3 billion to finance this populist gesture. (The first instalment was double this amount, of RM500).
Although slated as helping to increase disposable income, one-off payments are hardly helpful in the long term. It is also symptomatic of the failure of existing mechanisms within the economy to increase currently suppressed wages and purchasing power.
Structural reform
Although the budget indicates government’s financial spending, it is not the only document that governs public services and the economy. The 10th Malaysia Plan (2011-2015), and the Third Industrial Master Plan (2006-2020) are sometimes forgotten amid the rush of a budget. It has to also be considered in light of other plans such as the National Transformation Plan, the fourth Outline Perspective Plan (2011-2020), the Economic Transformation Programme and Government Transformation Programme.
Against this context, it is disturbing to note that the budget speech does little to address the problem of structural economic problems, which this column has previously referred to. Here, the Pakatan budget provides some solutions, proposing the formation of an Anti-Trust Act and Unfair Public Contracts Act to break up monopolies and oligopolies, and dismantle cartels. These businesses have stifled the growth of the private sector.
It is only through genuine competition that our economy will begin to once again blossom, opportunities given directly to honest, hardworking companies instead of through middle rent-seeking channels.
It is hoped that the Federal government will urgently make the necessary changes to the economy’s structure.
By addressing cronyism, corruption, wastage and leakage through the process of open tenders, transparent public procurement, and the breaking up of unfair monopolies, this would allow for Malaysia’s economic competitiveness to improve, eventually increasing GDP, reducing government debt, and increasing personal incomes – all objectives of the budget that we look forward to achieving each year.
Jib and Co are simply out of this world. Not a single cabinet minister turned up to debate the Budget during the Leader of Opposition reply and neither was the Audit-General Report nor the Economic Report released together with the budget presentation. To top it all the ” Contingent Liabilities” where billions are parked is not treated as part of the Budget. This is a budget with a colossal hole.
To me it looks like quadrple whammy ! Jib touted this is the best democracy in the world. Enough is enough.
Quite a bit of hyperbole here:
“More alarmingly, our public debt has grown to RM502.4 billion, 53.7% of GDP, which is the highest in our history and just below the statutory debt limit of 55%.”
Every year, except when the economy actually hits a recession, marks a new historic high for GDP and GNI as well. I don’t know if anybody ever makes a fuss over this. Also, as a ratio to GDP, our current debt level is actually half what it was in 1987-88.
On the “statutory” debt limit, there are actually 4 separate pieces oi legislation and three statutory limits for government debt. These govern external borrowing, short term conventional borrowing (T-bills) and – taken together – Islamic securities and MGS. The 55% statutory limit only applies to the last category, and far from being close to the limit, the oustanding debt under this category is below 45% of GDP.
The “statutory” limits are also not set in stone, as none of the relevant legislation explicitly mentions one. They’re actually determined by the authority of the minister of finance i.e. he can change them any time he wants.
Tricia mentions the 10th Malaysia Plan but leaves out the fact that development
spending under each annual budget is actually pre-determined by the concurrent Malaysia Plan. That’s what the Malaysia Plans actually are: setting priorities for annual development spending. So insinuating on the one hand that spending under the development budget is politically motivated, and then implying that it is also devoid of strategic underpinnings, is off the mark.
@aa
Including contingent liabilities on a balance sheet is against general accounting practice globally. It’s only done if there’s a reasonable expectation that the liability has to be paid off, in which case the liability is no longer contingent.
Hishamh,
You can argue that so long that we keep make more & more money than before, we are all ok. That’s also what many countries such as Spain & Iceland say so before the shit hits the fan. It doesn’t mean that when you have the power to print money, you spent your money frivolously.
I agree nothing is cast on stone but ten those are the guidelines. Things can get pretty bad very quickly if certain guidelines not followed.
Perhaps my England is poor, I no understand what issues with you on Tricia comment on the development funding. Kindly enlighten us further.
Reasonable expectation that liabilities to be paid off. What expectations may I ask are those
Din,
Back to you on this topic
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My own view is that Budget 2013 is not fiscally responsible. It has no a clear direction with regard to the structural problems of our economy. We can’t justify giving civil servants one and half month bonus because the bloated civil service today sucks, and rm200 each for the younger generation to buy smart phones supplied by an UMNO crony company. We can’t support giving rm100 million+ for Permata when our schools in the rural heartland do not have decent libraries, internet,and other basic facilities.
I think, even Hishamh whose views on economic matters I respect cannot defend this kind of spending by the Najib Administration.–Din Merican
@Looes74
Actually I was arguing against sensationalising – plenty of economic and corporate numbers hit all-time highs on a yearly basis. The fact that debt is at an all-time high matters less than the circumstances in which it arose. Context matters.
Nevertheless, with respect to comparisons with Europe, the differences are major and fundamental, but would take too long to explain in a comment section of a blog – especially on a Sunday night with work the next day! Suffice to say, much of Europe’s troubles can be directly attributed to membership in the Eurozone. A fairer comparison would be with Japan or Singapore, but there are significant differences here as well.
As for the development budget, Tricia’s implying that rural development spending in next year’s budget is politically motivated. But the development budgets from 2011-2015 are actually contained in the 10th Malaysia Plan i.e. next year’s development spending was decided upon three years ago, and Tricia’s wrong.
@Dato’ Din
This is down to a matter of interpretation. I see the budget as just that – a budget. The strategies to overcome our structural problems and development hurdles are not contained in the budget for the simple reason that they have been articulated in other documents such as the NEM and the ETP. The budget in this sense is just an enabler, not the platform for voicing out new strategies. I’ve found this to be true in the corporate world as well – budgets are just one tool among many for change management, and not always the most important one.
And I disagree that this budget is fiscally irresponsible. The overall numbers indicate a mildly contractionary budget – the growth contribution next year will be slightly negative. And while I fully agree with you regarding the smartphone rebates, I find little to argue with in the other initiatives.
For example:
1. 40% of our “bloated” civil service are teachers. Unless you’re willing to countenance an increase in already over-sized class sizes, this is one of the “costs” of having a “young” population. Effectiveness of course is another issue, but that’s not a something you can “budget for.
2. I fully support the measures to expand pre-school education. There’s a substantial research literature that shows early intervention in education is far more cost-effective and welfare enhancing, particularly from about 3 years old to the first 3 years of primary education. There’s a strong correlation between stronger primary education and higher incomes, but there isn’t one with tertiary education for instance. Also, since much of current pre-school coverage is urban middle to higher incomes, the lack of universal pre-school education is playing a role in strengthening income and wealth inequality across generations.
You might want to contrast the allocation and number of potential beneficiaries of pre-school education against the allocation and numbers slated under technical and vocational training. It’s no contest.
3. BR1M is another initiative that I can fully support – it’s far more efficient than blanket subsidies that disproportionately benefit higher income households; like mine.
4, There’s more in this budget that I quite like – the insurance/takaful coverage for farmers, fishermen and hawkers, for example, which gives real benefits when people need it the most, for a minimal fiscal outlay. The big allocation for R&D to the research universities, which is not before time considering our truly abysmal R&D ratio to GDP. The proposal to allow the use of IP as collateral – there’s some very clever ideas in this budget.
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Hishamh, the budget is part of an overall strategic plan. NEM, ETP and BRIM are mere slogans. You have not commented on budget allocation for Permata. Our rural schools need money to give students better facilities and more conducive environment.–Din Merican
Dato’,
I suggest you read the NEM document – it’s a lot more than a slogan, it’s the basis for the ETP and the structural transformation of the economy. I think you’ll find many of your concerns are actually addressed in it, and it explains some of the government’s moves over the past 2-3 years (e.g. change in employment law, minimum wage, the Competition Act, the forthcoming implementation of unemployment insurance etc).
As for Permata, my thoughts are under point 2 in my previous comment. Non-cognitive (right-brain) development in children is strongest before age 6, while cognitive (left brain) development tends to take over after. If we’re looking to develop a work force that is skill and knowledge driven, it’s imperative to provide a structured learning environment at the earliest age possible. Granted we won’t see the results for twenty years, but universal pre-school will set the foundation for Malaysia’s future prosperity (current level is about 2/3rds compared with over 90% for both primary and secondary).
One issue with rural education is lack of access to pre-schools or the incomes to pay for it. This puts rural (and urban poor) children at an immediate handicap even before they enter the formal school system. They are then further handicapped because of lack of access to tuition, thus exacerbating the rural/urban, rich/not-rich divide.
My daughter’s 8 years old, but she struggled a bit entering Primary 1 even with the benefit of 3 years of pre-school. Based on the syllabus that I’ve seen, you are already expected to have the rudiments of reading, writing and math even before entering Primary 1. Kids who have not had the advantage of some schooling before entering formal education thus fall behind, and are continually playing catch-up.
So in a very real sense, Permata and universal pre-school education is about rural education.
In case you missed it, the allocation for additional school infrastructure is about RM1 billion for 2012 (about 47 new primary and close to 200 new secondary schools, plus expansion of existing facilities). The total allocation for the formal school system is nearly RM25 billion – pre-schools will only get less than RM490 million.
There’s method behind the madness.
As for BR1M, Malaysia has the third highest level of income inequality in East Asia, just behind Hong Kong and Singapore. This is of course a multi-faceted problem and needs to be tackled on many different fronts, especially with respect to inter-generational transfer of wealth and endowments.
One way of course is equal access to education (of which pre-school education and extra tuition is a part) – which is fine in theory, but empirically has not contributed much to reducing inequality. The most effective method is tax and transfer policies, which has proven to be very effective in reducing income inequality in many advanced economies. So despite appearances, there are solid economic reasons behind BR1M.