October 15, 2014
Malaysian Prime Minister’s 2015 Budget Speech
Below are my comments:
The Budget Speech was a pathetic demonstration of our Prime Minster’s inability to come clean or present the big picture. The point is not about what he said but what was not said. Most of the 30 pages of the speech were devoted to the spending side which essentially was all about handouts and a laundry list of projects that will benefit UMNO warlords and their cronies.
GST & Income Taxes: The GST will yield RM 23.2 billion but with the repeal of Sales Tax (RM13.8billion), net increase will be RM 9.4 billion. This means a net burden on middle and low income households whose incomes are stagnating . This burden is on top of the hit from the withdrawal of subsidies on fuels. True enough the PM hands back in some by way of an increase in BR1M and a few other handouts. Nevertheless, the net outcome is that middle and low income households will bear the brunt. He next lowers corporate and personal income tax – the beneficiaries are the rich, the well-connected and the tycoons and their corporations.The budget ignores all sense of equity and fairness. The effect is that the wide income disparities that exist will be further widened.
Macro-Economic Picture: Najib’s speech hardly provides any details about the basic fundamentals that were used. He essentially painted the usual rosy picture – 5 to 6% growth in GDP. This is higher than what the IMF has projected ( 5.2%). Najib does not say a word about inflation. Note IMF is projecting inflation at 4.1 % in 2015 a jump from 2.9% in 2014. The tables in the Treasury Economic Report show some detail — key is that Private Consumption and Investment growth will be slower in 2015. Overall growth will thus depend on the public sector.
The critical issue of public debt is dismissed in a sentence or two. He is telling us like the snake oil salesman “ Trust me, the deficit will be 3.0 % next year!” No details are given on how we can get there! Nor are we told what the hidden contingent liabilities are or how much off budget borrowing there has been or will be in the year ahead. There is not even a whisper about the ballooning size of private household debt last reported to be in excess of 85% of GDP.
Najib also hardly makes mention of the huge illicit capital flight that continues or the brain drain that directly impact adversely on his vision of a knowledge based, innovative, high tech economy. He repeats the mantra of joining the ranks of the developed high income countries by 2020. That is a pipe dream given the lower rates of growth experienced in the recent past and now projected.
Here is a bombshell about which we hear not a pip from Najib or for that matter in the media. The bombshell is reported in the Treasury Economy Report. The Economic Report discloses that Malaysia’s external debt totals RM 729 billion, equivalent to 67.6 percent of GDP. This compares with a debt level of RM 335.6 billion or 31.1 percent of GDP before the revision. This more than doubling of the external debt cannot be swept under the carpet. It should be sounding alarm bells.
The Report goes into a long discourse about revised international standards for debt reporting being the reason for a sudden rise in the level of foreign debt. Under the new definition non-resident holdings of local currency debt, loans and credits and non-resident financial flows are treated as external liabilities.
The Treasury Report offers a weak justification for the high level of external debt asserting that the rapid growth of the bond market has led to sizable increases in the participation by non-residents in lending in the Malaysian market.
However, the Report fails to point out that a sizable part of the debt is short-term (with a ratio of 47.6 percent to GDP). Such short term debt is by nature volatile and subject to flight in periods of uncertainty. It would appear that we did learn lessons from the 1998 East Asia Crisis which was triggered by the withdrawal of short term funds. It is highly irresponsible to ignore the dangers and not have clear policies to address a potential devastating crisis.
By the way, speaking of the Treasury Economic Report, here is an indication of sheer incompetence: Take a look at Table 1.3 – Key Economic Data of Selected Developing Countries. Yes, the Whiz kids in the Treasury have taken upon themselves the task of reclassifying Australians and the Russians as part of the Developing World. It is also noteworthy that Asia’s third largest economy (India) does not merit mention.
Bottom line: Judging by the way the Government is managing the economy, by 2020 we shall as a country, already trapped in the middle income group, move into the sub-category of Highly Indebted Countries.
How I wish I could be more generous. For a more sympathetic commentary please read Tan Sri Dr. Ramon Navaratnam’s article [ http://www.freemalaysiatoday.com/category/highlight/2014/10/14/many-thanks-for-the-goodies-mr-pm/%5D