Friday, October 23, 2009

Budget 2010: I'm (Mostly) Happy

…because lots of things on my wish list got ticked. Improve education? Check. More money for vocational schools? Check. Remove fuel subsidies? Mostly check. Do something for the lower-income groups and not just the poor? Check. But I’m getting ahead of myself. The numbers look half-decent to me:

But this is planned expenditure and expected revenue, either of which may change as we go through the year. The forecast is for a budget deficit of 5.6%, which isn’t bad either. As you can see from the charts above, most of the drop from this year’s expected deficit of 7.4% is coming from a rather savage cut in operating expenditure. The savings were garnered from a planned drop in procurement, subsidies and especially from “others”. I can’t imagine that would make many government contractors very happy.

Based on these numbers and a projected outstanding debt of about RM420 billion by the end of 2010, we’re looking at the debt to GDP ratio reaching 58.0%, which ain’t good. It’s not quite the all-time high (69.7% in 1987) but it’s getting a little close for comfort. On the other hand the banking system is still awash in liquidity, which means there’s still plenty of capacity to absorb government borrowing without impacting private sector lending. With any luck, we should have a firmer recovery in place by 2011, and we can start on fiscal consolidation by then – or at least, get the pace of borrowing below the economy’s growth rate.

My notes on some of the things that stood out for me in the budget speech:

1. As expected, the government revised upwards the growth forecast for this year to -3.0% from -4.0%-5.0%. Next year’s forecast is between 2.0% to 3.0% - encouraging but not great, as it implies that there will be little closing of the output gap and because with population growth at the upper end of that figure, real per capita income growth will essentially be flat to slightly negative (the +2.5% increase quoted by the PM is in nominal terms).

2. 48k projects under the stimulus packages completed and another 40k projects going on right now – impressive numbers until you look at the government’s account at BNM. September figures aren’t out yet, but as of August the government was sitting on RM25.6 billion in cash, which means projects aren’t being implemented as fast as the government is ready to finance them.

3. Note the introduction of Public-Private Partnerships, which at least have the benefit of having projects in the pipeline. You may remember that RM20b Private Finance Initiatives (PFIs) were mentioned in 9MP as another method of reducing the need for public development spending. Try as I might, I can find no evidence in the last five years that any PFI initiatives were even begun, much less completed.

4. New privatization program? Does this mean Khazanah will be letting go its holdings? How is Ekuinas affected?

5. Rationalising R&D efforts, establishing National Innovation Centre and integrating R&D with patent, copyright and trademark registration. Don’t think this is enough – how about triple deduction on R&D spending?

6. RM0.9b for the tourism industry and a whole slew of initiatives – thumbs up. Also kudos for PR status equivalence between males and females marrying Malaysians.

7. 10MBit broadband? Where? How much? And will it stay up? And RM500 tax allowance barely covers the cost even if you’re taking the cheapest packages. Does wireless qualify? 3G?

8. Halal industry – too little too late I think. But the effort’s appreciated.

9. RM0.5b for agriculture. I’m still waiting for the shoe to drop and someone discovers that we’re neglecting doing anything about domestic distribution.

10. RM1.0b for incentives and subsidies to farmers and fishermen. Why not just give handouts? It’ll probably be more effective. Some of the “incentives” that used to be offered had some perverse effects.

11. GreenTechnology investment – not unexpected

12. Bringing pre-school education into the national system – about time. I’m wondering what this might mean in terms of employment of pre-school teachers.

13. Prestige schools and recognition of head masters – elitism? Or introducing competition into the school system? Time will tell. This isn't a new idea, but at least the government is listening.

14. For students, 4 measures that are bound to be popular – 30 non-race based national scholarships, converting loans to scholarships for 1st class honours, 50% discount for KTM rides, and best of all, subsidized broadband and netbook purchases. Lucky b****rs.

15. RM1.3b to improve polytechnics and community colleges, RM1.1b for training and vocational institutes. I really like this. Trying to put everyone through university education never struck me as a good strategy – you just get poor quality graduates. At least this way, some of our youth have a fighting chance at getting good jobs that don’t necessarily need an academic education, an education they might not be suited for. And I really like having SKM on the same level as diploma holders. I’m reminded of Germany’s apprenticeship system here, and it’s a potential solution towards upgrading our manufacturing capabilities and breaking reliance on low-wage type jobs.

16. Ar-Rahnu microcredit program – I don’t like this on principle. The whole idea of microcredit as pioneered by Grameen was to provide financing based on need and desire for work, not on the ability to put up collateral. The way this is structured, it just confines the hardcore poor in a poverty trap, surviving on handouts.

17. Still no GST!

18. RPGT is coming back!

19. RM10k for each AP! Woot!

20. Fuel subsidies abolished! Kind of. What the new system will be like and how it will be managed are still unknown. I’d actually go further and slap a tax on petrol for those who don’t qualify for the subsidy. The proceeds could help fund investment in green technologies.

21. Government child care centres! Now if only the private sector would follow suit.

22. Individual income tax cut to 26% and personal allowance raised to RM9k. I didn’t expect this and I’m not sure it’s warranted. It’s definitely a significant boost to consumer spending power, at least for those who pay taxes and especially those who are in the top tax bracket. But with the tax base already so narrow, I’m not sure this is a good move at all. Add the RM1k increase in the allowance for annuities and KWSP contributions, and you’re talking about narrowing the tax base even further.

23. Urban poor to include those earning less than RM3k – but with only RM48 million allocated for urban poverty eradication, that’s like spitting into the wind.

24. More trains for Komuter and LRT – I don’t think these will be enough, based on recent experience. Congestion has been increasing so rapidly, that these will only be stop-gap measures.

Overall, I'm not down on this budget - there were some gaps, but there were also some truly good ideas here. I can just imagine civil servants trying to get to grips with outcome based budgeting! Compared to DAP's alternative budget, this one's way weaker on transport, but much stronger (in my opinion) on education.


  1. Hm good take. Yeah putting everyone in university will only mean that the level of education has fallen. They cant put 1 million kids in uni and make 50% of them fail. It will have a bad image on the uni. So, logically, the uni will let 1 million people pass. That is why nowadays, it is best to see Universities have stringent intake requirements.

    Anyway, I am wondering how the RM 50(principal) and RM 25(supp) credit card annual charge will induce prudent spending. Fixed cover charges like this look more like extracting consumer surplus. Malaysian stores still take only Visa/Master and hardly any Bank Card EFTPOS.

    It might not be suitable to introduce GST. When Australia introduced GST, lots of varying results occur. And with GST, the highest paying state (new south wales) complained that they do not get back the benefits and in fact shortchanged. Most of the funds were reallocated to the northern state of Australia and some to the West Australia. Also, many studies have been conducted on this and give varying results.

    Anyway, I thought Malaysia has Govt Tax 10% and service tax 5%. So, isn't that a form of GST also ? (though not standardized and not implemented by all across industries)

    We are still developing, low taxes are good but we have to consider a worrying part of Government expenditure. The public hospitals. The current reduction in subsidies are actually reallocating subsidies to development of other sectors. Govt still spends alot. I dont know if the Govt can continue to support the growing public hospital bills. Perhaps it is time we restructure for a better insurance system and begin to slowly shift the burden of costs to consumers.

    Just some thoughts to share.

  2. Wei Liang, thanks for your thoughts and sorry for the late reply. Doing spring cleaning this weekend, so very busy.

    For the card tax, I think there will be an impact in terms of reducing available credit. Many card holders carry more than one, and this will provide an incentive to curtail "collecting" cards. More importantly, the impact will most probably be felt for lower income card holders and for first time card holders - the tax will provide a brake on carrying more than one or two cards at most, which means less chance for anyone to get into trouble.

    GST is different from the current sales and service taxes, as GST is a value-added tax whereas the current tax system is not. GST is fairer and should encourage more tax participation, thus raising potential revenue for the government.

    Since collection will probably be federal, I don't think the states will have grounds for complaint.

    I agree with you on healthcare - actually I don't think the government is spending enough here, and probably too much on defense and security. I've had occasion to use public hospitals - the congestion is really bad in the Klang Valley, and doctors are overworked and underpayed. There are no easy answers in this area - many can't afford even basic health insurance.

  3. I forgot totally about Malaysians habit of collecting more than one credit card. Haha. Thanks for the fresh perspective !

  4. Thanks for your analysis HishamH.