Saturday, October 16, 2010

Federal Government Budget 2011: First Impressions

At first reading (and hearing), this budget seems determinedly populist, especially if you heard the last ten minutes live:

  1. Big infrastructure projects, like the Warisan Merdeka development and EPF’s Sungai Buloh development;
  2. The establishment of the National Wage Consultation Council (which will set the minimum wage);
  3. The increase in civil service maternity leave;
  4. The continuance of the electricity bill rebate;
  5. Subsidised low cost Housing  loans for estate workers;
  6. Government guarantees for the 10% deposit for first time homebuyers, for those earning less than RM3000;
  7. Increase in monthly allowances for community leaders including Imams (almost double the previous level); and
  8. No toll rate increase for highways under PLUS for the next five years.

About the only thing still missing from peoples’ wish list is a cut in income tax – neither corporate tax nor personal tax rates were touched. I didn’t expect that to happen with GST being postponed, but there’s been speculation every year since our tax rates are quite a bit higher than, say, Singapore. But a cut in the income tax was probably never on the cards given the narrow tax base. Most of the earlier speculation regarding green incentives and a boost for ETP projects were largely vindicated.

However, I have this vague sense of being a little disappointed. There isn’t this feeling that we are truly getting under way towards really transforming the structure of the economy – or perhaps this is because the budget after all is about where money is being spent, rather than about substantive changes in policies, procedures and strategies.

And maybe that’s all to the good, as the NEM/ETP is a lot more relevant in that area.

But there were some nice touches in this budget – the cuts in import duties on consumer goods is great as that puts us on a better footing with Singapore as a tourist shopping destination. I also like the prominence that women were given in this budget, as well as the support for the poor to get housing loans. The setting up of an R&D unit under the PM’s Dept is well past time, as it’s been a pretty hopeless slog this past decade trying to boost R&D spending without top involvement. There’s a couple of billion set aside for training and skills enhancement, which is better than nothing, though I’m dubious as to how effective this will prove to be.

All that aside, the actual numbers look…ok. This year’s growth projections came within a hair of matching mine – the government has upped their forecast for 2010 real GDP growth to reach 7.0%, which is a little higher than my forecast of 6.9% (details to come later). Next year’s growth is expected to come in between 5.0%-6.0%, which I think might be a little optimistic. We’re past the recovery phase, which means that future growth will depend on real expansion, rather than using capacity that fell unused during the recession.

More to come.

Technical Notes:

  1. Economic Report 2010-2011 (extracts) from the Treasury
  2. Budget Speech (pdf link)
  3. Budget Appendices (pdf link)


  1. I guess this is very much an election budget giving way to a lot of preparations to ordinary folks by offering them the 'feel good' factor. The PM however really want to rope in the CM of Sarawak quickly into the 1 Malaysia movement.( Remember that the CM of Sarawak said that 1 Malaysia is nothing new to Sarawak because she has all the while been practising it). With Sarawak General election timed together with the next Semenanjung and Sabah General election ( my hypothesis) the CM of Sarawak cannot play truant anymore. Sarawak need to deliver the votes that would give a new mandate for PM to push his transformation of Malaysia. Put it differently, the PM seems to be under the mercy of CM of Sarawak.Taib say give me the billions first in January then I'll decide when the best election date is for the whole nation. ( But not later than July 2011). What else can Najib do but wait. Therefore no tranformation budget yet.Not until the next integrated general election and BN remains in power.

  2. cut in corporate/individual tax?
    maybe not now. i think it can only be done concurrent with a) implementation of GST b) streamlining the too much incentives/exemptions in the tax system (our tax rate may be higher than S'pore but our effective tax rate is actually lower than S'pore) c) giving out of subsidy to only targeted groups.

    tranforming structur of the economy?
    mind share your view?

  3. @anon,

    I think the government is doing most of the right things - but these aren't the policies that typically hit the headlines or get votes, e.g. increasing work force flexibility by encouraging part time work, greater help for women, increasing the emphasis on the non-tradables sector etc, phasing out low-cost manufacturing, corporatised agriculture etc.

    The big-number infrastructure spending gets the headlines, but they're not in my view all that important. I think the Greater KL EPPs are probably the weakest (and most irrelevant) part of the NEM/ETP.

    There are two things that the government has not talked about handling as yet (and are missing from the NEM/ETP) - how to handle transforming the education system in both quality and quantity (we need to at least double university places in the next ten years), as well as a social support system for those who are going to be left behind by the NEM - and there will be more than a few.

    Having said that, achieving high income economy status will be pretty easy I think (my forecast is early 2018), but whether we deserve that label is another matter.

    You have a great point regarding the effective tax rate.