Fiscal Revenue: Something’s Not Right

From the Business Times (excerpt):

Govt revenue comes under the spotlight

Kuala Lumpur: The government's revenue has not kept pace with the growth of the economy, which is a worrying trend if another economic crisis comes around, said a leading economist.

Prof Datuk Dr Mohamed Ariff, a professor of international economics at the INCEIF (International Centre for Education in Islamic Finance), said revenue has shrunk to 22 per cent of the gross domestic product (GDP) compared with previous years when it stood at 34 per cent.

"There was also only a marginal increase in revenue by RM1.1 billion in 2010 compared to the previous year although the economy expanded by more than five per cent. Clearly something is wrong with the level of taxes," he said in an interview with the Business Times yesterday…

…The coffers have not been growing fast enough while Malaysia started reducing tax rates to attract foreign investors as well as trade agreements to liberalise tariffs.

"Last year, the federal government debt stood at RM430 billion in the first quarter of 2010, up by RM23 billion from the first quarter in 2009 - that is an enormous increase in government debt," he said.

Although the debt level at 53 per cent of the GDP is not that severe as that during the 1980s, it has been growing by 12 per cent per year on the average and in 2009 it spiked to 18 per cent per year.

If not addressed, it can snowball and lead to dire situations faced by economies elsewhere. Malaysia was able to withstand the Asian financial crisis because of a long fiscal surplus period it enjoyed in the 1990s.

"Fortunately, our debts now are locally sourced, but with the low revenue level, the government will face the strain to borrow further." …

…"It's our fiscal side which is worrying and in serious problems. We have been in deficit since the crisis in 1998 and today we rank as one of the Asean economies with the longest deficit line."

Rolling out RM68 billion stimulus package at the height of the global economies crisis has also added more fiscal strain on the government's debt level and economy.

"We still lack the fiscal discipline in balancing the book (trimming the deficit). The problem is how to get it done when revenue is not growing. Do we cut expenditure or increase the tax revenue?"

With the run-up to the general election, Ariff feared that the focus seemed to be providing sweeteners to the people, saying populist policies do not benefit economies in the long term.

Policies should be focused on fixing the economy and getting more revenue while trimming the expenditure so that the economy continues to remain competitive in a global market…

Something’s not right here, alright…but it’s not with government revenue.

Here’s the actual ratio over the years:

Gosh, that’s a big drop all right…not.

The average of the ratio over the last twenty years is about 21.2% – in 2010 it was at 20.8%. Unit root tests for that sample period show stationarity i.e. there’s no trend one way or the other.

I have no idea what Prof Ariff is talking about…unless he’s been misquoted by BT (something that can’t be ruled out).