Quick Thoughts On Budget 2012

First – whatever they may say, this feels like an election budget. While it doesn’t feature some of the more desirable aspects of Pakatan’s Alternative Budget (e.g. review of IPP contracts, wider scope for the Competition Act), there’s an awful lot of “handouts”, if you want to call them that.

Book vouchers and abolishment of fees for national and national type schools, the assistance for taxi drivers, free medical care for the elderly, there’s a little bit of something for everyone – at least going by the measures announced in the speech proper. The one-off assistance to low income households is smaller than Pakatan’s proposal (RM500 versus RM1000), but the scope is far wider covering households earning RM3000 or less compared to RM1500 or less. Smokers and drinkers ought to be happy – no increase in sin taxes either.

The rationalisation in the civil service wage scale (and increase in increments) is also not before time. It’s a bit of a chicken and egg problem – do you raise incomes before seeing productivity increases, or do you wait for productivity increases before hiking salaries? The former, all things being equal, risks providing an impulse to inflation; while the latter is inequitable. But if we are to retain and attract talents to the civil service, you have to at least pay a living wage, and this budget helps to accomplish that. Moreover, putting in place a voluntary separation scheme provides a way for the government to get rid of deadwood, though I’m doubtful whether this is really effective – VSS tends to draw the better talents, not the lesser. I’ve experienced two of these already in my career, so I’ve seen how it works first hand. And it ain’t cheap either.

But here’s the crux of the matter: the government’s projections on the budget (which are almost always wrong, btw), show a minor increase in operating expenditure and revenue between 2011 and 2012. Which begs the question: given the expenditure cap, how is the government going to pay for all this? My belief is that they are redirecting expenditure from cut programs and procurement (I can hear the howls from Class F contractors already). There’s hardly much change in taxation rates, not enough to matter anyway. And then there’s asset sales – Felda, anyone?

Assuming the aggregate figures are actually correct, this budget is slightly negative with respect to the economy as a whole compared to this year’s. There will not be a “pump-priming” effect (not that there ever was one), because what matters to total aggregate spending is total net government spending which is barely changed in absolute terms. In fact, by essentially redirecting spending from investment to consumption, the effect is actually slightly more negative because the multiplier for consumption is much lower than that for investment. I’m not going against the consensus opinion here, which considers the government’s economic forecasts for next year (5%-6% real GDP growth) more than a little optimistic.

Don’t get me wrong – there’s quite a bit of social support in this budget, which should help sustain domestic consumption next year. But as in Pakatan’s budget proposal, there’s some wishful thinking involved.

A word of caution when comparing the two – Pakatan’s budget has elements of its long term structural plan embedded, while the government’s doesn’t. That’s because that particular element is already iterated in the 10th Malaysia Plan, which outlines the long term objectives and spending priorities for the development portion of the budget well in advance. So don’t look for long term structural plans in the budget, you’ll be looking in the wrong place.