Friday, October 7, 2011

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.

10 comments:

  1. "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." -

    emm Gov give a lot of tax reduction for bisness entity, so that FDI will be increases later.. i think this is stimulus package to attract investment.. is that the long term plan???

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  2. what i like most is the 2% compensation to taxpayers for late refund.

    I received last year's refund in Jan 2011. That's quite a lot had the gomen introduced this earlier

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  3. Good blog. Congrats. I will place you on my blogroll. Din

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  4. @Living Seed

    Nah, they do that every year.

    @anon

    Damn, better start talking to LHDN, they haven't refunded me two years running.

    @Dato Din

    Thanks! and thanks for dropping in.

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  5. Must all govt expenditures including for infra projects by 100% owned entities be in the budget?If a loan is raised by an OBA via govt guarantee is there a need for inclusion in Budget?

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  6. I'm actually not sure for the first part (I don't think so), but government guarantees (as a contingent liability) is not an actual cash outlay, thus doesn't fall under the budget.

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  7. Didnt know you have a blog. Since dr raficks r2w closure I've been at few places and even was censored/banned by din Merican for giving contrarion views.

    Anyway could you offer some write up where we can draw the line on spending for social welfare and safety net. What's a reasonable ratio?

    Just read also Michael spence on globalization and employments. I think this outcome of tradable and non tradable sector will hit us as well. There'll be a widening gap of inequality. This is where if you can assist me I think we need to draw that line before the budget becomes counter productive. I think our politics force both our political parties (bn and pr) pushing for populists policy not in the interest of our nation.

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  8. Malaysians would probably forego these 1-off or small payments in exchange for a cleaner, more ethical & efficient gov, who would ultimately improve the overall income level.

    Anyway, be thankful for any assistance, but vote wisely at the same time. Sweets handed out by an election budget will be taken back via GST & other means later.

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  9. @Ellese

    Welcome aboard. I don't know enough about the mechanics of social transfers to make a real determination where the dividing line should be. Though I do know that temporary transfers will in all probability have no great permanent effects. It's just a band-aid.

    ref: Michael Spence - it's a two way process, and we've had our share in it as well, both as a beneficiary and as a contributor. Its one of the key parts of an export-oriented model - taking advantage of lower wage costs to get part of the action in the global supply chain.

    Since the emergence of China, the process has been working in reverse. That's not necessarily a bad thing - one of the side effects of a reliance on low wage industries is because it is in the tradable sector, wages adjusted for productivity tend to equalise in the global market, especially via the real exchange rate. In other words, income and purchasing power growth in Malaysia has been slow partly because of globalisation. With a greater emphasis on the non-tradeable sector, which is not linked to global markets, demand and supply of labour will be more in line with domestic conditions - but we have to be prepared for the structural changes involved to fully take advantage of this move.

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  10. @Frust,

    Don't look now, we're already paying for it. The difference between next year's planned expenditure and this year's estimated expenditure is less than 1%.

    All this talk about extra spending is a smokescreen. I'm wonder which programs got the axe.

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