The Cost Of Buku Jingga

I’ve been asked by a friend to look at the numbers being bandied about regarding the cost of the proposals that a Pakatan Rakyat government would implement if it came into power, for example, as brought up in the recent debate between DAP’s Lim Guan Eng and MCA’s Chua Soi Lek (excerpt):

Pakatan’s call for change will bring uncertainty to the country, warns Soi Lek

…Dr Chua said the country would be bankrupt within two years of Pakatan's five-year tenure if it implemented all its pledges.

Even if the Pakatan could achieve 100% no-corruption and no-leakages, it might only save RM26bil; while its total pledges amounted to between RM200bil and RM230bil which is the country's total revenue in a year, he said.

Giving the breakdown of the figures, Dr Chua said this comprised between RM50bil and RM100bil for free toll, RM43bil for the abolition of PTPTN loans and RM93bil for the promise of the minimum monthly household income of RM4,000…

[If you click through the link, just ignore the very obvious spin in the article]

Since I don’t know the basis of the calculations on each side, and because Buku Jingga itself is rather short on details, an objective assessment is really out of the question.

Nevertheless, from my point of view, there’s a certain level of justice on both sides. It’s just that one side takes the best case scenario, while the other takes the worse – that’s just the way the incentives work out. The truth, as is usual, is probably somewhere in the middle.

There’s certainly a good argument that leakages and poor procurement practices can be plugged and that could result in some savings of outlay.

There’s however only so much you can do – some part of the overage in spending is due to government departments trying to “spend up” to their budgets, some part to corruption, and some part to incompetence. But some of it is purely down to the inherent inefficiency of centralised procurement. Unless you’re willing to trust your people enough to do their own individual purchasing, you’re not going to get “market” prices.

As well, shifting to open tenders will generally only save money for supplies, but not for more complex projects where the big money is actually spent and contract fulfilment is a greater priority than cost.

Trust me, it’s not only governments who have to deal with overpriced goods and services. These problems are endemic within the corporate sector too. I’m also wondering how much more cost-effective PR’s policies would be relative to what the government and Pemandu are doing now in reforming the government procurement process. Believe it or not, there have been changes and progress made.

Whatever controls are put in, I doubt you’ll save more than half the wastage identified on the outside (that’s a guess by the way) – significant money nonetheless, but not to the extent of RM26-28 billion (depending on who you’re reading).

On toll and utilities, there’s an even bigger gap in the numbers from the two sides. Personally, I’d keep toll concessions in the private sector as much as possible as that makes more economic and financial sense – unless you believe JKR can do the same job of building and maintenance as efficiently as a private company with a profit incentive.

There’s however grounds for looking at the process of awarding toll concessions. And there’s certainly a good case for taking a long hard look at prices and practices in the private utility sector. Will any of these result in “savings” for the federal government? As things stand, probably not. Utility subsidies are mainly borne by TNB and Petronas, not the government directly. Abolishing toll concessions might be as cheap as PR believes, but that doesn’t factor in the government bearing future upgrade and maintenance costs, nor the implications for future infrastructure development.

As for “free” education – there’s no such thing. Whether the government provides loans or scholarships, somebody (i.e. the taxpayer) foots the bill. In terms of expanding the number of public universities to cater for all who qualify, I think the government estimates for setup costs can be brought down – it really depends on what type of university you want.

The traditional sprawling campus approach costs more to build because more land is used up; but if you don’t care for such things, a few office blocks will do. Take my alma mater – our “campus” was a narrow crooked alleyway maybe 150m long in between a couple of decent sized (but old, cramped, and drafty) buildings.

But setup is just the start; I think KJ in his debate with Rafizi a few months back brought up the point about running costs, and that’s where the real constraint on the supply side lies – can you actually get the faculty given the already short supply of skilled labour, and pay them what they’re worth? And if you can’t, aren’t you embedding a lower quality of education into the system, while at the same time bidding up labour costs? You pick your poison.

As for raising household incomes to a minimum of RM4,000 – sorry that’s a pipe dream, at least not within this decade and not without some really serious consequences for employment and inflation. One of the virtues of the minimum wage as it will be implemented next year is that its not too far off average market wage for low skilled labour. But a RM4000 target implies a minimum wage of around RM2250, which is way, way above and truly distortionary.

It’s one thing to put a floor on wages to limit employer abuse and encourage capital intensity, but it’s quite another to upset competitive balance and relative prices in an economy. My belief is that at this moment, we would see unemployment effects (and hence lower GDP growth) starting at minimum wages above Rm1,200, rising to a limit of about RM1,900-RM2,000 by 2020 (and that’s being very, very generous).

Unless PR are willing to go the whole hog and install a full welfare state (with all that implies for government finances), I don’t see how this can be done. My cost estimate for this, assuming a RM2250 minimum wage, a commensurate unemployment benefit, and assuming a doubling of the unemployment rate to 6% suggests a minimum annual pay out of about RM23 billion, not including income top-ups for low wage employment or the social and economic costs involved with higher structural unemployment (structural unemployment in welfare state Europe is about 8%, and double that rate for the younger age group). Lower than Dr Chua’s cost estimate, but a significant pile of cash nevertheless.

Bottom line here, the above discussion notwithstanding, is that you can argue the figures one way or the other for a month of Sundays and still be left with only opinions and no objective basis for choosing. I’m certainly not going to pretend that what I’ve talked about here is anything but my opinion. I think that PR is being way too optimistic in its assessment and their proposals will cost significantly more than they estimate, just as I think the government might be leaning too much the other way.

My preference is to establish something along the lines of the Congressional Budget Office in the US, which is an independent body tasked with assessing budget proposals and their long term impact, as well as providing independent forecasts of government revenue and expenditure. If we’re serious about getting an objective, non-partisan view of competing fiscal platforms and get beyond, "he said, he said", that’s really the way to go.