KJ On Buku Jingga

With the 2012 Federal Government budget set to be tabled in Parliament tomorrow, the papers are full of commentary on what people want, and what the government should be doing (though at this stage, it’s probably a little late to make further suggestions).

The Pakatan Rakyat’s 2010 Buku Jingga on the other hand is the coalition’s statement of principles on what it would do if it ever gained power. There are some good proposals and some not so good ones, but the main problem with it is that it was very light on details.

There’s also further policy proposals that have been mooted since, like free tertiary education and the relatively new proposal to phase out the very high excise duties on cars in Malaysia.

But there’s hardly any numbers placed on these policy initiatives until very, very recently (I’ll get to that later). Here’s KJ’s take on the matter in The Edge on Monday (excerpt):

Where will the money come from?
Written by Khairy Jamaluddin

…Two of the federal opposition's policy proposals that were announced this year are designed to strike at these two voter demographics directly. The first was a promise to write off all National Higher Education Fund (PTPTN) loans and provide free university education, and the latest, a policy that will see a reduction in passenger car prices.

Both policies have clear political objectives in mind. The student loan write-off is an attractive promise for young voters still saddled with their PTPTN debt in addition to dealing with higher living costs and for some, the financial commitments of marriage and starting a family. The promise of lower car prices casts a wider appeal as most Malaysian car owners bemoan having to pay more for the same car than people in other countries, which results in a bigger chunk of their salary being used to service their monthly car loans…

…The purpose of this article is not to examine the two proposals directly but to discuss one fundamental question that arises when political parties — especially those not in power — make electoral promises: How do they hope to pay for these pledges?…

…As far as the federal opposition is concerned, it is doubtful that fiscal discipline is high on its agenda. It has not really explained how it is going to pay for its electoral promises. And just to put it on the record once again — its electoral promises amount to a whopping RM206.5 billion in the first year alone.

This includes not just writing off the higher education loans and reducing taxes on cars, but these Johnny-come-lately ideas must be read together with earlier pledges contained in its Buku Jingga. The table summarises the financial cost of its promises.

And this doesn't even include the standard talking point of an immediate reduction in the price of petrol should it take over the government. Depending on the reduction, this could cost hundreds of millions on top of whatever has already been quantified in the table…

…The key point is this: It is easy to say savings can be made by reducing leakages, but nobody really asks how much you can save. While 10% of procurement-related items can yield a significant figure as explained above, it is not so significant when measured against a slew of promises that cost so much more to fulfil…

…Unless the opposition can answer these hard questions and explain how it will raise the money to fulfil its promises instead of copping out with the corruption explanation (which doesn't add up), we can safely assume that either it will drive Malaysia to ruin by spending what we don't have or, in fact, it has no intention whatsoever of fulfilling its promises because it knows it simply can't pay for them.

If you want to have a look at the table mentioned in the article, try The Mole.

Looking at it objectively, I don’t think the specific policy proposals mentioned will come to as much as KJ asserts. There’s really no disagreement in the costing except for two items – the abolishment of tolls and the minimum monthly income of RM4,000 per household, for which there’s massive disagreement.

But taking the others together, it amounts to about RM60 billion or so, phased in over a couple of years – doable in fiscal terms, though I agree with KJ that PR’s deficit and debt targets will be going down the toilet. No balanced budget here; especially since the fuel subsidy is a real fiscal millstone, and will cost far more than PR seems to allow for (to put a price tag on this, it’s about RM2.5 billion for every 10 sen reduction in petrol pump prices).

But moving on to those two controversial items – the two sides are about RM45 billion apart on the price for toll abolishment. I’m not competent to deal with that question, so I’ll leave it as it is.

The RM4,000 target though, will not have the RM90 billion price tag KJ claims. On the other hand what PR are planning to do to achieve it, won’t work either.

Yesterday’s Alternative Budget from PR contains more specifics on the income target – it’s really a combination of productivity improvements (by which they mean, the target should be reached with no inflationary consequences), a raising of the minimum wage and various supplementary cash transfer measures.

There’s a number of problems with this approach. First, raising the minimum wage too far, too fast will be inflationary and have unemployment effects – even the RM900 coming in next year is a little high for my taste. Raising it to RM1,100 is going to require lots of political courage, and is frankly going to be bad economic policy this early.

Many of the cash transfers are group specific and won’t apply to all low and middle-income families (teachers’ allowances for instance).

But more importantly, I think PR isn’t addressing the right channels in raising household income. It’s not just about Malaysia being stuck in low-wage manufacturing and needs to go up the value chain. It’s also not just about neglect of productivity growth.

The problem is that for the last decade and a half, productivity growth (and we have had quite a bit) has not translated into wage growth. For all the years between Independence and about 1998, productivity levels and wages per worker were closely tied together; but they have been diverging ever since (log difference between output and wages per worker in manufacturing; 1959=100):

Raising productivity in this environment will do little for the ordinary worker, because most of the gains in profitability will mostly go into shareholders’ pockets, not workers’.

The common tie-up of productivity with wages is a simplifying assumption in economic growth models, and while it has for many years been an empirically valid relationship, it should not be mistaken as an attempt towards accurately describing the real world. On that basis the hope for “trickle-down” from higher productivity and thus higher corporate profitability, into higher take home pay, is misplaced.

To be fair, the government isn’t exactly coming to grips with this problem either.

Bottom line is that I don’t think implementing the Buku Jingga proposals will bankrupt the country; but there’s little doubt in my mind that the cost will be far greater than many imagine.

Here’s my plug for the day – to evaluate these policy proposals objectively, cries out for an independent, non-partisan body with the expertise and credibility to the job, like the US Congressional Budget Office. That’s one way for voters and the man on the street to weigh different policy options and proposals without the political posturing that we have to deal with at present. I know many of my colleagues agree.