Friday, September 28, 2012

Pakatan Rakyat’s Alternative Budget

Good luck finding coverage of PR’s Alternative Budget (hereinafter referred to as AB; link here) in the mainstream media. And the commentary from the other side has been, shall we say, less than complimentary. I for one, however, am not going to call it “stupid”. There is some gold in the dross.

[For foreign readers, what’s being discussed here is not the official government budget, which will be tabled this afternoon. Rather, this is the “shadow” budget presented by the opposition and distributed on Sept 26th]

I’ve made some preliminary comments in my previous post if you care to read those (too lazy to repeat myself).

Comments will be stream of consciousness stuff, because I haven’t the time today to organise things, what with the “official” budget this afternoon.

  1. First of all, my inner English grammar nazi persona says, “If you can afford to fly around in a private jet, you can afford an English editor.” Never mind if the editing is sponsored by somebody else, the English version of the AB seriously needs some attention. For that matter, an editor for each language version should be a must – the document looks unprofessional otherwise, and is a little annoying to read.
  2. And while they’re at it, somebody needs to do some fact-checking as well. E.g. pg 57, it is claimed that Malaysia is the only net exporter of capital in ASEAN. Isn’t Singapore part of ASEAN? And capital flows out of Singapore more than matches Malaysia’s. On pg 58, there’s a proposal to audit all GLICs to “ascertain the return on investments enjoyed by the government so far”, with Khazanah and PNB specifically mentioned. With the exception of Khazanah, 1MDB and Ekuinas, none of the other GLICs (EPF, PNB, KWAP, LTAT) manage government money. Obviously Khalid Ibrahim didn’t have much input into this document – he knows better.
  3. On the economic numbers, the only beef I have is with the forecast overall size of the economy – at RM1.06 trillion, we’d need to be growing at double digit rates in 2H2012. Somebody should have done a better job of reviewing the numbers (and for that I mean the budget as well).
  4. For the budget itself, PR is as guilty as the government in being ridiculously overly conservative in forecasting. My current forecast for government revenue next year is circa RM230 billion, as opposed to the AB’s RM197 billion. Even taking into consideration the proposed cut in excise duties, that’s a RM30 billion gap. Especially considering that the excise duty cut is expected to be offset by higher tax collection as well as a somewhat odd increase in forecast licensing revenue.
  5. The AB’s expenditure estimate is RM234 billion, which is another low-ball estimate. Subsidies are expected to hit near RM40 billion this year, while the AB envisages it to drop below RM30b for 2013. Fuel makes up nearly two-thirds of subsidies, and if oil prices stay steady or increase next year, this figure is already way out of line, no matter how much rationalisation you do of food and toll concessions. This is all without even taking into consideration any further increase in the oil subsidy (my estimate is RM2.5 billion for every 10 sen increase). Also the figure for emoluments (code for civil service pay), is at least 10% too low, especially with AB contemplating a hike in medical staff pay and teachers allowances. Most of the savings from “corruption” and “inefficiency” are, as expected, coming from the procurement budget and amounts to a forecast RM6 billion – just enough to cover the proposed increase in oil royalty payments, but nothing else. Bottom line is that I think the expenditure forecast is at least RM10b-RM15b below what it might actually turn out to be.
  6. None of the above means the deficit target of 3.5% is unrealistic – higher than expected expenditure will be more than covered by higher than forecast revenue. But this makes the AB just as off-base as the government budget has been over the last couple of decades.
  7. With respect to the specific proposals, my thoughts on the income target of RM4,000 are contained in my previous post. I’ll add that the idea of focusing on increasing manufacturing as the basis for higher incomes is pretty contrary to development theory. We’re already past that stage of development, but PR seems to think we’re still a low income economy who can export our way to growth. Plus they buy into the myth that the level of private investment pre-Asian Financial Crisis was appropriate – I always saw it as an aberration that helped drive us into the crisis in the first place, and not something we want to aspire have again.
  8. On the excise duty cut for cars, my concern is less about the cost of cars than the negative externalities arising from fossil-fuel use that are not captured in market prices. Reducing and/or abolishing taxes on cars should reduce the heavy distortions in the auto market (read: Proton) and make them more affordable. At the same time, the cuts also increases the impact of these negative externalities (on health, traffic congestion and the environment), which makes a cut in the petrol and gas subsidies even more urgent and vital. I can’t in all conscience support one without the other. In fact my preferred strategy would be to sell subsidy rationalisation on the basis of tax cuts on cars, as the other way around simply won’t work. As an aside, the numbers on this exercise contemplate increased tax collection from higher disposable income. I’m sorry but with the economy near full capacity, the fiscal multipliers on tax cuts approach zero. On public transport however, there’s quite a few good ideas.
  9. On housing, I like the idea of a single body to coordinate all public housing activities – I don’t agree if this turns out to be one more body. It’s not clear from the AB which alternative is being contemplated. It’s true however that the government’s efforts in this area are fragmented and confusing to the public.
  10. Building entrepreneurs and reducing monopolies – on this policy position, the AB is schizophrenic. On the one hand it condemns and proposes the breakup of monopolies like Bernas while claiming GLCs are crowding out legitimate private businesses. In a later section (on “Oil justice”), the AB proposes to set up state-owned oil & gas services companies to compete with politically connected private-owned O&G companies. So if you can’t beat them, you join them? You have to fight fire with fire? This inconsistency on a question of principle is rather disconcerting, to put it mildly. After reading through this part, it became increasingly harder to take any of the rest of the document that seriously.
  11. I think the Caruman Wanita Nasional is a something worth investigating, though I’m seriously dubious about its viability.

That aside, the rest of the document is pretty consistent with PR’s policy platform – populist and socially oriented. Once you get past the political rhetoric (and the unpolished presentation), it reads like any other budget document. There’s the good, there’s the bad, and (as my friend put it) there’s the ugly. Mostly its high-flown aspirations followed by “this is how much we’ll spend on it”, which sets up  expenditure as the target, not the achievement of the purpose of the policy in the first place.

That’s why I personally have never found the budget to be really satisfying from an economic perspective. It’s all about where the money is going to, not about what should be achieved. The impact is also as much psychological and political then economic.

More to the point, we’re only talking about planned expenditure of just one-fifth of the economy – as important as that is, it’s still in the minority. The government gets too much of the credit when things go right…and too much of the blame when things go wrong.

Just remember that perspective when the official budget is read out this afternoon.

Technical Notes:

Belanjawan 2013 Pakatan Rakyat (warning: pdf link)

5 comments:

  1. I'm surprised you didn't make a comment on the claim in the AB that we're in a middle-income trap

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    Replies
    1. I think I've belaboured that point too often before, and I didn't want to detract from the rest of the commentary.

      It's a battle to be fought another day.

      Delete
  2. That is why I dubbed it bomohnomics in an earlier thread: short on substance and specifics and long on populism and illusion.

    The Fuckatan crowd don't have it in them to coherently outline and cogently argue policy initiatives. They are what I would call populist hogs sans reality glasses. They are too deluded that they imagine that there are pools of money leaking from burst plumbing!!And vendetta is always high on the agenda as point 10 illustrates. It is nothing more than leveraging on state money to outgun the private O&Gs just because some of the latter are owned by people the Fuckatans dont like. That was somewhat the theme during the ala-IMF stunt 10 years ago, only back then, it was use your grip on the purse strings to dry your rival's backers dead, not about the greater good. Well what else can you expect, if they are led by the same deluded one who is hapless as a headless chicken when confronted with a crisis:

    http://www.globaleconomicgovernance.org/wp-content/uploads/sundaram-pathways_malayisa.pdf

    As for them cheaper cars, why not throw Fuckatan just quit taking everyone on a joyride and throw the public transport thingy outta the window. Then enjoy the drive while it lasts, after all it cant get as bad as elsewhere, can it?:

    http://www.bbc.co.uk/news/magazine-19716687

    me..I support a new reformed NAP with sane excise duties + no fuel subsidies (why in fact no to subsidies at all: that 40billion saved in one fell swoop that more than offset lower or no auto taxes.)Oh.. I will not forget to restructure and amalgamate Proton and Perodua as one to target the small car and mid-size sedan groupies.....

    Warrior 231

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  3. hi hisham, wouldnt u think that manufacturing should remain a key pillar of economic growth? take the case of the eurozone... the only reason why germany is still going strong is cos of pricing power which its manufacturers have no?

    don't you think that a strong manufacturing sector is vital for a healthy economy?

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    Replies
    1. Jon,

      Malaysia's manufacturing sector is highly exposed to external demand - in a very real sense, we have little to no control over its growth.

      With respect to Germany, Eurostat's forecast for growth this year and next is just 0.8%. As a percentage of the economy, manufacturing in Germany forms about 22.6% in 2011. Malaysia's manufacturing sector by comparison is about 27.5%. To quote some other examples, Korea's is a hair over 30%, while Singapore's about on par.

      In that sense, Malaysia's manufacturing is adequately large enough.

      In any case, despite what many people think, government budgets aren't really the proper place to look at development and growth strategy - it's just one tool among many.

      Delete