Monday, October 1, 2012

Budget 2013: Some Thoughts

I’m frankly suffering from budget fatigue. There’s a lot of analysis in the news, and many conflicting opinions based on very different perspectives. For my part, this is more a commentary of the commentary, rather than talking about the budget directly. That analysis I’m planning to look at tomorrow.

One thing in the commentary that’s struck me, is the rather strange expectation that the budget is some kind of policy and strategy platform. You hear people expressing disappointment that industrial and SME development isn’t being touched on, or the absence of strategies to combat corruption, or the lack of info on how we are going to improve education.

This betrays a fundamental misunderstanding of what the budget is and supposed to do: allocate government expenditure for the year ahead.

It is NOT:

  1. A policy platform
  2. A strategic plan
  3. A statement of principles

If those are the expectations, then we’re doomed to disappointment every year.

A second thing I find really odd is that people are looking at the development portion of the budget as if it’s discretionary. The truth is, the development budget is set years in advance via the 5-year Malaysia plans. The only discretionary part is how much of the Malaysia Plan allocation is to be spent every year.

A third issue that bugs me is that people seem to be missing the forest for the trees. I hear lots of commentary about the cash handouts – understandable with the general election around the corner – as if those are the only major things that the government is doing . But here the amounts being disbursed are more than matched, if not dwarfed, by allocations for promoting investment, for green technology, for R&D, for education and technical training. For some strange reason, these allocations simply passed many people by, despite being a part of the budget speech.

Fourth on my list of annoyances – there’s this perception that the “middle-class” who are the “bulk of tax-payers” aren’t getting anything out of the budget. I’m sorry – if you’re one of the unlucky few who have to actually pay income tax, you’re NOT middle-class. You’re in fact in the top tier of income earners in Malaysia, and benefit the most from subsidies on food and petrol. Personal income taxes also only account for about 11% of government revenue (sales and service taxes add about another 7%-8%), so the idea that individual taxpayers are paying for everything is a little ludicrous. So forgive my utter lack of sympathy.

Fifth is the perception that this is an over-spending budget, an image no doubt boosted by the plethora of income assistance given, and the looming spectre of the general election. The truth is that total expenditure is being held almost flat between 2012 and 2013, with the plan being to actually slightly reduce government spending next year. I’m not fool enough to believe that this will actually come true, as I don’t see oil prices coming down as the government is assuming.

But if the budget is busted, it’s going to come from higher outlay on subsidies and not from social welfare assistance.


  1. Very nice pieces. Waiting for your analysis.

  2. Generally, the budget is one of the tactical tool for an overall stragegic plan. Thus, people will look critically from this angle. So for e.g. what is the point of that BRIM? It is short-term C which multiplier effect is very small. So, basically, we can and criticise from angles of CIGXM ... and conclude whether the government has any long-term strategic plan or not ....

    1. BR1M was billed as an assistance in response to economic slowdown in 2012-2013. From the start, it is a short term initiative. ppl expecting it to fulfill some long term strategy will be rightfully dissapointed.

      Personally i believe having extra RM500 helps. It can covers room rental for 7 months for 21 yo above or cover cooking ingredients for a family for 5 months. Helpful but not too excessive.

    2. @mantra,

      Some of the clues are there if you care to look. Rather ironically, in the case of BR1M the budget allocation priorities actually do fit into a long term strategic imperative. In this case, its partly about a shift from general subsidies to targeted subsidies, which are more efficient - this was actually mentioned in the budget speech.

      BR1M also helps to address a couple of large structural issues that were not explicitly stated, which are the low share of wages in national income (sub 30%) and high income inequality (Gini over 0.4).

      The implication is that, as I had hoped, BR1M will be a semi-permanent feature of the budget not a temporary one (under the assumption of RatEx, temporary windfalls will be saved not spent).

      For my part, the impact of BR1M on consumption will be mildly positive, but on overall growth will be negative, as the drop in the deficit wipes out any potential increase in consumption - ΔY = ΔC + ΔG + ΔI + ΔNX - i.e. the drop in ΔG more than offsets any increase in ΔC. This is especially true since consumption multipliers are much smaller than investment multipliers, and also because the economy is already close to full potential (higher consumption results in higher prices and/or higher imports), and because MPCs for households (even low-income households) are less than one.

      We're looking at a redistribution of spending, not an increase in it.

      All the above rather nicely illustrates my point - knowing what the government is spending on doesn't tell you much or anything about the why.

      There are also plenty of initiatives that don't have any fiscal implication at all, but are absolutely critical to restructuring the economy - minimum wages for one, changes to employment law to protect part-time and free-lance workers another.

      So just looking at the government's budget as some kind of policy platform or strategic plan will give you a jaundiced view of what its aims and goals really are.

  3. People should differentiate between budget and policy. ETP is an example. It is a long term policy/plan/program to further imporve the economy, to increase GNI, to increase per capita income, to increase job opportunities etc...

    Budget is a proposal detailing how the money is going to be spent for the next fiscal year.

  4. I have no qualms on this posting except for your fourth annoyance. I'd have to disagree that if you're paying taxes than you're rich.

    That's very simplistic of you when in the same post you complained about people being simplistic, missing the forest for the trees.

    I'm not earning 5 figures a month and yet a big chunk of my salary is being deducted by PCB. Many don't see almost 20% of their salary after PCB+EPF.

    So where's the help for these people who's disposable income is being eaten up by inflation and rising cost of living?

    1. hyelbaine,

      I was actually very careful to avoid the word "rich". Collectively, my wife and I do in fact earn more than five-figures a month, but we don't feel "rich" either. But rich-middle-poor is a very different thing from the high-middle-low income distinctions.

      The fact remains that if you're paying tax, your gross income level is better than 7 out of 8 Malaysians you meet on the street.

      As far as help is concerned, let's just look at petrol subsidies. Every litre you use carries a subsidy of at least RM0.80 (at today's prices). Say an average of 140 litres a month (1 full tank a week driving a MyVi), that's about RM1,300 a year. If you include negative externalities to that (the cost to society from fossil fuel use), the figure more than doubles.

      Effectively what that means is that if you're earning less than RM5,000 a month (which covers about 95% of the working population), you're either paying no tax or the taxes you pay are fully returned to you in kind.

      That's just from the petrol subsidy mind, not inclusive of gas subsidy (and consequently subsidised electricity), free education up to secondary level, cooking oil, sugar etc etc.

      I think giving government help to the small segment of society that pays net tax (less than 1 in 20) yet are not "rich", shouldn't be a government priority.

  5. "I’m sorry – if you’re one of the unlucky few who have to actually pay income tax, you’re NOT middle-class."

    I don't agree unless our understanding of middle class is vast difference. Can you elaborate more? Thanks

    1. HuaYong,

      The ADB defines middle class as anybody above the poverty line. I'm not going to go that far. One possibility (which is the one I prefer) is just looking at the income quintles - middle income would be the 40% of the income distribution below the top 20% (about RM2000-RM5500 per household in 2009). Another would be looking at the distribution of income centred around the median (approx RM2600 per household, or about RM1500 individually).

      The point is that middle-income/middle-class is usually defined in relative terms, not absolute. The rich/not-rich divide is an absolute measure.

      If you're thinking of middle-income as someone who has a degree, a car and a house (with the loans to match), that's actually a small segment of the population - less than 1 in 8.

  6. Agreed on a lot of the points, but I have to say the main thing that irks me about the budget is the smartphone allowance. I still don't understand why we need it considering mobile phone penetration is at 129% and to be frank, not owning a smartphone is not the end of the world.

    I would've preferred if the handout was given in form of a subsidy for professional courses, night classes on professional skills or even language courses considering the standard of Malaysian talent is generally quite appalling.

    What are your thoughts?

    1. Mellissa, that one's a pure election giveaway in my view. On the other hand, I don't think it will be all that effective or amount to very much.

      The hardware cost of a smartphone doesn't amount to as much as the cost of data plans that go with it. Telcos are already substantially subsidising the hardware anyway.

      I think as far as subsidising training or skill acquisition, I suspect that would be difficult to administer, though obviously better to do.

  7. Thanks Hisham, perhaps you are right though i am not sure which is a more reasonable definition if take into account living standard, i just can't imagine a person with an annual income of MYR36k that converetd to USD12k per annum could qualified as middle class.

    1. HuaYong,

      A one to one comparison is hard to do because the country price levels are so different. There's also cultural factors at play as well, which makes cost-of-living comparisons difficult (e.g. the larger family support system most Asians have).

  8. I got a general question which may / may not related to your posting but I'm not sure where else I could ask this.

    I hear a lot 'grumbling' about the high rate of inflation and ever increasing cost of living.

    I may read this incorrectly (I never studied economics) but never saw the CPI figures that relates closely with what people are telling me.

    Some even described that the basket of goods doubled in price within a span of the year (eg Bought stuff for RM150 in 2011 now it's RM300)

    What's your take on this?

    1. Asri,

      Sorry for the late reply - weekends I'm usually offline spending time with the family.

      With respect to your question, there's a number of ways to explain this phenomenon.

      First and foremost is that the CPI is based on the "average" Malaysian household. If the basket of goods that people buy differs substantially from the "average", their personal inflation rate will be different from the official CPI.

      As you go further down the income level for example, food, transport and housing tend to be larger items of household expenditure (technically the expenditure weights increase) - that means as food and transportation have generally driven price increases over the last five years, the inflation rate for lower income households will be higher. This is a known and documented phenomenon in other countries.

      A second related problem is that people tend to notice and remember "bad" news more than "good" news. As such price increases stick in the consciousness more than price decreases or when prices are stable (both of these have actually happened in some categories of goods and services - telephony for instance). Food items are especially notorious for being volatile (i.e. going both up and down).

      Third, focusing on a particular basket of goods that have seen price increases fundamentally misses the point - the CPI is intended to cover all household expenditure and averages out the price increases, not just the items that happened to have gone up in price. So looking at just a subset of expenditure will overstate the rate of inflation.

      Fourth, the CPI covers "consumption" of goods and services. What this means in practice is that house price appreciation for example isn't included, only the "consumption" of housing services (aka rental).

  9. Hi I am currently doing my research on the effectiveness of social welfare assistance in addressing the food price inflation (case of malaysia)... Your blog seems to be helpful for my research. Pls give me ur opinion relating my topic to the recent budget.... Thanks in advance

    1. @anon,

      Welfare assistance doesn't actually address food inflation, since it neither helps on the demand side or the supply side. All it does is supplement incomes so that people can get despite the price increases.

      Do the handouts help? To my mind, without a doubt.

      The problem is whether the price increases are permanent or transitory, as food prices are notoriously volatile. In the case of proteins (meat, fish, poultry), the unfortunate answer is the former.

      What we're seeing is the impact of a rapid pace of growth in major emerging markets (the BRICs) that have pulled hundreds of millions of people out of poverty in the past decade. Even Africa is making progress in growing out of poverty. But when that happens, people's diets change, shifting to a greater portion of proteins against staple carbohydrates (like wheat or rice). It's no accident that most of the permanent increase in food prices has been in protein-based foods.

      So in the absence of a supply-side response (greater supply of livestock and fish stocks), food price inflation will be with us for the foreseeable future.

      The implication for social assistance schemes are profound - they too must be more or less permanent, unless and until supplies are also permanently expanded.

      That's one reason why there's an emphasis on aquaculture and the existence of initiatives like the *cough* NFC *cough*.

      The other question is whether BR1M and its associated programs will be enough. Pending someone working out what the portion of food expenditure is in lower income households, the honest answer is I don't know.