Budget 2014: Highlights and Lowlights

Well, its in the books now – metaphorically speaking that is, because it technically still has to pass Parliament.

First a look at the headline figures:

1. Growth is expected to be between 4.5%-5.0% this year, and 5.0%-5.5% next year.
2. Government operating expenditure is slated to increase 0.7% to RM217.6b, while development expenditure is expected to rise/fall to RM46.5b/RM44.5b depending on whether you believe the speech or the 2013-2014 Economic Report.
3. Government revenue is forecast to increase 1.7% to RM224.1b

I take these figures as reliable – reliably conservative and underestimated, that is. The forecast I did last year for this year’s revenue was around RM220b-RM230b; that firmed up to RM220b earlier this year, when we got the full year data for 2012. That contrasted sharply with the government’s budget forecast of about RM208b. Guess what the government’s estimate for revenue this year is? RM220.4b.

I’ve revised my revenue forecast model, but the 2014 forecasts for both new and old models are near enough as to make no difference (RM millions):

We’re looking at a model average of about RM231b – the standard errors are fairly high however (RM12b-RM15b), mainly due to some weirdness going on in the early part of the sample. But the correlation post-2008 is really strong. The forecast is about RM7b above the government’s forecast, and about RM5b above Pakatan’s.

Expenditure is more discretionary, and constrained by the government’s self-imposed limits of a 3.5% deficit and 55% overall debt to GDP ratio. So I’ll just note in passing that unconstrained by these limits, government operating expenditure would be forecast to hit RM234b, compared to the RM217.6b budgeted i.e. RM17b higher. Development expenditure rarely varies, as this is typically set via the Malaysia Plans i.e. a 5-year budget cycle.

Still and all, it’s a mildly contractionary budget, which won’t change even if forecast revenue and expenditure are higher than expected.

Moving on to specifics, the following list is going to be of the like, don’t like, scratch head variety, rather than a full blow-by-blow assessment – that’s pretty much impossible with something this complex. So this will only be a partial list of things that I actually have an opinion on:

Really Like

1. Abolishment of the sugar subsidy – Some critics are saying that the link between sugar and diabetes is weak, and we should be paying more attention to the overall Malaysian diet. That’s fair enough; but I’d want to know, what economic justification is there for subsidising sugar in the first place?
2. GST – We’ll probably be returning to this topic again and again over the next 17 months (and more), but now we can hopefully move on to substantive public discussion instead of “will he, won’t he”.
3. RM50 i-BR1M for takaful coverage – Making a meaningful difference in people’s lives for what’s effectively chump change. Anybody catch on to the circularity of this policy? RM50 per BR1M recipient going to Takaful companies, who will turn around and invest in – government securities. Sweet.

Like

1. The Netting Act – I had to have this one explained to me, but it makes a whole lot of sense.
2. Incentives for pensions and PRS – the household savings is poor, to put it mildly. The earlier you start the better.
3. Outcome based budgeting, and proactive audits – They’ve been talking about the former for years, and the later was a reaction to the A-G’s report. Either way, both good.
4. RM530 million for pre-schools – I like this no end, cause I think we really need to move to universal pre-school. Though I have to ask, is this enough?
5. Public transport improvements – RM2.9 billion for double tracking, “park and ride” and other facilities. ‘Bout time.

Conflicted

1. BR1M – I agree with BR1M, and I think its necessary. The increase is probably warranted, and financing it is probably more than covered by the cut in petrol subsidies. The problem I have is that its still unconditional. Breaking poverty barriers, even relative poverty, means changing behaviours. This won’t happen with unconditional cash transfers, worthwhile though that may be on their own.
2. Property measures – Banning DIBS was good, raising RPGT was probably inevitable. Neither will work to really stop property speculation. Unfortunately, the most effective tool – raising stamp duties – would kill the market in its tracks, and that won’t be pretty at all, oh no my preccioussss.

Don’t Like

1. Agriculture – it’s not an excuse to say that everybody else does it. Agricultural subsidies are politically untouchable in pretty much every country. Some of the incentives here will probably be effective (raising productivity for example), but most won’t. I see these measures really as income support more than anything else.
2. MaGIC – one more government agency we have to remember (and probably forget).
3. RM600 million for R&D at research universities – that works out to about 0.5% of GDP. Won’t raise our R&D standing one bit, not when more advanced economies are spending 2% or more.
4. RM100 million for education and RM50 million under Tekun for the Indian community – I don’t like this, not because it targets the Indian community, but because I don’t think it’s anywhere near enough.

What were they thinking?

1. Corporate tax cut – this one’s strange. It’s sold as part of the package of incentives to offset the introduction of GST. But companies will have no tax liability under GST and there’s a whole slew of proposed support for software and training to help companies cope. If it was couched as necessary for international tax competition, it’d be more understandable – though I still wouldn’t agree. This one still leaves me scratching my head.