A quick note on this (excerpt):
PETALING JAYA: Budget 2015 is to be re-examined, with spending cuts likely to be made in the face of plummeting global oil prices.
Prime Minister Datuk Seri Najib Razak said there was a possibility that the budget tabled last Oct 10 would be restructured.
He told reporters that a statement on this restructuring would be issued next week.
Critics noted that the country’s Budget 2015 totalling RM273.9bil has become increasingly untenable as global oil prices drop below US$50 a barrel.
Budget 2015’s projected revenue was based on global oil prices of US$100 to US$105 and increased tax revenues. Since late June, prices of both US West Texas Intermediate (WTI) and the global Brent crude benchmarks have more than halved on a combination of a supply glut and softening demand stemming from the uncertain global recovery.
Fitch Ratings said in a report on Monday that sustained weak crude oil prices in the international market could threaten to delay, or even derail, the Government’s fiscal consolidation efforts….
What I hear was that this was supposed to have come out a couple of weeks earlier, but got postponed due to the PM catching e. coli while visiting the flood zones. We’ll be hearing the details next Tuesday, with a dialogue session planned for the week after.
In any case, my take on this is that it makes fiscal and financial sense. With the pressure on markets and the Ringgit, on top of the news about 1MDB, restructuring the budget by cutting expenditure is the sensible thing to do to support investor confidence.
That’s the kindest thing I can say, because it makes no sense at all from an economics perspective.
Given the drop in oil & gas export revenues and the cuts that have and will probably be announced in O&G capex spending, simultaneously cutting government expenditure to conform to the drop in revenues virtually guarantees slower growth. I hadn’t been inclined to cut my growth forecast for this year, but now it looks inevitable.
Worse, slower growth means government revenue will also be even lower than expected. The lessons of the Eurozone crisis and fiscal austerity programs aren’t being heeded. Trying to maintain fiscal consolidation in the face of slowing growth is nothing but a painful race to the bottom. Now the burden of maintaining the economy’s growth path has been tossed back to BNM, who don’t seem inclined to reverse last year’s rate hike given the concerns over still high household debt.
Of course, we’re talking about marginal changes here, which shouldn’t be too negative for growth. The cuts required to keep to the 3.0% deficit target aren’t, in the grand scheme of things, very big. Nevertheless, this would not have been my preferred policy solution mix. I would’ve kept government spending as planned, fiscal deficit be damned.
And Fitch? I hear the kite flying is pretty good in Greece this year.