Alternative Budget 2017

It’s that time of the year again!

I’m not going to comment extensively about the Alternative Budget (you can download it here), especially on the numbers. I’ve already spotted one whopper of an error, and another biggie that can be put down to lack of info (more on this later). Given the assymmetry in information between government and opposition, I’m not going to be too critical over these.

Rather I want to touch on the broad themes raised in the document. As an aside, I’d also note that mainstream media coverage on the Alternative Budget is far more widespread than it used to be. There was a time when barely anyone wrote about it.

On to the comments:

1. Equal opportunity commission – In principle, I’ve always agreed with this. In practice, it’s hard to prove discrimination, especially if you can’t even get a look-in for a job interview. Still, it’s an idea worth exploring – in principle.
2. Publicly subsidised increase in minimum wage to RM1500 – this proposal is clever, but not quite clever enough. Fundamentally, it’s similar to a negative income tax, but there’s no details on implementation (through employers? LHDN?). Two issues I see here: can SMEs handle a further 25% increase in the minimum wage, on top of the 10% we’ve already had this year? The document glibly notes that the expected pickup in consumption should offset the increase in costs, but this ignores the distributional impact as well as the likelihood that some portion of the increase in income will be saved. Second, the funding estimate for this program is seriously lowball (again more on this later).
3. Foreign labour – I’m in the open borders camp (and I know I’m in a total minority here). Let me introduce you to the lump of labour fallacy. I also wonder how this squares with the equal opportunity theme.
4. Procedures for government reporting – As I recall, MOF is moving towards adopting accrual accounting as the basis for preparing the fiscal accounts. A risk statement is actually part of this package, so what’s proposed here is already on the cards.
5. Anticorruption – I’ve always been sceptical of the claim of 20% savings from reducing corruption and inefficiency. Having personally involved in tenders before, I think people will find it’s much, much harder to fix than they think. I’ll leave it at that, since the proof is in the pudding – we’ll never know until its tried. Certainly, we could use more open tenders in public procurement.
6. East Malaysia – I’m agnostic on this one. Rural development, and East Malaysian development in particular, is a big challenge, and not always the best use of money. From an equity standpoint however, more attention to East Malaysia is both warranted and necessary.
7. Rice industry – have at it boys! In the words of Miracle Max, “It would take a miracle”.
8. Telco fund – I think I’m one of the very few who’ve actually heard of the USP fund. While I’m all for better efficiency in using these monies, the document’s proposals are disappointingly vague, and a bit out of touch. Might benefit from actually talking to the telco players (cell towers are actually big business in ASEAN, with listed players).
9. Public transport – Some sensible ideas here, which have been brought up time and again. Worth continually pushing for I guess, especially the last proposal to separate asset ownership and operations.
10. Public Housing – It’s not clear what’s really being proposed here. On one side, this budget proposes state governments to take the lead. But since property is a state matter, it’s up to the states to take the lead anyway. Public housing isn’t something the federal government can do much about, which is why the housing ministry is flailing about with proposals on financing, because that’s about all the federal government can influence.
11. Healthcare – I don’t know enough about Malaysia’s healthcare system (outside of its costs) to make an intelligent comment on this. Anyone care to contribute?

Apart from the above, three more general comments:

1. Rolling back GST to the old SST regime is incredibly silly. By all means try and reduce the rate (go ahead, I dare you), but going back to an inefficient and even more regressive system doesn’t do the country any favours. [Digression: In one of those odd twists of fate, GST is actually more progressive than SST, despite being broader based]. And tacking on capital gains tax and inheritance tax, while worthwhile on their own, won’t come close to replacing the revenue loss. I’m also curious on why the choice of inheritance tax rather than estate tax (not being critical, just curious on the reasoning).
2. Ignore the projected budget numbers. They’re prepared on the wrong basis of GDP, which means all the revenue and expenditure projections are off. As I said I won’t be too critical about this, but you shouldn’t use GDP in current prices, then use a real GDP (constant prices) growth forecast to generate revenue and expenditure forecasts. I’m expecting inflation next year to average around 2%, and if oil prices stay more or less as they are, that means the GDP Deflator growth will also be around that ballpark figure. But that means an NGDP growth forecast of between 6%-7% next year, not the 4.3% real GDP growth estimate used in the document. This is a novice mistake, but hey, I don’t want to be too critical, right?
3. The workforce estimate used for the minimum wage supplement proposal is also way off. My own data says roughly 2 million workers are earning at or below RM1k per month, versus the budget estimate of 362k. You also have to take into account those earning between RM1k and the proposed RM1.5k floor, as these workers would also need to have their wages raised as well – it’s unfair otherwise, and you’ll get a threshold effect at RM1k. There’s also the consideration that despite the minimum wage order, plenty of people continue to earn well below that, either due to lack of enforcement, or through employers rejigging income between wages, allowances, benefits and overtime. The bottom line is that the cost of this policy is seriously understated by AT LEAST a multiple of six. Roughly 45% of the formal workforce earn less than RM1.5k a month, so I’d say a fairer estimate would be between RM30b to RM50b, not the RM5b the budget states (even assuming that RM5b figure is correct, as I can’t figure out how they arrived at it).