Assessing Budget 2017

Today’s the first chance I’ve had to sit down and really think about the budget, past the first impressions we all got on Friday.

Overall, it somewhat exceeded my expectations. Granted, my expectations were undemandingly low, which is what happens when you commit to a hard limit on public debt and promise to cut spending over the medium term. But within those constraints, there was still some nice ideas in the budget speech.

But first, the macro projections. Again no big surprises – growth at 4%-5%, inflation between 2%-3%, and a deficit target of 3%. These were all within expectations, and more or less communicated before the tabling of the budget. My impression though is that things will be a little easier next year than this year, as revenue is expected to start growing again as will operating expenditure. The impact will again be slightly negative on growth, as implied by the reduction in the deficit.

Philosophically however, I’m in two minds. Looking at the current situation, where we have very high household debt, and middling public and corporate debt levels, I don’t know if fiscal consolidation should be that much of a priority. This is especially true since public/private debt tends to have a substitutive relationship.

Let me explain (hopefully in a way that makes sense): There is a complementary set of fiscal and monetary policy settings that are consistent with full employment growth. At the extremes, you could have highly expansionary fiscal policy offset by contractionary monetary policy, or expansionary monetary policy offset by contractionary fiscal policy. In between the two extremes, there will be trade offs between the two.

Ideally, there would be a situation where both would be neutral, but that would depend on the specific circumstances – under the secular stangnation thesis for example, “neutral” requires expansionary fiscal or monetary policies or both.

But I digress. The point here is that in a situation where fiscal policy is effectively contracting, ceteris paribus, you’ll need expansionary monetary policy to ensure growth remains on course. In other words, the government’s fiscal consolidation agenda puts pressure on BNM to delay monetary policy normalisation (a return to neutral), or even to loosen monetary policy as we saw earlier this year. But the transmission mechanism from looser monetary policy to growth is via the medium of increased private borrowing (from lower borrowing costs).

Put another way, reducing the public debt burden requires an increase in the private debt burden, and vice versa. Equivalently, public savings must be accompanied by private dissaving, and vice versa. The only way out of this is to accept less than full employment growth, which has costs of its own, not just on an individual level but for society as a whole (lower investment, long term costs of unemployment etc).

If we add on the complexity of an open economy to our little thought experiment, the only way both public and private sectors can save simultaneously is through the dissaving of some external party, i.e. via a current account surplus. But that relies on the rest of the world dissaving i.e. running a current account deficit. If everybody is dealing with debt problems and global growth itself is below potential, then we’re all out of luck. Fixing one imbalance implies a growing imbalance somewhere else.

Given the differences between debt levels and resources, my preference would be to delay fiscal consolidation and fix the household balance sheet first, because households are far more vulnerable.

As I said, I’m in two minds about this, because the effect of having to manage fiscal consolidation in an environment of falling natural resource revenues is having a salutary and gratifying effect on the efficiency of government spending. Is this efficiency gain worth the lost growth potential of the economy? I don’t know – again, it’s partly a philosophical question.

Anyway, on to some of the specific measures that I found of interest:

1. Home ownership – easier financing (I won’t comment on the EPF involvement), some subsidies, use of government lands, etc. All helpful, but in aggregate too small to fully address the supply shortfall just yet. The housing market will likely remain unbalanced for some years to come.
2. BR1M increase – as expected, and fairly significant at that, ranging from 12.5% to 20%. Would certainly help support private consumption  next year.
3. Malaysian Bureau of Labour Statistics? Yes, please. I’m on the technical committee for one of the stats in question, and there’s a real push for improving our knowledge of the labour market. Unfortunately, it’ll be some time before the data starts getting published.
4. UTCs, RTCs, and new Job Centres – I’m a fan of this concept. It’s really improved government service delivery, and we could do with more (existing ones are getting crowded).
5. The Collection Intelligence Arrangement (CIA) – this may come as a surprise to most people, but most agencies within the government don’t really share info. Part of the problem is that there is no legal framework for data sharing even within the government, on top of the strong disincentive provided by the Personal Data Protection Act. The result is a lot of difficulty in policy coordination, which requires a measure of goodwill among ministries to overcome.
6. Healthcare – a big allocation here, including recognition that existing facilities are under strain (while I was writing this, the news broke about the Hospital Sultanah Aminah fire – my condolences to the victims families). Healthcare spending has continued to escalate, and will become a bigger headache as the population ages, and we very obviously need to spend more on maintenance.
7. Taxi industry restructuring – we’ve been talking about this for years, and it took Uber and Grab to finally force some semblence of sanity into the industry structure. Taxi drivers will now gain individual permits, which should reduce monopoly costs and make finding a living easier.
8. Broadband – key effort I think, in this post-industrial age. It’s especially critical for rural development.
9. Childhood and pre-school – I really, really wish we could do more here (I have some ideas for improvement), but opening access to 200,000 more kids is great.
10. Higher education – the budget cuts here are controversial, because of how deep they are. Personally I’m more in favour of providing greater funding to TVET and early education rather than tertiary, but I’m concerned about how these cuts would feed into the depth and breadth of university teaching.
11. Corporate tax discount – this one’s really interesting, and a novel idea. I’m not sure how beneficial it would be, but it’s not quite as crazy as it sounds. One issue Malaysia has had is just getting companies (and people for that matter) to declare their income. The lower tax rates based on profit growth might drive the right or wrong behaviour, and I’m wondering whether this has ever been tried before anywhere else. In any case, something to keep an eye on in the future.
12. Civil service perks – I’m not terribly keen on the increase of loan eligibility for civil servants (civil servant debt loads are alrady too high), but won’t complain too much on the rest of it.

Overall, there was a little something for everyone – unfortunately, emphasis on little. The feedback I’ve been getting was that there wasn’t much excitement in this budget, but given the public’s emphasis on keeping expenditure and debt under control, I hardly know what people were really expecting.

Notwithstanding my comments above on whether such fiscal rectitude is desirable in the first place, MOF has had the difficult task of balancing all the competing demand from stakeholders and for funds against some very hard constraints. I can’t say I particularly like those contrainsts, but I understand the motivation.