Teaching Moments

Angst over GST seems to be rising, or at least being more deliberately aired. I’m feeling like a broken record (for those under the age of 40, this is what that phrase means).

First up (except):

On Bruce Gale’s Najibnomics
By TK Chua

…The author wrote as if 1MDB, FGV and the controversial Arab donation are trivial matters. Are these not matters closely related to the poor governance, malfeasance and lack of confidence that the country is facing now? How else is the management of an economy perceived to be in good hands if not through the manner in which public finance is managed?

The author talked about “inherited” problems, such as public debt, which is strictly not the fault of the current administration. It was due to a single year’s pump priming in 2009 when the present prime minister first assumed office.

Perhaps it is time for the author to look further afield – at off budget agencies, public enterprises and GLCs, the massive loans of which are guaranteed by the federal government. Perhaps he should also look at new loans to be disbursed soon on new mega projects such as the ECRL and other gateways, the viability of which are deemed doubtful by many….

…I think we have heard ad nauseam that the weak ringgit is due to weak oil prices. My question is why are countries with no oil, to begin with, not as badly affected as Malaysia? Did the Thai baht and Sing dollar suffer the same fate as the ringgit? As an oil producing country, whatever the oil prices, it should provide us strength rather than weaknesses.

The author also argued that a weak ringgit is not all bad. It makes Malaysia’s exports cheaper and provides foreign direct investors with an opportunity to establish a presence in the country. I, too, have studied economics for many years and I can tell him this: it is an oxymoron argument to use “non-orchestrated” weak currency to “promote” export and foreign investment. Is Zimbabwe promoting export and encouraging foreign investment?

The author justified subsidy cuts by pointing out its unsustainability over the medium term. But was there really a subsidy cut? If in the past many wealthy people had enjoyed subsidies, I can say the same thing about BR1M, too. There are thousands of “wealthy” people, but with no documented income and, therefore, are entitled to BR1M payments. I think we will dig a bigger hole with BR1M eventually.

When imposing GST, the argument has always been we need new sources to replace the oil-related revenues. But after GST, have we resolved our deficit problem? The truth is we have always grown our expenditure to meet any new revenue we can lay our hands on.

Totally confused argument, since the data says otherwise. One by one:

1. In the first few paragraphs, Mr Chua is referring to contingent liabilities. They look big, but only taken in isolation. Total government guarantees is about RM180b, which would adds up to perhaps 15% of GDP. What’s not mentioned is that Malaysia’s implicit contingent liabilities are at least twice as large, and that many countries have much, much bigger implicit debt loads. In the US for example, government guarantees alone are 100% of GDP, and total contingent liabilities (exclusive of Medicare and Medicaid) reach 500% of GDP. For those who think they get away with it because they are a developed country, the absolute amount is in the region of USD75 trillion. The worst ratio I’ve seen is Poland, at over 1000% of GDP.
2. For someone who claims to have studied economics, the comments on the Ringgit and oil defy belief. When the global price of a commodity falls, that causes an income and welfare transfer from producers to consumers, since consumers can buy more of that commodity at any given income level. In exchange rate terms, that means the currency of the commodity producer will fall, while those of consumers rise, which acts as a buffer against the shift in the terms of trade. This is basic international macro. Why should Singapore or Thailand be worse off when the price of oil falls? Neither of them are producers. That same body of work also suggests that having natural resources are more a curse than a blessing.
3. On the trade effects of the Ringgit’s depreciation, one need only look at export data across the region. Malaysia saw 1.1% export growth in 2016, and 1.6% in 2015. Everywhere else was a bloodbath. Singapore for example, saw –5.1% and –6.5% over the same period. Few countries in East Asia did any better. Zimbabwe on the other hand is a landlocked country, with few international trade linkages, and little to offer except *cough* natural resources *cough*.
4. On government revenue and expenditure, these are the growth numbers since 2006. You’ll note that since 2013, growth has been below that of GDP growth, while over the past two years, both revenue and expenditure have been actually shrinking (log annual changes):



5. On BR1M, the author fails to note that MOF has clamped down on abuses. I’m told IRB now has reference data from JPJ and the various land offices to check on applicants assets, and not just incomes, when assessing elgibility.

Second, Tony Pua has some things to say about GST (excerpt):

Najib admits to dismal failure in financial management
Tony Pua

MP SPEAKS | Prime Minister Najib Abdul Razak told the crowd at the TN50 dialogue with women yesterday that without the goods and services tax (GST), the government would have collapsed financially, and hence Malaysians should be thankful that he has implemented the GST….

…The prime minister could not be more wrong on two counts.

Firstly, why is it that a country like Malaysia, which is blessed and rich with income from natural resources, suddenly so desperately dependent on GST revenue after 60 years of independence?

Without the GST, the federal government revenue has increased consistently from RM123.5 billion in 2006 to RM185.4 billion (2011) and to RM219.1 billion in 2015.

The above represents a 77.4 percent increase in revenue in the 10 years before the GST was implemented, or an annual compounded growth rate of 6.5 percent - well above the average annual GDP growth rate….

…The very reason why the BN government is forced to implement the GST today to collect more taxes is that we have indeed borrowed heavily over the past decade.

Our federal government debt has increased from RM306.4 billion in 2008 to RM655.7 billion by the end of 2016. Hence the government’s debt increase of 114 percent far outstrips the revenue increase of 77 percent!…

…The next question to ask is, why has the BN government borrowed so much and where have all the money gone?

The answer is simple - waste, corruption and kleptocracy in the BN administration, as epitomised by the 1MDB scandal - which will cost the Malaysian taxpayers at least RM42 billion.

Without further ado:

1. It’s the same obsession with natural resources again. Having natural resources guarantees nothing, and is in fact a millstone around our necks.
2. Tony claims revenue growth has exceeded GDP growth. Two proofs why this claim is wrong. First, like many, he makes the mistake of calculating GDP growth based on (inflation adjusted) real GDP, not nominal GDP. The CAGR of nominal GDP for the ten years prior to GST was in the region of 8.4%, well above the 7.2% [sic] increase in revenue. Second, the revenue to GDP ratio has been falling, which again shows revenue growth is lagging GDP growth:
3. Most of the debt increase occured in 2008-2009, due to the global financial crisis. More specifically, it came from revenue falling well below expectations, not because of an increase in spending. Funny thing is, the same thing has been happening in the last two years, except without the acceleration in debt growth:
4. Next is the insinuation that 1MDB et al are responsible for the increase in debt. Which is nonsense of course, since 1MDB, FGV and the lot are off the balance sheet. That may or may not be true in the future, but they’re certainly not accounted for now.

Lastly, the economics of ikan kembong (excerpt):

The economics of ikan kembung
Sharon Tan

ONCE known as the “poor man’s fish”, the possibility that ikan kembung might become a price-controlled item is perhaps a better economic indicator for ordinary Malaysians instead of growth figures issued by the government.

The price of the humble fish in the mackerel family has been rising since the introduction of the goods and services tax (GST) in 2015.

Another factor has been fluctuating petrol prices. Prior to the GST, kembung or Indian mackerel, fetched around RM8 per kilo at the market.

In the past year, the price of kembung, the fish that sets the benchmark for other types of fish, has fluctuated between RM16 and RM22 per kilo throughout the country, causing consumers to adjust their diets besides buying less….

…Noting that the hike in prices not just for fish but for seafood overall, Siti Zahara who is anaemic said she often buys cockles when the dizziness gets the best of her but has also cut down on that of late….

…Earlier this month, the Domestic Trade, Cooperatives and Consumer Ministry said it might place Indian mackerel on the list of price-controlled items, provided the supply remained consistent and stable throughout the year.

Of the basic food items on the government’s list of some 20 controlled goods, chicken is the only protein. Fish and chicken are widely consumed meats in Malaysia compared to beef and mutton which are largely imported and more expensive.

Fishmonger Kenly Chin blamed the higher price of a once-cheap fish like kembung on the GST and the weak ringgit.

“People used to buy whole fish like tenggiri but now they buy in pieces or half a fish. Prices have gone up gradually after GST.

“Our weak ringgit does not help as we also buy fish from Thailand and Indonesia,” said Chin.

Consumers are likely buying less and stretching their ringgit, as the expected increase in the sale of chicken has not seen a drastic rise in tandem with the higher price of fish….

Let's call it the economics of seafood instead. You can see a summation of my thoughts here. The short version: Global fish supply has stagnated, while demand has increased in both depth (global population growth) and intensity (eating more per person). The combination of the two has caused a 300% expansion in overfishing (unsustainable rate of fish landings). We are literally eating down global fishery stocks. Price increases are a natural consequence, and have little to do with GST – seafood prices have been increasing globally at a fantastic rate, and its not just a local phenomena.

Apropos, putting ikan kembong on the controlled price list is a total non-starter. When prices are increasing due to global supply constraints, putting a cap on local prices simply diverts supply to those more willing to pay while retailers (who won’t be able to make a profit) will no longer carry the fish. In other words, price controls will just reduce the supply to Malaysia.