RM1 trillion debt? Don’t Panic

I realise in writing this that I’ll probably be a very lonely voice in the wilderness, but I think this needs to be said and intellectual honesty forbids doing anything else. I also promised years ago that I would defend a Pakatan government when keeping an elevated level of government debt. I’m going to keep that promise now.
As the news of the Malaysian government’s real debt position has been slowly been revealed over the past two weeks, the reactions have predictably ranged from horrified to furious. Unfortunately, the prevailing thought is mostly about how this debt is to be paid back, and the burden on taxpayers as this is being done.
Let me flip my usual practice, and begin with my conclusion, before going into the reasons why.

BR1M: Good Or Bad?

Loanstreet has an article on the pros and cons of BR1M (excerpt):

Will BR1M Destroy Malaysia from Within?

Since BR1M was implemented in 2012, it's been heavily criticised by many sections of the public. Many view it as nothing more than vote buying from the marginalised in society. Its harshest critics even claim that such careless use of public funds will run the country to ruin.

We believe that politics aside, the merits of BR1M should be assessed on its own. Is it really such terrible policy? Will it ruin the country as some claim?

Because we ourselves did not know how to feel about it, we decided to thoroughly examine the issues surrounding BR1M to find out if it is actually good policy, or one that could lead Malaysia to ruin.

The “road to ruin” narrative might be a little over the top, but the article covers most of the essential points. This came out before GE14, so a rebrand is probably apposite – my vote would be for Dividend Rakyat.

Two things I would add to the articles points are:

1. Cash transfers actually do address the root causes of poverty - for the next generation. Poverty should be seen not just in terms of the current poor, but the impact that poverty has on the chances for social mobility of their children. Meritocracy only works under the unspoken assumption that initial conditions for all children are the same, which under most circumstances they are not. It's not enough to provide a good education, since this ignores the importance of for example social capital. Studies on child development also point to the importance of education in the 0-5 age range in terms of soft skills development, which even universal pre-school will not fully address.
2. BR1M was explicitly funded by the savings from the reduction in petrol subsidies. In fact, initially, they even shared the same account code in the government's books. The way government finance works in Malaysia, BR1M would be classified as operating expenditure, so it can ONLY be funded by revenues, and not by borrowing.

The First 100 Days

I’ve had multiple requests to comment on this, but haven’t had the time. To be honest, I didn’t read either side’s political manifesto too closely, as most election promises are so hedged with operational realities that the likelihood of full implementation was never going to be very high, when political idealism meets unyielding economic realities. However, now that we have some clarity on the direction forward, it’s time to seriously assess Pakatan Harapan’s manifesto.

I won’t go over the whole thing, just the 10 items that were promised for the first 100 days, and even then only those that are economics related. So, no comment on investigating scandals or the stature of Sabah and Sarawak.

Fiscal Realities

A couple of things were raised last week that I want to address:

Issue 1: The Difference between Operating and Developing Expenditure

I’ve had to explain this at least twice over the last few days, so I thought I might as well spell it out. Malaysia is one of the very few countries that actually subdivides spending between operating and development expenditure – actually, I think Singapore is the only other country that does this. MOF keeps these accounts entirely separate (I’ll touch on how they intersect in a bit), whereas most other countries consolidate the two.

Thoughts on Alternative Budget 2018

So, I’ve finally sat down to read through Pakatan Harapan’s alternative budget for 2018. There are some good ideas here, and a fair share of bad ones, but no more than expected. The numbers are bonkers, but I expected that since this is more a political manifesto than a real fiscal document. I’ll give most of it a pass except the more egregious ones, and like many, I note that some of the policy objectives and prescriptions are contradictory. At least one proposal has me upset, but I’ll leave that for the very last.

Can the (overall) numbers be achieved? I’d say yes. If the government really wanted to, they could go with a balanced budget tomorrow. But I think it would involve as much cutting the provision of public goods and services, as it would be some putative “savings'” from reducing corruption and improving governance. I’m sceptical that there’s that much savings to be had from that source.

Thoughts on Budget 2018

I missed most of the Budget speech this year, having just landed from an overseas trip. That and jet lag meant I’m late in catching up on things, and today’s the first day I’m comfortable enough with the numbers and the anmouncements to actually comment on them. I’ll have something more to say about the opposition’s alternative budget(s) later.

First up, on the economic forecasts (2017: 5.2%-5.7%; 2018: 5.0%-5.5%). They’re eminently achievable, especially with the high frequency data coming in. The numbers continue to surprise on the upside, though some of that is coming from the low base we had last year. Even if we see just trend growth for the rest of 2017 and into 2018, the forecasts should bear out.

Cognitive Dissonance: Singapore Fiscal Policy

I kept getting this promoted tweet on my Twitter feed over the last couple of days, from the Lee Kuan Yew School:

2 principles shape SG's fiscal policy: balancing the budget and keeping government small. #SG52 #SGpublicpolicy https://t.co/VLrH1Sg2Ud pic.twitter.com/mJzJRc0Uny

— Lee Kuan Yew School (@LKYSch) August 8, 2017

I usually don’t bother with promoted tweets, but curiosity eventually won over and I read the article. It’s a fair description of Singapore’s fiscal policy framework, although the part on the management of past reserves could have been expanded for clarity (there’s no mention of GIC or Temasek in there for example, or the endowment funds the government set up).

There is however, one part I’m in violent disagreement with (excerpt; emphasis added):

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.

Budget 2017: Going Live

…but not in the usual way. I’ll be running around like a headless chicken for most of today (apologies to all headless chickens, by the way), so live bloggin the budget as I’ve done over the last few years won’t be possible.

However, I’ll try to put something up when the budget speech ends, and more importantly, you can catch me on NTV7’s post-budget show at 8pm.

Further analysis by next week (the weekend’s going to be pretty hectic too).

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.

The Difference Between Quantitative Easing and Helicopter Money

I just read a report from a major international bank this morning(who shall remain nameless) that claimed helicopter money was already being implemented in a few countries, herein defined as monetary financing of fiscal deficits.

This is wrong, and they’re confusing quantitative easing (QE) with helicopter money (HM). The difference between the two is more than just semantics, despite the superficial similarities between the two in largely involving central bank buying of government bonds.

The easiest way to show this is via an example. Let’s say the private sector has $100. The government wishes to borrow $50 to finance its spending. So the private sector buys $50 worth of government bonds, the proceeds from which the government uses to spend on goods and services. But that money goes back to the private sector, so the asset side of the private sector balance sheet now reads $100 cash and $50 in bonds. The private sector balance sheet has expanded, as has the government’s.

Now that we’ve set the stage, we can work out how QE and HM affects the economy.

MOF Smackdown…Of Me

Mea Culpa!

Last week, the government tabled a supplmentary supply bill in Parliament, seeking retrospective approval for RM3.3 billion extra in spending allocation for 2015. The usual headlines ensued.

My impression had always been that supplementary bills of this sort (and we’ve had one every single year that I can recall) were additive to the original annual budget estimates i.e. the government overspent the previous year, and had to seek Parliamentary approval for the overspend. I didn’t really have a problem with this, because MOF has also always been pretty conservative with their revenue estimates. On occasion the extra collection can be pretty large – in 2011 for example, they underestimated actual revenue by 11.2%(!).

In coversation with a senior MOF official yesterday (actually, it was more of a polite scolding), it turns out I was wrong.

We’re still looking at a case of overspending, but the supplementary bills are not necessarily an addition to the original budget. It turns out they only cover cases where some ministries have overspent their allocation; but as some ministries also don’t fully utilise theirs, the impact on the aggregate budget isn’t necessarily the same as the figure in the supplementary bill. We could for instance have a situation where even a largish supplementary bill might not imply an increase in actual versus planned government outlays.

I’ll probably need to reach out to MOF to clarify the situation further (for example the implication that parliamentary budget allocation approval is at the ministry/agency level), but it looks like the supplmentary bills aren’t exactly what they seem.

So, humble pie time. Mea Culpa!

Exchange Rates Are Relative Prices: China Edition

Or Part Two: The Real Reason Why I Feel Snarky This Week

Last week, an article by Prof Xiao Geng and our very own Tan Sri Andrew Sheng appeared on Project Syndicate (excerpt):

China’s Lonely Fight Against Deflation
…the current battle over the renminbi’s exchange rate reflects a tension between the interests of the “financial engineers” (such as the managers of dollar-based hedge funds) and the “real engineers” (Chinese policymakers).

Foreign-exchange markets are, in theory, zero-sum games: the buyer’s loss is the seller’s gain, and vice versa. Financial engineers love speculating on these markets, because transaction costs are very low and leveraged naked shorts are allowed, without the need to hedge an underlying asset. The exchange rate, however, is an asset price that has huge economic spillovers, because it affects real trade and direct-investment flows....

This is a mix of a witch-hunt, denial of economic theory and reality, flawed analysis, and historical revisionism. It's perhaps a blessing (and telling) that this appeared under the business and finance section, and not under economics.

Mexican Two Step

Last week, Banco de Mexico and the Mexican government delivered a double whammy to the financial markets (excerpt):

Mexico Battles Emerging-Market Bears With Surprise Peso Defense

The Mexican government’s unprecedented steps to protect the peso are off to a good start.

The currency posted its biggest rally in five years Wednesday after officials said they will increase the benchmark interest rate, reconfigure an intervention program to contain volatility and reduce government spending. It advanced another 0.5 percent on Thursday. The new measures came after the peso plunged 8.9 percent to start the year, the worst performance among major currencies, and was down 31 percent over the past 18 months as investors sold off emerging-market assets.

Thoughts On Budget Recalibration

Assume you have 20 marbles. I take 4 and borrow 1 from you, for a total of 5. I then give back 5 to you. How many marbles do you have?

Start with the same 20 marbles. I take 3 and borrow 1, then give back only 4. How many marbles do you have now?

If the first scenario was the original government budget for 2016, last week's budget "recalibration" is the second. In aggregate terms, the revised budget is fairly neutral. With no change to the deficit, either in absolute or relative terms, the impact on the economy should be muted.

That's the theory anyway.

Graeber on Sectoral Balances

I touched on this a few times before, but here’s David Graeber on sectoral balances and flows (excerpt):

Britain is heading for another 2008 crash: here’s why
David Graeber

British public life has always been riddled with taboos, and nowhere is this more true than in the realm of economics. You can say anything you like about sex nowadays, but the moment the topic turns to fiscal policy, there are endless things that everyone knows, that are even written up in textbooks and scholarly articles, but no one is supposed to talk about in public. It’s a real problem. Because of these taboos, it’s impossible to talk about the real reasons for the 2008 crash, and this makes it almost certain something like it will happen again.

I’d like to talk today about the greatest taboo of all. Let’s call it the Peter-Paul principle: the less the government is in debt, the more everybody else is. I call it this because it’s based on very simple mathematics. Say there are 40 poker chips. Peter holds half, Paul the other. Obviously if Peter gets 10 more, Paul has 10 less. Now look at this: it’s a diagram of the balance between the public and private sectors in our economy:

Budget 2016: Some Thoughts

The best laid plans of mice and men…

I was going to put up an analysis of Budget 2016 the day after the budget, but as luck would have it, I managed to come down with pneumonia and have spent most of the last two weeks trying to recover. So here’s a very belated, quick overview of what I think of the budget.

Or you can take this is as the confused, feverish ramblings of a diseased brain.

Live Blogging Budget 2016

I’m back at work, and just in time to catch the budget. In case anybody’s wondering where I disappeared to over the past month, I’ve been on a spiritual pilgrimage and only just got back a few days ago. It’s been a bit depressing having to come back to the real world (and the haze), but it was a simultaneously fun and scary break from work, responsibility, and everything else.

As has become traditional, I’ll be live–blogging (and tweeting) on Budget 2016 as the speech is delivered this afternoon, subject to my internet connection holding up. So stay tuned on this page.

• We’re almost live – PM has arrived at Parliament
• Some of the media outlets have jumped the gun already on the numbers
• Oh well, me too:
• 2016 Growth forecast at 4%-5% - no surprise
• Budget deficit at 3.1%, a little lower than this year’s 3.2%
• Revenue and Opex almost unchanged
• Development budget up by RM3b
• Inflation expected to remain between 2%-3%
• GST registration and compliance much better than expected (about twice as much as initially expected)
• Petronas dividend affected by oil prices – oil-related government revenue dropped 1/3 this year to RM44b
• RM21b drop in revenue, if GST had not been implemented
• 7 improvements to GST
• Controlled medicines and some others will be zero-rated (doubling the list)
• Zero-rated list for food also increased
• Decrease in registration threshold
• Approved traders scheme
• Temporary imported goods
• Vocational education
• Rebates given for prepaid telephony
• Income tax raised for the rich? 28% nice
• Investments – Malaysian Vision Valley, Cyber City Centre, Aeropolis, RAPID – doesn’t sound like much of it is actually borne directly by the govt
• Lots of other small projects, mainly rural
• MRT1/LRT extension to be completed next 2016
• Status updates on MRT2/MRT3/HSR/BRT
• RM1.2b for rural broadband
• Extension of income tax relief for tourism
• RM5.3b for agriculture
• Tax relief and exemptions for some agricultural projects – some aren’t new but extensions however
• Also for export-oriented SMEs
• 2016 – Malaysia Commercialisation Year (?)
• Focus on raising labour productivity
• A few small grants for innovation and entrepreneurship
• Taking on KRIS’ idea of industrial building system
• RM41.3b for education
• Cash and book vouchers students from for low income households
• Big money for vocational education
• Women’s corporate participation reiterated, but that’s it
• Bumi agenda – grants to existing agencies
• Sabah & Sarawak – Pan Borneo Highway (RM16.1b and zero toll), domestic air travel GST exempt, RM70m in zero-interest loans for longhouses (RM50k per unit), rice planting fertiliser subsidies, RM115 for special projects, mobile clinics
• B40 assistance
• RM600m for Bumis and Indians via Tekun
• RM60m for SME Bank
• RM200m for AIM
• RM100m for Indian NGOs
• RM90 for Chinese hawkers
• Waiting for BR1M (….)
• RM300m for Orang Asli
• RM852m for Risda and Felcra (for rice and rubber smallholders)
• Affordable Housing – Pr1ma, SPPK etc etc
• RM2b for social safety net
• RM17.3b for defence and security – quite a bit of procurement, including drones
• Civil service pay rise, minimum civil service wage set at RM1200, minimum pension at RM950
• No bonus?
• BR1M
• Under eKasih RM1050
• Under RM3000, up from RM950 to RM1000
• RM3001-4000, up from RM750 to RM800
• Single individuals below RM2000, raised from RM350 to RM400
• Total cost RM5.9b
• For the M40:
• Child Tax relief increased from RM1000 to RM2000
• Tax relief for single earner households raised from RM3000 to RM4000
• Tax relief for university going children, raised by RM2k
• Socso eligibility raised from RM3k to RM4k
• Minimum Wage Raised!!!!
• RM500 gratuity to civil service and RM250 for pensioners

And that’s a wrap.

I’ll post my first impressions here later tonight, so check back tomorrow morning.

11th Malaysia Plan: Quick Impressions

This was supposed to have come out a couple of weeks ago, but I ran out of time before leaving on a holiday. Just some quick thoughts on the 11MP:

1. Overall, the 11MP underscores the shift in the government’s strategy. There’s been a gradual but noticeable shift from boosting growth to labour and social issues in the last few years. This means potentially accepting a lower rate of growth to making sure that what growth we do get is more equitably shared.

Living Beyond One’s Means

Overspending is fairly straightforward when it comes to households. It’s a little more nuanced with corporates, but its a lot more convoluted when it comes to governments and nation states.

Here’s a quick rule of thumb, when it comes to governments:

1. A country is living beyond its means when its running a current account deficit
2. A country is living within its means when its running a current account surplus

How does this relate to governments? It doesn’t.

A country can be running a surplus or a deficit irrespective of whether the government is running a surplus or deficit. It’s really about the balance in the flow of funds between the different sectors in an economy – governments, households and corporations. Just because a government runs a deficit says nothing about whether the country as a whole is living beyond its means.