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.

Guys, This Argument Is A Total Waste Of Time

YB Rafizi Ramli is claiming that income tax collection has exceeded the rate of growth of the economy (excerpt, emphasis added):

PENINGKATAN KUTIPAN CUKAI PENDAPATAN SEJAK DATO’ SERI NAJIB MENJADI PM SUDAH PUN TINGGI, SEKARANG LHDN TERUS KEJAR RAKYAT

…Maknanya, dalam tahun 2017 ini pentadbiran Dato’ Seri Najib dijangka akan mengutip hampir sekali ganda lebih banyak cukai pendapatan (pada jumlah RM112 bilion) berbanding kutipan tujuh tahun lalu iaitu 2010 semasa beliau mula-mula menjadi Perdana Menteri (pada jumlah RM60.3 bilion).

Malah, kenaikan purata tahunan sepanjang tempoh 2010 ke 2017 (disebut cumulative annual growth rate atau CAGR) adalah 11%, iaitu kadar bertambahnya kutipan cukai tahunan secara purata di antara 2010 ke 2017 sebanyak 11% setiap tahun….

…1. Pertumbuhan ekonomi negara hanyalah sekitar 5% sahaja dalam tempoh yang sama. Jika ekonomi tumbuh hanya 5%, maknanya rakyat tidak merasa kenaikan gaji yang mendadak dan peniaga juga tidak merasa keuntungan yang mendadak yang membolehkan LHDN mengutip cukai yang lebih tinggi

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….

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).

Malaysia’s Government Contingent Liabilities

A fast one (seems like all I have time for these days are fast ones), on contingent liabilities (excerpt):

Analysts say Govt’s contingent liabilities likely to rise

...In recent years, the Government has relied on what is called contingent liabilities, or off-the-books debt, to fund major development projects. Big-ticket items such as the rail lines cost billions of ringgit, and with Government debt close to its self-imposed ceiling of 55% of gross domestic product, the use of special-purpose vehicles (SPVs) that take the debt burden off the Government’s books has been almost the preferred way of funding such mega projects.

Cumulatively, contingent liabilities amount to RM178bil worth of guaranteed debt by the Government. With government debt at RM630.5bil at the end of last year, the off-the-books debt that is guaranteed by the Government is worth 28% of the public sector’s total debt.

...Structuring debt in such a way is by design, according to economist Datuk Dr R. Thillainathan, who is the former president of the Malaysian Economic Association....

5 Thoughts on the OPR Cut

At the risk of getting a phone call from across the road, here’s what I think of last week’s 25bp OPR cut:

1. Surprise!

One of the reasons the move came as a surprise to the markets and everyone else was that it was not telegraphed beforehand. Nobody got a hint of any change in policy, right up to the announcement. On the one hand, this breaks with recent practice around the world, where guidance is given so that markets adjust in a relatively orderly fashion. On the other hand, if you believe in the neutrality of money and rational expectations, surprise changes in monetary policy are the only changes that work. More on this in a bit (see point 5).

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!

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.

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.

Thoughts On The Alternative Budget

This is even later than my thoughts on the official budget (this was supposed to have been published two days ago), even though Pakatan’s budget proposals came out a day earlier.

I’m not going to do a head-to-head with the “official” budget – the two are very different animals, and any comparison will not be fair. Pakatan does not have full access to the minutae of government operations, and as such will not have the kind of detailed expenditure breakdown that the official budget does. I take it for what it really is – a policy platform, akin to a political manifesto.

Thoughts On Budget 2015

It’s been a really hectic week, which is the reason I haven’t put down my thoughts on the budget sooner. In one sense, that’s an advantage – it means I get some time to think about it more. In another sense, it’s not – people are probably suffering from budget “fatigue”.

Be that as it may, here’s what I really think: there was a little something in here for everyone…emphasis on “little”. Ok, I’m kidding, just a bit.

Budget 2015–No Live Blogging

Unlike in past years, I won’t be live-blogging the budget this afternoon. I’ll be busy doing…other things.

However, I’ll do my best to tweet about it if time permits (catch the link to my Twitter feed on the right-hand column). Nor have I forgotten about the PR Alternative Budget which was released yesterday (link here)– again, a lack of time to comment. I’m hoping I can do something about both tomorrow.

Regulation And Ratings

There’s a fascinating new working paper at the NBER that examines how the confluence of ratings and regulation conspired to help create the 2008-2009 global financial crisis (abstract):

Rating Agencies
Harold Cole, Thomas F. Cooley

For decades credit rating agencies were viewed as trusted arbiters of creditworthiness and their ratings as important tools for managing risk. The common narrative is that the value of ratings was compromised by the evolution of the industry to a form where issuers pay for ratings. In this paper we show how credit ratings have value in equilibrium and how reputation insures that, in equilibrium, ratings will reflect sound assessments of credit worthiness. There will always be an information distortion because of the fact that purchasers of ratings need not reveal them. We argue that regulatory reliance on ratings and the increasing importance of risk-weighted capital in prudential regulation have more likely contributed to distorted ratings than the matter of who pays for them. In this respect, much of the regulatory obsession with the conflict created by issuers paying for ratings is a distraction.

Skipping over the math, what Cole & Cooley observe is that credit ratings and rating agencies continue to function pretty well, even under the potential conflict of interest arising from the “issuers pay” model, at least for “vanilla” credit securities.

Debt, Deficits, and Government Assets

I’ve been asked by a number of people to comment on this (excerpt):

Laporan Bank Dunia: Kerajaan BN Jual Aset Negara Untuk Capai Sasaran Defisit

Pentadbiran Dato’ Seri Najib Tun Razak terus mengumumkan angka-angka untuk meyakinkan orang ramai dan institusi kewangan bahawa beliau serius untuk mengekang tahap keberhutangan negara. Sasaran yang diletakkan ialah untuk menurunkan defisit ke paras 4% dari jumlah Keluaran Dalam Negara Kasar (KDNK)…

…Lebih memeranjatkan, Dato’ Seri Najib Tun Razak dilaporkan akan mengambil jalan menjual aset negara dan menerbitkan lebih banyak sekuriti hutang dari aset-aset negara semata-mata untuk menutup kegagalan pentadbiran ekonomi beliau mencapai sasaran defisit yang beliau sendiri tetapkan.

3Q2013 Government Debt Update

As outlined in the previous post, debt growth has slowed this year (log annual and quarterly changes):

3Q2013 Government Finance

The latest data on government finance is now available (RM millions):

Budget 2014: Highlights and Lowlights

Well, its in the books now – metaphorically speaking that is, because it technically still has to pass Parliament.

First a look at the headline figures:

1. Growth is expected to be between 4.5%-5.0% this year, and 5.0%-5.5% next year.
2. Government operating expenditure is slated to increase 0.7% to RM217.6b, while development expenditure is expected to rise/fall to RM46.5b/RM44.5b depending on whether you believe the speech or the 2013-2014 Economic Report.
3. Government revenue is forecast to increase 1.7% to RM224.1b