Thursday, July 26, 2012

Mythbusting: Government Debt Edition

Teh Chi-Chang of Refsa was on BFM radio the other day promoting his new book:

The Dark Side of Budgets

I sometimes feel like I’m banging my head against a wall.

Put me down as one who isn’t worried at all about Malaysia’s debt level or deficits as they stand. Plenty of financial market analysts and laymen appear to be concerned, but I don’t know many economists who think we have an immediate or even medium term problem.

Disclaimer: I have not read the book, and for the sake of my sanity, I don’t intend to. If you want my full thoughts on the subject of fiscal policy and government debt, please check the FAQ.

Before jumping into a critique of the issues brought up in the show, I have to admit I was cringing while listening through it; there’s enough confusion over the term “national debt” and this show just adds to it.

While by common consensus worldwide the term national debt is usually taken to mean central government debt, in Malaysia it is expressly used in officialdom to refer to the external debt of the country (both public and private) and not government debt. The confusion arises when people talk one thing, and the government presents data on something else. Ever since I found out that little nugget, I’ve avoided using the term.

In any case, my thoughts on some of the issues:

  1. Debt to GDP rising to 100% by 2020 – the host brought up the old prediction of Prof Mohd Ariff that debt to GDP, based on the then growth rates, would reach 100% by 2020, and Chi-Chang agreed it was possible.

    If you calculated the compound annual growth rate of the debt to GDP ratio from say 2006-2010, you would get a growth rate of around 6% per annum. Extrapolating based on that, you’d breach 100% of GDP by the 2020-2021 time frame. So they’re right, right? Problem is, almost all the increase in the debt to GDP ratio occurred in just one year – 2009. It was relatively stable before and has been stable since:
    For Malaysia to get to the 100% debt to GDP ratio by 2020, we would need in essence to undergo four more recessions of the length and depth of the Great Recession over the next 8 years. That sounds a lot less plausible.
  2. Reducing expenditure – Chi-Chang thinks that its possible to easily achieve a 10% reduction in total government expenditure without affecting public service delivery. Anybody reading the Auditor-General’s report would certainly agree. I’m not so sure.

    For one thing, as far as the development budget is concerned, the amounts are pretty much set in stone. The development budget is actually set for a five year term corresponding with each 5-year Malaysia Plan, and this is the only portion of the annual budget which is intentionally funded by borrowing.

    With respect to operating expenditure, much of it is “sticky” non-discretionary spending – salaries, pensions, debt service charges, grants and transfers (including to state governments) form about two thirds. Ah-hah but that leaves another third to cut up right? But one half of this is subsidies, and only the other half is supplies and services where the most egregious examples of government waste can be found and what makes the AG’s report so entertaining to read.

    Personally I’d start with subsidies first, but saving 10% of the total budget off procurement alone is pretty ambitious - you'd have to cut off two-thirds.
  3. Borrowing To Fund Operating Expenditure – Let me reiterate one point from the above – the government follows the “golden rule”: only borrow to fund investment, and not expenditure. For the last forty years, the operating budget has been in deficit just three times and the last time was 25 years ago. Even in 2009, with revenue dropping like a stone, the operating budget hit a surplus of RM1.6 billion. At one point, Chi-Chang contradicted himself, saying the government was borrowing to fund operating expenditure, then saying the operating budget was usually in balance.
  4. Current Debt Levels Are Close To The Legal Limit – At least twice in the program, the debt limit of 55% of GDP was brought up. This has been another source of confusion ever since the issue was broached by Anwar Ibrahim a couple of years(?) back. I’ve actually attended a meeting with MoF to help clarify some of these issues (straight from the horse’s mouth so to speak) – the problem is that there are multiple limits, and only some of them are legally binding.

    With respect to the limit that Chi-Chang mentions, it does in fact exist but there’s two of them. One is an administrative rule governing total government debt, but this is subject to change on the authority of the minister alone. The other is a hard legal limit, but…it is not in reference to total government debt, only to locally issued government securities.

    Let me repeat that – the 55% legal limit does not apply to total government debt, it only applies to locally issued government securities. Loans don’t count, external debt doesn’t count, the National Savings Bond doesn’t count. The outstanding value of locally issued government securities (both conventional and Islamic) amounted to RM387.7 billion at the end of 2011, equivalent to about 44% of GDP (source: Bond Info Hub). That’s a long, long way from 55%.
  5. Government Borrowing Is Inflationary – One of the reasons why I think our current level of government debt is perfectly fine is that most of it is issued locally and in Ringgit terms. What this means is that there are no balance of payments implications, and in extremis the government can resort to monetising the debt (aka printing money) to pay off maturing debt. Of course, the automatic reaction of many people to the latter is to bring up the spectre of inflation. It doesn’t exactly work that way, so let me explain.

    First, any increase in the money supply from debt monetisation would only have inflationary consequences if the economy is already at full employment. That's not a given by any means.

    Second, the inflationary impact of government borrowing is predicated on the government actually spending the monies borrowed (subject to the full employment condition above). In the scenario under discussion during the program – repayment of maturing debt through monetisation – that doesn’t happen, as the money goes to bondholders. Most holders of government debt (e.g. banks, insurance companies, pension funds) aren't looking for cash to fund consumption, they're looking for risk-free, interest or profit bearing investments.

    Third, we can't ignore the reaction of a central bank operating with an interest rate target (as BNM does). Since monetisation of maturing debt or even direct central bank purchases of government securities at issuance (which is the precise technical definition of printing money) results in an increase in the money supply, that would reduce the market interest rate. In the presence of an interest rate target, the central bank would then need to issue its own debt to reduce the money supply, to reorient the market interest rate towards its target rate. In effect, government debt is replaced by central bank debt and we get status quo ante.

    So no, "printing money" doesn't automatically equate to higher inflation.
  6. EPF Funds At Risk – I continue to be bemused that anyone thinks that EPF and its members would be better off without “risking” a big chunk of their money on Malaysian government debt (as at end-2011, 20% of EPF’s investment portfolio is in MGS). Anyone who’s had any experience with how pension funds operate (or any investment fund for that matter) should recognise the fallacy of that position.

    Given that EPF safeguards the retirement savings of its members, its primary consideration is and must be capital preservation, not return maximisation – and that means government securities. In any domestic financial investment environment, there is in fact nothing that is safer both from a credit perspective and from a liquidity perspective. Only MGS is regularly traded on the money markets; equities are subject to occasional capital loss, and higher price volatility.

    It might actually be more pertinent to ask why EPF, given its mission, is not investing even more of its portfolio into government securities as opposed to riskier property development or equities, especially since the EPF Act also requires EPF to invest 70% of its portfolio in government securities (a legal requirement it has been unable to meet for years).

    If you still don’t think its safe to invest in government securities, then you will be glad to know that for every Ringgit in members’ contributions, EPF has RM1.56 in invested assets to back it up.

To conclude, there is and remains a lot of confusion regarding the wisdom of continuing to maintain deficits and debt financing, especially in an uncertain economic environment. Personally I don’t think Malaysia’s position is at all very vulnerable, though I’m obviously in a minority here.

It doesn’t help when there continues to remain plenty of myths and misapprehensions regarding government debt, inflation and the economy. Even without this post, I’ve written reams on the subject already; I suspect I’ll have to continue to write more.


  1. Cool post bro hishamh.

    There's another rule that BNM maintains re the BNM participation at primary market or Secondary in Government Securities, if I'm not mistaken BNM Vs Gov position must always be positive to BNM so that it is not seen as undertaking the Deficit financing.

  2. Dear Mr Hisham.

    I am in full agreement with you that there is no way Malaysia govt could ever become insolvents in its debt obligation as long as the debt is denominated in RM. And the fear mongering regarding our public debt to GDP ratio is baseless.

    But I have a confusion regarding the External Debt ;
    Here is the "Definition of External Debt" given by IMF
    2.3 The Guide defines gross external debt as follows: Gross external debt, at any given time, is the outstanding amount of those actual current, and not contingent, liabilities that require payment(s) ofprincipal and/or interest by the debtor at some point(s) in the future and that are owed to nonresidents by residents of an economy."

    So from my understanding, Gross External Debt can be in various denomination (including in RM)

    As of july 2012, our Gross External Debt amounted at RM288billion.

    If I'm not mistaken in Malaysia, only borrowers that would gain in foreign currency are allowed to borrow in foreign currency.
    And if this is the case, I might not be worried with the external debt level since as long as borrowers' receive their revenue in foreign currency, devaluation of RM wouldn't have an impact on their debt repayment.

    So, Hisham; what is your opinion on our Gross External Debt?
    And is the Gross External Debts denominated various denomination (including in Rm)

    Looking forward for your reply

  3. @satD,

    Thanks bro. Hope you're having a good Ramadhan. Let's catch up after Raya.


    The simple way to think about it is the source of repayment. In the domestic case, since the banking system and BNM are the primary source of money creation, there's no limit in principle.

    For external debt (which btw since the Ringgit is non-convertible oevrseas, is ALL denominated in foreign currencies), the source of repayment is the amount of foreign exchange the country holds. Again, this is within the banking system and BNM.

    As of May 2012, the banking system has a net external asset position of RM44 billion, while BNM has a net official reserve position of RM423 billion. Put together that implies a coverage ratio of around 1.6 times external debt.

    In practice, what actually matters for solvency purposes is the ratio to short term debt (which is defined as liabilities due within one year), which is less than half the total. In that context the coverage is more than double at 3.2 times short term external debt.

    So we're in a pretty good position, unlike say Singapore or Korea, where the coverage is considerably lower despite their higher reserve positions.

  4. Thanks for your reply HishamH,

    I have 2 more questions;

    Regarding the external debts and BNM current ruling on foreign currency borrowing.

    1) Does BNM still maintain its strict regulation, that only resident/business which its revenue receives in foreign currency are allowed to borrow in foreign currency?

    2) if such ruling is no longer in place. So would you say that there is a risk of foreign exchange exposure for those domestic borrowers, which potentially could trigger a private debt crisis.
    (I've seen this happen to few companies after the Financial Crisis; one local shipping company was heavily indebted in Yen but its contract was in RM with local oil giant)


  5. Just listened to Teh Chi-chang,
    and this is my comment,

    The caused of Great Depression was debt deflation due to too much private debt build up (mainly for stock market speculation), which has nothing to do with public debt. And lacked of private sector confidence (which Teh said triggered the Depression) was caused by debt deflation.

    He correctly said that malaysia gov could never become insolvent in its debt denominated in RM.

    But he wrongly said that in order to pay back its debt (if govt revenue dwindle) Gov would engage in printing money (debt monetisation), according to which would cause hyper inflation.
    as Hisham said, there is no money printing involve in Debt Monetisation. Money printing is a separate operation, cash would be printed by Central Bank depending on the demand for cash in the economy, which has nothing to do with Debt Monetisation.

    Teh believes that 'debt monetisation' would cause hyper inflation because he is thinking within standard Money Multiplier hypothesis which is wrong. So called 'debt monetisation' were engage several times by Bank of England and the Fed since the last few years (also many times by Bank of Japan). it only increases the banking reserves (increase high powered money) and reduce short term interest ratel but total money supply does not increase as predicted by Money Multiplier hypothesis due to private debt overhang.

    For the sake of argument, assuming real cash is printed to pay for the govtdebt,(government cannot just supply extra currency notes)if it tried to somehow do it, households will exchange this for bank deposits and banks will return them to the central bank. So back to square one.

    Malaysia's Debt ceiling is a political decision which has nothing to do with economics . . .

    I believe Teh would have a different perspective if he understood that RM for RM, 'Malaysia Govt Debt' = 'Non Gov Sector Net Saving in RM'

  6. Hi HishamH,

    You have a great blog here, and as a layman I do agree with most of what you say. I have several questions about your explanation on government debt:

    1) You said that inflation will not happen as a result of debt monetisation so long as there is no full employment. I understand that the theory is that, when an economy is not at full employment, the growth in money supply due to debt monetisation will be taken by the the increase in production. But if this is correct, wouldn't that mean that we will never have any inflation so long as there is spare capacity?

    2) You also said that there will not be inflation as the bondholders will not spend the money on consumption. However, wouldn't this then breed asset bubbles, as portfolio rebalancing pushes money out from safe assets into more risky assets (like property and equities), potentially leading to a bubble? Wouldn't this be just as bad or worse than inflation?

    3) I also hear that, notwithstanding the low levels of external debt, the government is standing as guarantor to mountains of external corporate debt owed by government or politically linked companies. Is this possible?

    On a closing note, I fully agree with you that the fears of hyperinflation are overblown. However, just because something isn't true doesn't mean that people don't believe in it
    When people believe in it, they act on it, and this influences markets. I suspect that this fear is to some extent used by some to justify excessive inventment into hard assets like gold and property. Your thoughts?


  7. Hello Hisham

    This blog is one of the most informative in Malaysia. Nice to see someone actually focusing on the issues and data, leaving the politics outside the door.

    I want ask your comment on PR new policy of abolishing car tax.

    My view on this is that
    1) Malaysians will benefit from having access to better quality cars as continental and Japanese/Korean cars become more affordable.
    2) it is unlikely Proton & Produa can compete as a high quantity, low cost provider as they dun enjoy the economies of scale enjoyed by Japanese producers for exp. They will have to goto niche marketand become importer. Downsizing is inevitable... whether a devastating retrenchment o gradual transition depends on how PR quickly abolish the car tax.
    3) the ease of financial burden also will not change. One, ppl who already serving the debt at todays car prices have to continue with no second hand market option. Two, people who buy new cars will still have to pay the entry level prices that is currently held by Proton now. So their financial commitment is no different. Plus side they may get better cars and reduce monthly maintenance. Maybe one can save 50-100 permonth at most
    4) to get really affordable cars 5k - 20k, we can import chinese and indian branded cars. It will be super affordable but at the risk of introducing more unsafe cars to the market.

  8. @Anas,

    With respect to forex regulations, they've been progressively relaxed in the past decade. There are few restrictions now. Is that a point of vulnerability? Yes, but the danger is lessened by the fact that everyone has to take into account that the Ringgit is floating rather than the soft peg that prevailed pre-1997. That means that companies are more likely to hedge their exposures rather than relying on a fixed exchange rate.

    Second, Chi-Chang is actually using the term printing money correctly - you're confusing cash with money. The reason why "printing money" and "printing press" are used to describe debt monetisation is a nod to monetary history, when the terms had literal meaning.

    And while debt deflation (plus an adherence to the gold standard and protectionism) was the primary reason the Great Depression was so deep and lasted so long, the trigger was the Fed shrinking the money supply after the Great Crash of 1929.

  9. @anonymous,

    Thanks. With respect to your questions:

    1. Just because excess government spending won't be inflationary when there is slack in the economy, it doesn't follow that there will not be inflation anytime there is spare capacity in an economy. Government spending is demand side, as is private sector spending and investment. Additional spending by these sources should not be inflationary when an economy is operating below full employment. But there are also supply side sources of inflation, such as higher import costs, or bad weather disrupting food supply.

    One nuance that should be mentioned, is that this view is based on a one-good model of the economy. In practice, if excess demand is concentrated in one particular sector, there could be inflationary consequences even if the overall economy is below full employment e.g. we all start buying marine binoculars for some reason.

    2. Absolutely right. But my point was in response to the idea that debt monetisation leads directly to inflation, which isn't correct. Also, asset price inflation would only occur if the government was purely engaged in reducing debt through monetisation. Historically, the more likely scenario would be debt monetisation would be coupled with additional issuance of more securities i.e. there would greater supply of securities, not less.

    3. This is called contingent liabilities, and generally linked to companies directly owned by the government, not GLCs. I can't recall the figure off-hand but it currently stands at about RM100 billion or so (give or take RM50 billion, my memory on this is hazy). Whether you want to include this or not depends on your view of the likelihood that those guarantees are actually called. That probability is actually pretty low - the only one I can recall over the past twenty years is PKFZ.

    4. Certainly a possibility. However, you'd have to actually have some inflation in the first place for expectations to be raised. It's certainly not a factor in the US, UK and Japan, who've been the main practioners of QE in the last five years. But your scenario would fit India and China pretty well, although ironically India stopped monetising government debt about 17 years ago, and China has never done so.

  10. @mdabel

    Thanks for the kind words. I don't disagree with anything you've written there. We're out of line with the rest of the world in having expensive cars, but cheap petrol. The biggest impact will probably not be financial be qualitative as far as the cars are concerned.

    But I'm disappointed that no one wants to tackle petrol and gas subsidies, or their social costs. It's probably not a politically palatable or realistic policy option, but the inefficiencies, and environmental and health damage, are real. The market price of RON95 should be double what it actually is.

  11. Removing petrol subsidy is politically unpopular. I would say it is akin to suicide. If BN is gonna lose the next GE, their unpopular subsidy rationalization policy is gonna be the deciding factor. How can that policy even stand against PR abolishing car tax and reducing petrol price the next day they come to power?

    Perhaps a palatable policy combo for the common man are: remove car tax, import Chinese and Indian cars to provide super affordable RM5k cars (admittedly at the expense of safety), remove petrol subsidy and push forward public transport infrastructure.

    Banking on the goodwill created by affordable cars, govt takes a harder stance on associations who are slowing down public transport development (jalan sultan traders, Bandar Kinrara 3) and removing petrol subsidy to fund the developments.

  12. mdabel,

    Popular policies are not necessarily good policies. In fact, petrol subsidies are about as far from ideal as you can get. I'm still waiting for a reasonable explanation of how PR is going to be able to afford increasing the petrol subsidy - every 10sen difference between the subsidised price and the market price costs upwards of RM1.5 billion. That's not even including the RM1 per litre in environmental damage, health costs and related loss of productivity.

    Worse, more than half of petrol subsidies benefit high income families. I really don't know why, when I'm earning a six figure annual salary, the government is effectively paying me nearly RM4,000 a year for petrol, plus another RM4,000 for damaging the environment and everyone's health.

    The petrol subsidy might be popular, but its also short sighted and hugely inefficient.

    There's not a whole lot of immediate savings that can be gotten from the government operational budget, unlike PR claims. Over 60% is fixed costs - salaries , pensions, debt service charges and transfers to state governments (want to cut staff strength? 40% of the civil service are teachers).

    There's the procurement budget of around RM30 billion (about 20% of opex), which PR thinks can be cut via shifting to an open tender system. But this ignores the fact that the government has already largely shifted to open tenders for most procurement purposes. The other 20% that could be potentially be cut is subsidies.

    How are they going to keep all these promises (cutting duties on cars will cost at least RM1 billion in lost revenue), while at the same time achieve a balanced budget (as they claim to want) is beyond me. The numbers don't add up, and something has to give.

    1. 1) i agree with your analysis on the financial sustainability of PR's proposed policies. It just doesnt add up. How would malaysia having a budget office 'persuade' PR to showproof its claims?

      2) on corruption, I recall Barry Wain claiming that 100 billion was lost due to corruption during Mahathir's tenure as PM. On average 4.7 billion/year. So it appears to me even if PR eradicate corruption completely, their promises still look unsustainable.

      3) on petrol subsidy. Agree on all counts but if I were to be honest, I myself will be unhappy if RON95 prices double. It will suck. What is exacty the health and productivity cost of subsidized petrol?

      4) Any comments on the policy combo i suggested? Personally perhaps I can live with gradual reduction of petrol subsidy if car price is super affordable and I see real progress in public transport. Why is improving public transport taking taking so long? My assumption is the the fussy associations like the jalan sultan traders.

      3) some questions on the govt
      a) civil servant size: i understand the reason our civil service size iappears bloated is due to the inclusion of teachers, police, army and bomba etc as civil servants. But my question is why does PM dept has 43k employees and what is the justification of its RM 1 billion budget?

      b)when u say govt OPEX, does that include the amount spent on development?

      And, regarding open tender. A brief scroll on ePerolehan shows that majority of projects are done thru direct nego. Do u have any data on the country's open tendet process?

  13. 1. An independent budget office makes expert non-partisan estimates of any policy changes impacting government revenue and expenditure. This allows for objective and rational comparison of alternative policies. As of now, we're all relying on guesswork.

    2. Agreed. That number actually sounds pretty reasonable.

    3. Example of health costs include higher incidence of asthma, bronchitis and pneumonia, as well as skin diseases. Costs here include greater infrastructure costs (more facilities and equipment), higher insurance premiums and/or medical bills, and time lost from work or school. Social costs would include costs of cleanups from spills or leaks, as well as time lost from work or family through greater congestion.

    4. I don't know if I'd necessarily want to see cheap cars - that would just add to the costs in point 3. above. In fact, we could break down some of the social costs above into separate taxes depending on use e.g. a congestion tax a'la Singapore.

    On public transport, I believe the MRT is actually on schedule with no delays so far - about 2/3rds of the packages have been awarded and prelim work on some packages were already begun last year. The LRT line extensions are ongoing - I drive by the Kelana Jaya-Subang Jaya extension on a daily basis, and progress is visibly noticeable.

    6.a) To answer this properly you really need a political theorist, but what I see is an increasing concentration of power at the centre. Part of the problem, especially since the Mahathir era, is the increasing marginalisation of BN component parties outside of UMNO. A second related problem is that because of the size and inertia of the government bureaucracy, getting things done has increasingly required direct intervention from the top which in turn resulted in more and more functiona being subsumed under the PM's office at the expense of the other ministries. Despite the establishment of Pemudah, coordination between government ministries (really, separate fuedal fiefs) is increasingly challenging.

    b) Development expenditure is not part of opex, but neither is it part of the annual budgeting process. The development budget is set every five years with the Malaysia Plans, so for annual budgeting purposes its non-discretionary. In any case, considering that it goes into roads, schools, rural access to utilities, low-cost housing, family development etc, its not easy to cut down.

    7. Mea culpa. I was under the impression that the shift had already taken hold, seems I was wrong. Good catch.

  14. Dear Hisham H,

    I do respect your thoughts but feel it is premature to pooh pooh this idea.

    I have a different take on the issue. Number 1, Government's expenditure is sticky, its income is not. As it stands with a narrow tax base, the Government derives a significant source of income from Petronas. And remember the case of Italy - there does come a point in time when the debt load results in a perpetual deficit because whilst the Govt can maintain a primary budget surplus, the interest burden causes the entire budget to be in deficit. And if you consider that civil service wages will continue to grow at 5-7%++, and the civil service grows as well in absolute numbers, then you could end up with an exponential increase in Govt expenditure.

    Lets imagine for a moment that in the year 2019, our debt to GDP ratio is 100%. Under such a scenario, if we assume that interest on debt is 5%, then the equivalent of 5% of GDP is allocated just to service interest on debt. Since at the same time, it will be a given that the debt load will continue to increase as the Govt budget will no doubt be in deficit, this percentage will keep on rising. What happens if it rises to 110% of GDP in less than 2 years? (which is not to be unexpected if we assume the Govt is just balances the primary budget but is in deficit due to the interest)

    Surely all the added creation of money by the printing press will devalue the ringgit and cause inflation due to a weakening currency exchange? I have yet to see a situation where debt monetization was positive for any currency, and I doubt it would change in the case of Malaysia.

    Just my thoughts. Welcome your opinion.

  15. Wenger, long time no see, how're you doing?

    1. The rule adopted by Treasury is to aim for a balanced operating balance, not primary. So the scenario you're painting shoudln't apply. In the event that debt service becomes a bigger part of opex, they will perforce be cutting expenditure in other areas. I'm reminded of how the 2008-2009 "stimulus" was financed - it was almost entirely done by cutting into the procurement budget and whatever discretionary spending could be foregone. In other words, no stimulus.

    2. Have you looked at debt service as a percentage of the opex budget and GDP? I had occasion to work it out a couple of weeks ago - in 2011 the ratios were at an all time low. In the 1980s, it reached as high as 25% of operating expenditure, now its fallen to 10% depsite the higher absolute debt burden.

    3. With respect to debt monetisation *cough* Japan *cough*. Interestingly enough, Japan pioneered quantitative easing back in the 1930s.

  16. Japan aahh... The mother of all counter examples.

    So I guess I have been touché-d

  17. Dear Hisham,

    Good write. I'm actually quite amazed how many have been taken in by our so call debt problem propaganda. I'm also quite frustrated why our government can't just make clear this is a non issue. For me I think we should mobilize more of our ringgit savings into productive sector and in the current world economic development focus such utilization in creating more domestic driven growth. Why is it difficult to drive this point to the public?

  18. Ellese,

    From your mouth to God's ears.

    I think the reason why the government isn't doing a good job of explaining the situation is that, sad to say, (1) quite a few of them actually do believe that the debt problem is real, and (2) the rest don't understand economics or finance at all.

    And if they don't understand it, its not reasonable to presume the public does either.

  19. Probably right. But we have a deeper problem of partisanship and schism. Look at the budget presented by BN and PR both of which are deficit budgets increasing our debts. I just can't believe the propaganda people believe in that one side's deficit budget will make us bankrupt while the other similar deficit budget is good. The problem is communication and objectivity. I think we need more blogs like yours.

  20. Right. So you think were doing okay, well in fact. Well enjoy your delusions. Just fo not try telling that to the face of the average man who has seen his ringgit decline in value significantly.

  21. @Ellese,

    One of the proposals we put up with MoF this year is for an independent budget office reporting to Parliament, to look into the actual impact of alternative budget proposals. I doubt it will be taken on, but I'm going to keep proposing it until it is.


    Sorry, what has income and inflation got to do with the topic of this post, which is about government finances?

    For reference on what I think about Malaysian incomes, try this post instead, or this one. For the whole shebang, try here.

  22. The government is increasing its contingent liabilities. The MRT project which is going to cost I think RM40.0 billion is going to be guaranteed by the government. When it is completed, assuming interest rate of 5%, is going to cost RM2.0 billion to be serviced annually. This is going to be a direct liability on the government. The MRT is not going to generate the sort of income to pay this off. To date, I have yet to see the income projections of the MRT, but I am sure its not going to be in the billions annually to be able to pay off this debt.

    Further for a small country with large oil reserves, we shouldn't have such high debt levels, which as I understand is the 2nd highest in Asia.

    The main reason of course is wastages. Petronas works very hard to pay the government and the government throws it away at cows as an example.

  23. Gundrohiker,

    To be blunt. So what? First we need to decide whether we want the mrt. I've written elsewhere we need more than the proposed mrt line. I want even a circle line like London. I want more connectivity. Next issue is whether we can afford? We have high savings. Govt incurring local debts is not like us incurring debt. In fact it's a primary task of a leader to mobilize country's resources efficiently (of course with no corruption) to improve our standard of life. Singapore does this efficiently with double of our GDP debt ratio. No problem. We have a fair bit of liquidity as witnessed by the take up of various billion ringgit bonds. This scare mongering propaganda has somewhat paralyzed our ability to discern what's beneficial for our own good. We have become delusionally partisan. Thus you will see that if pr wins and continue with mrt it'll be a good decision by those who object it in the first place. Just like deficit budget. One can do it but it's wrong if the other side does the same.

    To Anon 9.34, I can't see how you relate the incurring of local debt by government affects everyday man's ringgit value. Let's take an example. Prasarana issues bonds and taken up by local players including Epf. How does that effect your ringgit value? Please clarify.

  24. Gundrohiker,

    For some perspective:
    1. RM2 billion is somewhat less than 1% of the government's annual budget.

    2. The entire MRT, if it does come to RM40 billion, will cost less than one year's deficit.

    3. Today's yield on 10-year MGS is less than 3.5%.

    Most infra investment of this sort typically lasts at least 50 years, and going by the historical record, over 100 years is not uncommon. It's not a bad investment by any standard and probably a better use of the money than many another project we could all name.

    With respect to our use of oil income, it's really a function of our very, very narrow tax base and the tremendous outlay on subsidies (RM30 billion this year).

    Our actual government expenditure as a percentage of GDP is right in line with most of the rest of East Asia and the developed world, but our non-oil revenue is not. If you add in the subsidies on natural gas paid for by Petronas (and thus not carried on the government's books; it's an additional RM25 billion or so every year), we could solve our overall deficit problem overnight by abolishing all subsidies.

    Wastage is a factor, but compared to subsidies, it's a really, really minor one.

  25. The problem is that we are also churning out more and more lop-sided PFIs like water and waste management under the guise of increased efficiency. Having first class facilities is ok, provided we have the money. If you go to Putrajaya, you can see one government department occupy one office block when 3 or 4 government departments could have occupied it and this is still continuing. Who is paying the rent for these buildings, the federal government. Lets also not forget the new bus terminal for the Northern & eastern regions. PFIs are coming out left and right and all rely on the federal goverment for payment. Isn't these unnessary leakages. I sometimes wonder whether the EPU's work is to devise newer and more creative PFIs.

    And now the federal government is issuing guarantees left and right. Some might have underlying cashflow. Others like the Tun Razak Exchange looks very speculative. 40% is owned by 1MDB while the other 60% by a Middle Eastern sovereign fund. They can be excused since they have money to throw away with oil reserves 30 times more than Petronas.

    My feeling is the country has somehow lost its direction. One one hand Idris Jala said that we will be like Greece in 10 years if we don't reduce our subsidy bill. On the other, we are spending like there is no tommorow. If we are to add up the contingent liabilities to the public debt, we are already at 85% to GDP.

    To me, the ETP is nothing more than the MRT project. All others would have been undertaken in any case and were hijacked by the ETP. I also wonder what has happened to the Northern Corridor, Eastern Corridor and SCORE. SCORE to me is a disaster waiting to happen.

    Finally, how is it that Phillipines and Indonesia public debt is lower than us. What do we have to show with such high debt levels. Where has all the money gone to.

  26. Gundrohiker,

    If money goes towards physical investment, it's not technically "leakage".

    Second, I don't see the government giving out guarantees any more than they usually do. Contingent liabilities are never included under debt calculations for the simple reason that they are contingent. If you want to look at some really frightening contingent liability numbers, just check out any bank's annual accounts.

    Third, from my perspective, I would hardly characterise government expenditure as "spending like there's no tomorrow". Expenditure growth is not of line with income growth.

    Fourth, it's no accident that the only (relatively) successful regional development initiative has been Iskandar - trying to develop rural regional corridors, given the existing agglomeration advantages of current urban areas, is trying to lean against the wind.

    Fifth, debt accumulation is a policy choice, one that's actually available to us. The Phillipines and Indonesia have underdeveloped financial systems, historically poorer rates of national savings, and relatively lower rates of investment. Malaysia's policy is to only borrow to fund investment, a rule that the government has managed to keep to for all but three years in the last four decades (in case you're wondering where the money has gone to).

    Can I point out that Malaysia's per capita GDP is nearly 3x Indonesia's, and nearly 4x the Phillipines? In 1960, Malaysia's lead over Indonesia was 2x and the Phillippines had nearly equal income levels.

    Can I also point out that we're not 2nd highest in Asia in terms of public debt but about 4th, behind Japan, Singapore and Vietnam, and that India and the Phillippines aren't that far behind? Our debt level is a quarter of Japan's and less than half of Singapore's.

  27. Gundrohiker,

    I think you're mixing myths with facts. Probably been taken in by the effective political propaganda.

    Take comparing us with Indon n Philippines. By many accounts we are better than them. Flip the pages of economists for broad facts n figures. Instead I'll argue kudos should be given to the government. To make sweeping statements on Indonesia and Philippines the way you did is unjustifiable. We can show many things.

    On pfi Please note it is typically a Blt and to be distinguished from a guarantee. It involves payment of rentals. Guarantee and lease payment are different. Even tony phua can't get this right. If you take it as the same then numerous Malaysians and companies give guarantees.
    Govt buildings are based on Blt. Tony phua is at the forefront of this misinformation citing e.g. our PBLT which develops the police quarters as government guaranteeing the project. This is far from truth. Government pays rental. This is a good credit by itself. Thus if you look at the AMAN sukuk there's no guarantee as you can securitise the lease rentals.
    Government has been reluctant on giving guarantee. It's been limited. It's governed by loans guarantee act n must be laid before the parliament for scrutiny. It's not what you claim as giving guarantees left right and centre.
    On mrt why are you against it? Similarly with the bus terminals? I'm firm on public amenities. We need to improve greatly our rail system n bus terminals. The bus terminals are crapped. Thus it's incumbent for govt to find means to develop and finance this if they can afford it. So they adopt pfi/Blt. Shouldnt they be praised for the effort? Don't understand Malaysians.
    On ecer Iskandar etc please just google. We must read beyond AM which publishes half truth all the time. ECER eg has brought in 30 b investment with the latest one being an investment by givo for a 1.65 billion rm biosobutanol plant. Just google and don't believe the propaganda as the whole truth.

  28. PBLT/Aman Sukuk is just deferred government spending. The question that should be asked is it is understandable to have a big police station in Dang Wangi or Sentul but what if you had a big police station in the middle of no where;)

  29. unfortunately that is how we talk about the economy in malaysia, politics dipped in sens! what about the new report from fitch?

  30. Part 1

    I thought you were away in Mecca hence my reticence from clicking the link provided in RB(where I cyber-hangout pretty often)which was stuck on this post. Apparently, I misread your intention as you were obviously hunting for a haj package not Umrah.My mistake again.Apologies.

    Anyway, salam berpuasa again. A few observations:

    1. the measure of using debt to GDP is not accurate in efficiently indicating the debt burden in my opinion. Say for example public spending accelerates (say in GDP calculated via the Expenditure approach scenario) wouldnt that paint a rosier debt/GDP %.
    In any case, we wont be using total GDP to retire the debt, only a slice in the form of revenue and that is what that ultimately matters.

    Hence a better approach at looking at the issue would be using the debt/revenue ratio. allow me to cite an example. Based on Q1 2010 data, the US debt to GDP ratio = 87% looks rather good given the US perceived underlying strength but when looked from the Debt/Revenue perspective (based on 2008 data), it was = 12.7trillion (debt)/2.5trillion (revenue) = roughly 507%. meaning the US would need 5 years or so to retire the debt, everything else in deep freeze that is!!

    Malaysia's is 246% meaning we just use ALL the revenue to pay off the debt without expending it on anything else including salaries. Anyone game for that??!! Yeah, I know much off it is local paper and can be monetized but the net result of that monetization is still uncharted territory, models notwithstanding

    Now I am not saying that the debt/revenue ratio is a better indicator (Fitch seems to think so: but it is generally an indicator less used by governments or even the opposition as Ariff's and Yew's crap above obviously indicates. be that as it may, it gives a better pix of where we stand in terms of other issues like policy flexibility, financial leeway etc......

    Warrior 231

  31. And one for the road, lest everyone thinks i have embraced rating agencies. Nope I havent, I think they have a hidden agenda. The case in point being the US and to a lesser extent Israel but then again i digress.

    Just to pique everyone;s interest, maybe giving the economic reins to people like Anwar, Tony Phua, Rafizi et. al would be a disaster in the making.1998 says much about Anwar's acumen. As for the others, liberal socialist douchebags are oftentimes the worst lot to be entrusted with the national till:


    Warrior 231

  32. Some overdue corrections:

    1.Malaysia's is 246% meaning we just use ALL the revenue to pay off the debt without expending it on anything else including salaries.

    should read

    Malaysia's is 246% meaning we just use ALL the revenue to pay off the debt without expending it on anything else including salaries for 2 and 1/2 years........

    2. Ariff and Yew's crap

    should read

    Ariff and Teh's crap.......

    Warrior 231

  33. We need the MRT..thus whatever it cost is immaterial.And even at this late stage,there is no budget,no funding plan,no fare structure its perfectly ok.

    What we need is a Public Transport that provides the best coverage and service with the most cost effective capex.

    Of course you guys will never appreciate that difference.

  34. Warrior, you're getting closer to appreciating the truth:

    1. Higher public expenditure does indeed create higher GDP, and thus makes for a better looking debt to GDP ratio. But in this scenario, higher public expenditure also creates higher revenues at the same time. In fact the elasticity of revenue with respect to GDP for Malaysia is greater than unity, something I suspect is true for other countries as well. That's why for instance in Europe fiscal austerity isn't really working - cuts in government expenditure is causing tax revenues to fall even faster.

    But getting back to the point, that implies that the debt to revenue ratio would be more volatile and would see an even greater effect from higher public expenditure than the debt to GDP ratio would.

    The other reason why debt to GDP is preferred over revenue to GDP is that the former recognises that ultimate responsibility for payment of debt lies across the whole economy, and not solely the government.

    Some further notes: the impact of debt monetisation aka printing money doesn't exactly exist only in theory e.g. India practised automatic monetisation of its government deficit for nearly four decades after independence. So there are some empirical examples to look at. Also that 87% debt to GDP ratio for the US is net, not gross. The gross figure is somewhere north of 100%.

  35. Warrior,

    With respect to your other points, it's actually sufficient to remove subsidies alone. Outlay this year is expected to be about RM30b, but this does not include gas subsidies paid by Petronas. If you add that in (assuming the gas subsidies are then redirected towards dividend payments to the government), the deficit disappears, and you still have about RM10b-12b to play with for social protection and transfers. My preference would be petrol vouchers rather than food stamps, but either or both would do - preferably transferable, so people can use them as intended, or as income supplements.

    Funnily enough, I was thinking exactly the same thing about Kedah last week, particularly the SP-Butterworth corridor.

    With respect to my quote (and this is relevant to the balanced budget proposal), understand that my viewpoint of fiscal policy is first and foremost as a macro-level adjustment mechanism towards achieving a full employment economy.

    So the reason why I said what I said has to be taken in that context - given our current situation of historically low unemployment, decent growth that's just below trend, and high capacity utilisation, there's no need for higher public expenditure and in fact a good argument for faster fiscal consolidation. Higher expenditure in the face of capacity constraints results in nothing but inflation and/or higher imports i.e. no real increase in domestic welfare. Accelerating debt accumulation under those circumstances would be less than worthless.

    But this kind of viewpoint necessarily entails complete opposition to having a balanced budget. A balanced budget essentially means completely giving up on fiscal policy as a macro-tool and relying solely on monetary policy to adjust the economy to internal and external shocks. Why would you want to limit your options? Especially since there are areas where fiscal policy might be more effective than monetary policy (and vice versa)?

    And this argument isn't limited to deficit budgets either. For example, in 1994-1996, given the constraints on monetary policy in the face of appreciation pressures on the Ringgit, inflation, runaway credit, and excessive private sector investment - i.e. private sector dissaving - one policy option that could have been taken was to be far more aggressive in public sector saving than was actually the case (i.e. aim for a much bigger budget surplus), which would have helped reduce overheating pressures in the economy.

    Your hands would be tied with balanced budget legislation.

  36. “Worse, more than half of petrol subsidies benefit high income families.”

    I don’t know what is your definition of high income, even if that is true, what is the better way to subsidies the other half? What is the impact to remove the subsidy base on current situation, I suspect the so call high income families have more option to change their spending habit and lifestyle to suit, but I don’t think the low income group can do the same. Moreover, this has much to do with our NAP and transport system which I think a very firm decision needed from our politician. In your view, who from the present administration dare to suggest scrapping the national car?

  37. HuaYong,

    One of the good things that has come out of the "handouts" under the BR1M program is the government now has a good database on families earning less than RM3000 per month.

    My preference would be to abolish the petrol subsidy, but replace it with a petrol voucher system for those in the lower income brackets(say RM1000-2000 per year per family, graduated depending on income level). That would cut the petrol subsidy in half. In addition I would also make these vouchers transferable, which means if a family does not fully utilise its allocation, the excess vouchers can be sold to supplement their incomes - no wastage.

    There's also the negative externalities related to petrol use - in advanced economies, petrol is typically highly taxed to account for the environmental damage and health costs borne by the public. We could do the same, and use the voucher system to further compensate lower income households.

    The savings from this can be utilised to either reduce the deficit, or fund continued expansion of public transport. What this means is that instead of the government subsidising everybody, higher income households (with their higher fuel use) would then be subsidising lower income households, a much more efficient way of doing things.

    By my calculations, I'm not rich but my household is in the top 1% of income earners in Malaysia. It doesn't make sense to me that the government is effectively subsidising my family's petrol use to the tune of RM400-500 per month, and another RM400-500 in other costs that arise from my fuel use. Richer families are benefiting even more, because they're more likely to own bigger, more petrol hungry cars and MPVs.

    As far as the national car policy is concerned, I'm all for abolishing it. And I think the government is sureptitiously moving that way already, considering the sale of Proton by Khazanah.

  38. Part 1

    1. Any measure of public debt sustainability would be easily evidenced by testing the relationship between public debt and primary fiscal balance with a positive reading a necessary indicator of sustainability if the debt/GDP ratio is high . (Bohn.H)

    Bohn.H., “The Sustainability of Fiscal Policy in the United States” available for free online reading at

    Though the hard copy would be better ; )

    2. I would err on the side of caution with regard to debt monetization as Indian economic growth within the 4 decades you mentioned was anything but stellar. A less salubrious outcome is evident in Japan in the 1930s when they commenced debt monetization after exiting the Gold Standard (thus losing access to foreign funding) and ended up in their one and only default thus far in 1946 with a bastradised currency to boot!!

    Shima, K., ‘Iwayuru Takahashi Zaisei ni Tsuite’[‘The so-called Takahashi's economic policy’], Kin'yu Ken'kyu [Monetary Studies], 2, 2 (1983), pp. 83–124.

    Shizume., M : Sustainability of public debt: evidence from Japan before the Second World War accessible here:

    Having said that debt monetization is still an alternative tool of last resort, although there seems to be a caveat that debt monetization will only engender an expasionary effect if :

    “ ............. if the government sets the stance of discretionary policy so as to hit its
    target debt-to-capital ratio. (page 23)

    The jury is out though in real life situations in the contemporary era though Japan may be the making of another ‘innovation” (this time hopefully more successfully of course)

    Let us hope though that Malaysia ends up in a Japan like scenario very distant in the future with Japan’s resources to boot of course 

    But maybe the author is not seeing the whole thing in its entirety as one of his commenters (bonkthegrups) points out.

    3. The deficit was approximately 46 billion in the 2012 budget (Revenue: 186B – Expenditure : 232B). Food and fuel came up to approximately RM30B (according to the Economic Report). Throw in those gas subsidies you mentioned and the figure reaches upwards to 55B. Jettison the subsidies and yes we will erase the deficit and maybe just have some spare change to boot. But we forgo initiating structural change to the economy if we just stop there.

    The proposal to cull certain programs (like the NS, funding for socially divisive vernacular education etc) is to reduce the government’s burden whilst at the same time affording leeway for social re engineering. The net impact of culling the public sector would be a long term diminution of the wage and pensions bill whilst embedding the notions of productivity and performance in the workforce and at the same time reducing bureaucratic inertia.

    Warrior 231

  39. Wats the threshold to be in Top 1% income household?Thats about 80,000 households ..very select group by any means.I hazard a guess that 400k per annum after tax wld be minimum to be in this group

    1. @anon,

      Cut your figure by about 40%. and make it before tax.

    2. Wow..i am in the select 1% too?Certainly don't feel rich.Can afford most gadgets ..not many Euro cars and certainly not most prime area properties.That must be reserved for the select 0.1%?

  40. Warrior,

    1. There's more than one way to measure debt sustainability, and there's little consensus on which particular methodology is the "best".

    2. With respect to India, you're imputing causality when there is none. India's low growth rate pre-1990s can be put down to autarkic policies, which were reversed in the 1990s (hence India's current decade long boom).

    With respect to Japan, their 1946 default is more likely due to:
    1. Having just lost a crippling war;
    2. Totally losing access to their empire (including the natural resources of SEA and Mongolia);
    3. Annihilation of their merchant marine and navy (which prewar were among the world's biggest) and thus cut off from trade;
    4. Suffered a comprehensive and borderline genocidal bombing campaign that wiped out their heavy industries.

    I don't think debt monetisation can be blamed here.

    3. I'm curious how tying pay to productivity can be engendered, when most of the output of government is in the form of non-remunerated services.

    How do you figure GST is a double penalty, when it will result in mostly lower retail prices?

    4. With respect to the balanced budget proposal (and my thinking on this extends to deficit caps), it does in fact mean effective abandonment of fiscal policy as a macro-stabilisation tool. The popular notion of Keynesian economics is to spend when the economy is down, and save when the economy is up. Fiscal policy is thus used to smooth variations in output over time - across the "business cycle".

    This is based on the notion that economies are self-correcting and tend toward full-employment equilibrium (mathematically, growth is trend stationary, and economies post-recession return to their previous growth path), and fiscal policy can be used to maintain the optimal growth path. But under those circumstances, fiscal policy is actually ineffective as the latest research shows that fiscal multipliers are negligible when output gaps (positive or negative) are small. Monetary policy would then be the preferred tool.

    Fiscal policy is only effective when output gaps are large, and only if the change in expenditure or taxation is significant to offset the drop in output. In other words, even a deficit cap would be counterproductive, as it may actually require a government to cut spending just when it's supposed to increase it.

    In the last three major recessions in Malaysia (1986-87, 1997-98, 2008-09), the economy shifted downward to a different growth path, not resume its old one. In other words, these weren't business cycle recessions.

    With respect to 1995, I'm not putting forward the then existing budget surplus as one cause of the subsequent crisis, but rather one menu option that could have been taken as mitigation. In the absence of monetary policy action, fiscal policy can be effectively used instead - and not just expenditure, I was actually thinking more in terms of levying taxation. In that sense, the surplus was not sufficient as it was too small.

    5. I don't disagree with any of your points here, though I suspect if you look at the development of those areas you mentioned, it's largely an evolution with governments catching up afterwards in providing infrastructure.

  41. Warrior,

    P.S. thanks for the link, nice reading

  42. 1. "How do you figure GST is a double penalty, when it will result in mostly lower retail prices?"

    Reply: I was thinking more in terms of high personal taxation coupled with a newly introduced GST which would tantamount to a 'double penalty' in plain-speak but apparently does not if viewed from an econspeak.

    a.For the tax-paying population, there is a purported silver lining in the form of lower personal and corporate taxes. This is what those who pay high taxes under both categories are hoping for, as Prime Minister Datuk Seri Najib Tun Razak has hinted that both these taxes could be lowered when the GST is in place.


    2. "one policy option that could have been taken was to be far more aggressive in public sector saving........."

    Have I misread that or is it clearly indicating more expenditure cuts rather than extra revenue generating measures like taxation as in " far more aggressive in public sector savings"

    4. Finally, autarkic is an oversimplification of India's anaemic growth. Rather, the deepening of its financial markets and a move away from debt monetization played a crucial role in capital formation and its infusion (especially by the private sector) into the economy:



    5. About Japan, again i suspect an oversimplification of its default although those factors, no doubt, did play a role. But I need to gather more information pertaining to that.

    6.On fiscal policy, there seems to be caveats in your stance while a deficit cap does not necessarily entail a cut in spending, does it? You can still have a deficit of RM15-20billion with a 2% cap on GDP dont you but a more targeted nuance in that defict spending.

    More about the last two later with more data. Meanwhile just as an aside:

    Warrior 231

  43. Warrior,

    1. GST is slated to replace SST. Indications are that they are thinking of a 4%-6% rate for GST, compared to the current 5% + 10% for SST. An income tax cut will only benefit somewhat less than 10% of the labour force, so I don't see the the need.

    2. My contribution to your education today :)

    From a macroeconomic perspective, a public deficit (public dis-saving) is still dis-saving irrespective of whether it arises from higher expenditure or lower taxation. Similarly, a public sector surplus remains public saving irrespective of whether it comes from higher taxation or lower spending. It's the fact of a surplus or deficit that matters, not how it's arrived at.

    Given the situation in 1995-96, with accelerating asset prices and runaway credit, with a central bank unwilling to bear the cost of sterilising capital inflows, I would have taxed the hell out of the property and financial sectors (RPGT, withholding taxes, stamp duties etc).

    3. With respect to India, you have an identification problem - financial sector reform allowed for more efficient financial intermediation, which helps foster growth. Equally, deepening financial markets makes debt monetisation unnecessary. Causality can run one or both ways in either relationship or across the relationships (e.g. issuance of government paper would help improve liquidity and depth to financial markets). In any case, you should note that while India has foregone automatic monetisation of government deficits, it has continued to do so on central bank discretion.


  44. [cont]

    4. With respect to Japan:

    Impact of unrestricted submarine warfare:

    Impact of US Strategic Bombing:

    If you haven't read through it already, please read my FAQ on government debt, especially point 3.

    In reference to Japan, the destruction of industrial capacity and existing assets resulted in a substantial and significant decrease in the ability of Japan to produce goods and services (i.e. GDP). If you consider money as a representation of real output (plus/minus demand for money itself), a decrease in potential output relative to a given stock of money would necessarily result in inflation and/or devaluation of the currency.

    This would be true irrespective of whether government debt was money financed or debt financed - in fact, the method of debt financing would be completely irrelevant.

    If I can make reference to India again, the proximate problem they are having now (high capital inflows, current account deficit, asset price and consumer inflation, while paradoxically undergoing a credit crunch within the financial system), has close parallels with the AFC.

    The current account deficit (private sector dis-saving) and inflationary pressure point to excess demand. Given the concerns over the viability and stability of the financial sector tying the central bank's hands, one policy option that can and ought to be pursued is public saving, i.e. running a government surplus and reducing aggregate demand pressures. But of course, they're not doing this and running a public deficit instead - India is playing with fire.

    But the essential point here is that the limits of government dis-saving (or the desirability of public saving) irrespective of how it is financed, is really the ability of the economy to produce.

    6. On the last point - consider Malaysia's experience in 2009. The deficit rose from about 4.8% in 2008 to 7.0% in 2009, an increase of 2.2%. Virtually all of the increase in the deficit came about from a drop in revenue which was 10% lower than budgeted for. If you were starting off from a balanced budget, and had a deficit cap of 2%, that would have meant that the government would have needed to cut spending.

    I'm also thinking here of the experience of state governments in the US - all have balanced budget provisions. During the onset of the Great Recession, free-falling revenue meant that state public expenditure had to be cut to balance the books. The end result was that the nearly US$1 trillion in federal government stimulus was completely offset by the reduction in state expenditure.

    Now you could have a balanced budget approach and/or deficit caps and make it work, but at the price of relying almost solely on monetary policy to mitigate shocks, but it would need to be far more aggressive and volatile.

  45. “My contribution to your education today :)”

    Thanks but no thanks, man. That long explanation is old news to me. You need not have taken the trouble, just cut and paste this from your 8.18am:

    “……. and not just expenditure, I was actually thinking more in terms of levying taxation.”

    And voila! you could have clarified:

    "one policy option that could have been taken was to be far more aggressive in public sector saving........."

    in a heartbeat and bat of an eyelid which even any esoteric reading would decipher it as what it was as it appeared before our eyes, get my drift, friend…hahaha…

    Be that as it may, I have very limited time as my twice delayed flight is finally on, thanks and no thanks to the airline. Anyway, I will leave you to mull over these

    while my Shia optimism pray that everyone will see the light.

    And for dessert:

    while for a nightcap: &2

    as they say, every economist has a different perspective which on reflection, we engineers are blest to be without…alhamdullilah for the mercies of empirical exactitude over speculative modeling : )

    Yeah,and I do know the old rule: not every circumstance is the same………….

    And it would be interesting to ponder about the anguish confronting Takahishi and his pal Fukai in pages 27 & 28 here as they contemplated in true Zen mode the repercussions of their impending deed:

    No siree…nuclear bombing or destruction of production capacity or blockages, reparation burdens etc din’t cause the default, they were direct triggers no doubt but the cancer had already started metastasizing from 1932 onwards when DM commenced in earnest.

    Military adventurism and all were knowingly and wilfully added risks to the original sin and to use that as an excuse masks the act, zenly speaking…hehehe.

    I will catch up with India and Japan later as for the time being time is flying by while a flight is due in 4 hours or so plus another connecting one 20 hours later. But then again worldly matters can wait while Qom calls…ah for the respite of Fatimah….

    Selamat Eid-alFitr HishamH and family. May Allah azza wa jalla shower His blessings and sakinah to all and sundry. And thank you very much for a civil and enlightening exchange. Allah blest and knows best

  46. eyelid which even any esoteric

    should read....

    eyelid something which even any esoteric

    2. and before anyone gets ideas, Fatimah ...the the Fatimah Mausoleum in Qom

    Warrior 231 (forgot this in above)

  47. Warrior,

    Selamat Hari Raya, and may you have a safe journey.

    I'll save my comments for your return.


    So, does your post address this insider posr as well?

  49. Sorry, for the late reply, I'm just back from the Raya break.

    Short answer: yes, it does. The FAQ addresses the more specific concerns.

    Pak Sako did make one error - Fitch did not say that Malaysia's finances are "at the same level" as Italy's, they said "deteriorating public debt ratios" (referring specifically to debt/revenue). Italy's debt "level" (specifically, debt to GDP) is more than double Malaysia's.

    Incidentally that calls into question the consistency of Fitch's rating methodology if we are rated the same. Italy's public debt is in Euros not Lira, and thus effectively foreign currency debt, whereas Malaysia's external public debt is negligible.

    The markets certainly think Malaysia is a safer credit - current market yield for 5 year MGS is at 3.25%, 5yr Italian govt bonds are yielding 4.75%.

    In addition, that comment about debt doubling is idiotic - most of the increase in debt occurred because of a shortfall in revenue over 2009-2010, not through increased spending. It also ignores the fact that the economy is now fully a third larger than it was in 2007.

  50. i like the way you write...keep up the good work!

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