Tuesday, October 29, 2013

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

I take these figures as reliable – reliably conservative and underestimated, that is. The forecast I did last year for this year’s revenue was around RM220b-RM230b; that firmed up to RM220b earlier this year, when we got the full year data for 2012. That contrasted sharply with the government’s budget forecast of about RM208b. Guess what the government’s estimate for revenue this year is? RM220.4b.

I’ve revised my revenue forecast model, but the 2014 forecasts for both new and old models are near enough as to make no difference (RM millions):


We’re looking at a model average of about RM231b – the standard errors are fairly high however (RM12b-RM15b), mainly due to some weirdness going on in the early part of the sample. But the correlation post-2008 is really strong. The forecast is about RM7b above the government’s forecast, and about RM5b above Pakatan’s.

Expenditure is more discretionary, and constrained by the government’s self-imposed limits of a 3.5% deficit and 55% overall debt to GDP ratio. So I’ll just note in passing that unconstrained by these limits, government operating expenditure would be forecast to hit RM234b, compared to the RM217.6b budgeted i.e. RM17b higher. Development expenditure rarely varies, as this is typically set via the Malaysia Plans i.e. a 5-year budget cycle.

Still and all, it’s a mildly contractionary budget, which won’t change even if forecast revenue and expenditure are higher than expected.

Moving on to specifics, the following list is going to be of the like, don’t like, scratch head variety, rather than a full blow-by-blow assessment – that’s pretty much impossible with something this complex. So this will only be a partial list of things that I actually have an opinion on:

Really Like

  1. Abolishment of the sugar subsidy – Some critics are saying that the link between sugar and diabetes is weak, and we should be paying more attention to the overall Malaysian diet. That’s fair enough; but I’d want to know, what economic justification is there for subsidising sugar in the first place?
  2. GST – We’ll probably be returning to this topic again and again over the next 17 months (and more), but now we can hopefully move on to substantive public discussion instead of “will he, won’t he”.
  3. RM50 i-BR1M for takaful coverage – Making a meaningful difference in people’s lives for what’s effectively chump change. Anybody catch on to the circularity of this policy? RM50 per BR1M recipient going to Takaful companies, who will turn around and invest in – government securities. Sweet.


  1. The Netting Act – I had to have this one explained to me, but it makes a whole lot of sense.
  2. Incentives for pensions and PRS – the household savings is poor, to put it mildly. The earlier you start the better.
  3. Outcome based budgeting, and proactive audits – They’ve been talking about the former for years, and the later was a reaction to the A-G’s report. Either way, both good.
  4. RM530 million for pre-schools – I like this no end, cause I think we really need to move to universal pre-school. Though I have to ask, is this enough?
  5. Public transport improvements – RM2.9 billion for double tracking, “park and ride” and other facilities. ‘Bout time.


  1. BR1M – I agree with BR1M, and I think its necessary. The increase is probably warranted, and financing it is probably more than covered by the cut in petrol subsidies. The problem I have is that its still unconditional. Breaking poverty barriers, even relative poverty, means changing behaviours. This won’t happen with unconditional cash transfers, worthwhile though that may be on their own.
  2. Property measures – Banning DIBS was good, raising RPGT was probably inevitable. Neither will work to really stop property speculation. Unfortunately, the most effective tool – raising stamp duties – would kill the market in its tracks, and that won’t be pretty at all, oh no my preccioussss.

Don’t Like

  1. Agriculture – it’s not an excuse to say that everybody else does it. Agricultural subsidies are politically untouchable in pretty much every country. Some of the incentives here will probably be effective (raising productivity for example), but most won’t. I see these measures really as income support more than anything else.
  2. MaGIC – one more government agency we have to remember (and probably forget).
  3. RM600 million for R&D at research universities – that works out to about 0.5% of GDP. Won’t raise our R&D standing one bit, not when more advanced economies are spending 2% or more.
  4. RM100 million for education and RM50 million under Tekun for the Indian community – I don’t like this, not because it targets the Indian community, but because I don’t think it’s anywhere near enough.

What were they thinking?

  1. Corporate tax cut – this one’s strange. It’s sold as part of the package of incentives to offset the introduction of GST. But companies will have no tax liability under GST and there’s a whole slew of proposed support for software and training to help companies cope. If it was couched as necessary for international tax competition, it’d be more understandable – though I still wouldn’t agree. This one still leaves me scratching my head.


  1. Yup, would prefer if corporate tax can remain at 25%. However maybe IRB can recoup it thru better documentation done under GST. The reality is, ASEAN countries is becoming more competitive tax wise. Thailand went from 30% corporate tax to 20% just within 2 years.

  2. stamp duties will overkill the market?

    1. Stamp duty is effectively a tax on transactions, and it applies whether you make a profit or not. In theory, that should reduce the number of transactions, in a market that is already pretty illiquid.

    2. My understanding, stamp duty is a small amount to be paid by buyer in the scheme of things. It doesn't stop one from speculating or buying. But (painfully) high RPGT will stop buyers from flipping their properties under 5 years.

    3. Hi Saffura,

      The problem is that I don't think its just speculation that's affecting the market. There are some fundamental factors as well, such as internal migration. So we have excess demand, inadequate supply, and speculation to top it off. I don't think shutting out the speculative element alone will slow down price escalation sufficiently to maintain affordability.

    4. Going through this thread, a perverse thought just crossed my mind.
      Just as the increase in the price of sugar is expected by the man-in-the-street (on this, I have the firm support of my barber and my taxi driver) to drive up the price of ALL food and beverages (whether or not they contain sugar in the first place), the increase in RPGT rates should likewise drive up the price of property, since disposers will now factor in the extra profit they would have to make to cover the additional tax.
      Taking heed of the former proposition, I shall order my teh tarik ‘kosong’ (may now not be able to afford even ‘kurang manis’) and then ponder the wisdom of the latter proposition….

    5. pohLam,

      Agreed. That's why I don't think RPGT will have that great an impact on house price increases beyond the immediate term.

  3. The Netting Act ? Can you explain what this means ?

    1. Its basically a measure for capital market participants. Instead of requiring full payment under any derivative contract, participants can "net off" their respective liabilities. This substantially reduces liquidity needs.

      For instance, if I owe you RM1 million under one contract, and you owe me RM800,000 under a different contract, I only need to pay RM200,000 under the new law and consideration under both contracts will be satisfied.

      Otherwise, I have to send you RM1 million, and then you have to send me back RM800k, which is a bit silly (and expensive because both of us have to have that amount of cash on hand).

    2. In business we have been doing this all the time - contra account.

      Capital market i take it is like bond market or the likes.

      Zuo De

    3. Zuo De,

      Yes, exactly that. Controls on financial firms are a little tighter, for obvious reasons.

  4. Bro,

    Can u please help to explain further on GST from economist point of view. This is a very confusing topic. The government said that implementing GST will benefit the people more compared to the existing sales tax. Isn't that conflicting, as the idea to introduce GST in the first place is for the government to collect more tax revenues to address fiscal problem.

    It seems with GST, tax will be charged on every stage of supply chains, which means more tax burden will be transferred to us, the customers eventually. And worst, tax rebate would only be given to businesses and not to individual. Really hope u can share some input on this matter.


    1. @anon 11.52

      GST is indeed levied at every stage of the supply chain, but only to the extent of the value-added. That means you "only" pay that 6%.

      The biggest issue with the sales tax is that even though it is theoretically only levied at a single stage, some of that tax actually cascades i.e. some manufactured goods might include inputs that have already been taxed, so you're actually taxed twice or more.

      Because of this element of cascading taxes, prices at the supply chain level are distorted, which causes prices to be higher than they should be. GST would thus be more "efficient", because it lets prices more fully reflect demand and supply. Also, implementing GST should make exports more competitive as businesses are no longer taxed. That expands the economy, and raises incomes.

      So the rakyat benefits overall, though in a backhanded sort of way. The key question is not so much benefits and costs, but who benefits and who bears the costs. Export oriented industries (and the people who work in them) ought to benefit, as should larger companies who are fully integrated into the GST system. Smaller companies might not, as they fall below the tax threshold, and thus don't qualify for input tax credits.

      Also, GST is helpful in the sense that it raises awareness of how much tax people are actually paying. Most haven't a clue that they've been paying sales and service taxes for the last 40 years. That awareness in turn puts more public pressure on the government with respect to its spending.

  5. could you please explain the Netting Act?

  6. pls disregard my above comment. just found your explanation

  7. An idea for BR1M. If BR1M really have to continue, make it conditional. For those who are below certain ages (say, 50 years old), they MUST work. If they don't have job, they can't get it. Only for those who have disabilities who don't need to work.

    - Just Some Guy