Tuesday, October 25, 2016

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.

But first, the macro projections. Again no big surprises – growth at 4%-5%, inflation between 2%-3%, and a deficit target of 3%. These were all within expectations, and more or less communicated before the tabling of the budget. My impression though is that things will be a little easier next year than this year, as revenue is expected to start growing again as will operating expenditure. The impact will again be slightly negative on growth, as implied by the reduction in the deficit.

Philosophically however, I’m in two minds. Looking at the current situation, where we have very high household debt, and middling public and corporate debt levels, I don’t know if fiscal consolidation should be that much of a priority. This is especially true since public/private debt tends to have a substitutive relationship.

Let me explain (hopefully in a way that makes sense): There is a complementary set of fiscal and monetary policy settings that are consistent with full employment growth. At the extremes, you could have highly expansionary fiscal policy offset by contractionary monetary policy, or expansionary monetary policy offset by contractionary fiscal policy. In between the two extremes, there will be trade offs between the two.

Ideally, there would be a situation where both would be neutral, but that would depend on the specific circumstances – under the secular stangnation thesis for example, “neutral” requires expansionary fiscal or monetary policies or both.

But I digress. The point here is that in a situation where fiscal policy is effectively contracting, ceteris paribus, you’ll need expansionary monetary policy to ensure growth remains on course. In other words, the government’s fiscal consolidation agenda puts pressure on BNM to delay monetary policy normalisation (a return to neutral), or even to loosen monetary policy as we saw earlier this year. But the transmission mechanism from looser monetary policy to growth is via the medium of increased private borrowing (from lower borrowing costs).

Put another way, reducing the public debt burden requires an increase in the private debt burden, and vice versa. Equivalently, public savings must be accompanied by private dissaving, and vice versa. The only way out of this is to accept less than full employment growth, which has costs of its own, not just on an individual level but for society as a whole (lower investment, long term costs of unemployment etc).

If we add on the complexity of an open economy to our little thought experiment, the only way both public and private sectors can save simultaneously is through the dissaving of some external party, i.e. via a current account surplus. But that relies on the rest of the world dissaving i.e. running a current account deficit. If everybody is dealing with debt problems and global growth itself is below potential, then we’re all out of luck. Fixing one imbalance implies a growing imbalance somewhere else.

Given the differences between debt levels and resources, my preference would be to delay fiscal consolidation and fix the household balance sheet first, because households are far more vulnerable.

As I said, I’m in two minds about this, because the effect of having to manage fiscal consolidation in an environment of falling natural resource revenues is having a salutary and gratifying effect on the efficiency of government spending. Is this efficiency gain worth the lost growth potential of the economy? I don’t know – again, it’s partly a philosophical question.

Anyway, on to some of the specific measures that I found of interest:

  1. Home ownership – easier financing (I won’t comment on the EPF involvement), some subsidies, use of government lands, etc. All helpful, but in aggregate too small to fully address the supply shortfall just yet. The housing market will likely remain unbalanced for some years to come.
  2. BR1M increase – as expected, and fairly significant at that, ranging from 12.5% to 20%. Would certainly help support private consumption  next year.
  3. Malaysian Bureau of Labour Statistics? Yes, please. I’m on the technical committee for one of the stats in question, and there’s a real push for improving our knowledge of the labour market. Unfortunately, it’ll be some time before the data starts getting published.
  4. UTCs, RTCs, and new Job Centres – I’m a fan of this concept. It’s really improved government service delivery, and we could do with more (existing ones are getting crowded).
  5. The Collection Intelligence Arrangement (CIA) – this may come as a surprise to most people, but most agencies within the government don’t really share info. Part of the problem is that there is no legal framework for data sharing even within the government, on top of the strong disincentive provided by the Personal Data Protection Act. The result is a lot of difficulty in policy coordination, which requires a measure of goodwill among ministries to overcome.
  6. Healthcare – a big allocation here, including recognition that existing facilities are under strain (while I was writing this, the news broke about the Hospital Sultanah Aminah fire – my condolences to the victims families). Healthcare spending has continued to escalate, and will become a bigger headache as the population ages, and we very obviously need to spend more on maintenance.
  7. Taxi industry restructuring – we’ve been talking about this for years, and it took Uber and Grab to finally force some semblence of sanity into the industry structure. Taxi drivers will now gain individual permits, which should reduce monopoly costs and make finding a living easier.
  8. Broadband – key effort I think, in this post-industrial age. It’s especially critical for rural development.
  9. Childhood and pre-school – I really, really wish we could do more here (I have some ideas for improvement), but opening access to 200,000 more kids is great.
  10. Higher education – the budget cuts here are controversial, because of how deep they are. Personally I’m more in favour of providing greater funding to TVET and early education rather than tertiary, but I’m concerned about how these cuts would feed into the depth and breadth of university teaching.
  11. Corporate tax discount – this one’s really interesting, and a novel idea. I’m not sure how beneficial it would be, but it’s not quite as crazy as it sounds. One issue Malaysia has had is just getting companies (and people for that matter) to declare their income. The lower tax rates based on profit growth might drive the right or wrong behaviour, and I’m wondering whether this has ever been tried before anywhere else. In any case, something to keep an eye on in the future.
  12. Civil service perks – I’m not terribly keen on the increase of loan eligibility for civil servants (civil servant debt loads are alrady too high), but won’t complain too much on the rest of it.

Overall, there was a little something for everyone – unfortunately, emphasis on little. The feedback I’ve been getting was that there wasn’t much excitement in this budget, but given the public’s emphasis on keeping expenditure and debt under control, I hardly know what people were really expecting.

Notwithstanding my comments above on whether such fiscal rectitude is desirable in the first place, MOF has had the difficult task of balancing all the competing demand from stakeholders and for funds against some very hard constraints. I can’t say I particularly like those contrainsts, but I understand the motivation.


  1. When you put into perspective that most household debt is relating to residential properties, and addressing the low-cost housing issue by encouraging low-income earners who make RM3000 per month to take a loan up to RM295,000 that is 8.2 times their annual salary, do you think that these signs point to an easing of monetary policy?

    On that, would it be possible for the government to inflate its way out of its current conundrum to achieve a higher nominal GDP growth, increase housing affordability, and reducing the fiscal deficit, as well as its debt/GDP? What would the potential consequences be, other than a weaker Ringgit?

    1. @anon

      1. Short answer: no. It's too small, and too limited. That particular scheme only affects PR1MA, not all developers.

      2. Essentially, to achieve all that you will need private borrowing and debt to zoom. Not exactly wise with current private debt levels.

    2. @Anon

      You wouldnt want to fancy that if I were you. We havent come close yet but we are getting there fast:


      By the way, Canada's GDP per cap was (gulp): USD 51k.......ours.....the less the better.

      Simply put as way back as 2013 I had warned abot household debt...soon the birds will come home to roost as I was right about Singapork as a Financial center all along...ask Indonesia on that (wink wink)

      Warrior 231

  2. Talking fiscal first, macro in upcoming comments...

    Our side (we coming up with our report) soon. We are kinda worried about some of the ratios.

    Revenue-to-GDP: 16.6% (um.)
    Debt to GDP: seems like we'll breach that target (not law) this year
    Debt service-to-revenue: (double um.)

    What happened to MTFF numbers?!

    1. @Jason

      Oil and gas prices essentially. From a credit perspective, not surprising there would be some slippage. It could have been worse.

      As for the MTFF, I never thought it credible. As long as BNM doesn't respond aggressively to fiscal consolidation, it was unlikely the targets would be met.

      My feeling is that with LNG prices depressed and decoupled from oil, we're unlikely to see real improvement any time soon, for the current account or fiscal revenue.

    2. @Jason
      Good luck with the report. You will find a lot of interesting things...ehem ehem..wink wink.......

      and yup, gas prices will tank for the foreseeable future with new producers coming onboard, improvements in gas extraction from shale and even global warming:



      In short as a forex earner, LNG's better days are past.

      Would be interesting to see your thoughts on household debt and its impact on private consumption. As i said, good luck anyway.......

      Warrior 231

  3. I am not interested about Budget dude. Its a dud anyway given the way things are going to unfold on the global economic stage. And its gonna get worse folks......

    I am just curious about your "aging thingy". A year ago I put tamped down wages as the prime reason for the present global economic malaise (no response yet on that dude??). Central to all that was Bernanke the charlatan's sleight of hand in creating created the perfect mechanism to enrich the elite while paupering the masses without igniting inflation.Ditto the Japs (they have been long at it since early 2k anyway).Atually its nothing new...historical data on debt bloating (QE or whatver fancy name you give it) supports my assertion that there is an effective transference of wealth that benefits the elites anywhere anytime. Remember our argument on this 3 years ago....

    And pray what is that mechanism? QE of course. So CB balance sheets get farked while elites bank accounts get fattened and the masses get steamrollered as they unwittingly pick up the tab in the equation.Throw in voodonomics like policies, discredited CRAs and sleazy global Financial centres and you have the perfect macro explanantion for the slowdown plus more. In short, the system is farked big time.

    There is so much evidence on that I have accumulated that the economics system is now a massive Ponzi scheme that farks everything in its sight driven as it is by GREED and SELF. Nope not a rant, just a fact.

    You cunningly talked about ageism....ROFLMAO....I say why not write about the impact of poverty, income inequality, debt (underwriten by the exchequer) fueled speculation corruption....blah blah blah. I waited for that (really dude) but to no avail..so I put down this little bomblet to blow your theory to smithereens:

    See this little snippet will show how one of the above causes impacts the future:


    That's approx. 26% off the table dude. And that's just ONE net outcome of poverty + income inequality's impact on global growth.

    Gandhi was spot on when he said; "There is not enough for GREED." But then again capitalist roader economists (to paraphrase Mao...hahaha)disguised as do gooder mavens are a dime a dozen right. Hey I am not a commie....but the real deal Economics and its thoeries have been flushed down the loo, Smith, Ricardo, Hayek, Keynes, Minsky et al would be rolling about their graves as the charlatans churn up their version of Vanity Fair.(LOL)

    Warrior 231

    1. @Warrior

      Gosh dude, QE again? How's that prediction of runaway hyperinflation doing for you? I'm still waiting for it to turn up.

      What makes you think I'm even talking about the current slowdown? I'm fairly confident growth over the next decade will be better than the past ten.

      As for your little snippet - dude, you've ignored all that I've written about that over the years. Those issues have been relatively constant and fixing them won't change the growth trend, only the growth level.

  4. Man, you have turned spinning into an artform. But thats par for the course with regard to this blog in recent times.

    You know how hyperinflation comes about dont you. Dont tell me you are too dumb to read or playing avoidance again for the sake of it.

    I wrote this up there:

    "Central to all that was Bernanke the charlatan's sleight of hand in creating the perfect mechanism to enrich the elite while paupering the masses without igniting inflation."

    Bernanke didn't create anything hyper cos he didn't throw all that money outdoors of the CB into the waiting palms of the public. He created a new mechanism through which money was channeled into the elites hands and inflation was kept muted in the process but rearing its head in different permutations nevertheless, one example being spiraling housing prices brought about by speculative activity funded by that easy money being moved across the globe, there are other obvious examples go figure which but DONT SPIN, please.

    If he had done it the normal way, then classical theoeries apply and inflation or even hyper is ignited. I am not that dumb to not know that as you are.... I guess.....

    And please dont talk cork about trend and level. Thats econsspeak corktalk. Get the facts right for a change will ya. But anyway its your blog, why should I care.

    Folks, aging societies have nothing to worry about if wealth, income etc are equitably accessed and remember too in totality there is still many young ones around, sorry to prick someone's thought balloon:


    By the way, you never responded the wage growth thingy....been a year already. And what about the minimum wage and LFPR, cat got the tongue....hahahaha

    Warrior 231

    1. @Warrior

      1) "created a new mchanism"? Dude, just admit you got it totally wrong. Can I say I told you so? I told you so.

      2) That's the first time I've heard basic math described as "econospeak".

      3) I never responded to the wage growth "thingy" because I happen to agree with you. Hard to start an argument that way. Only problem is you were so late to the party, the chairs are on the tables and the lights have been switched off. People have moved on to trying to figure out why and what to do about it; the what is taken for granted.

      It's like you were saying, "Wheels are round!!!!". Um, yes, and?

      Case in point: impact of inequality on lifetime income of the poor. Where were you when I was writing about that 4-5 years ago? But then as I recall, you dismissed it as neoliberal thinking.

      4) The trouble with young people is that they grow old. And for growth to continue, it's the inflow of young people that matter (the trend), not the number there are right now (the level). This has nothing to do with age or number of young people per se, it has to do with the size and growth of the labour force relative to the total population. But that might be too much math for you.

    2. Man, you had me rolling on the floor, holding my sides lest they split open and I end up in A&E for some stitches.....(OMG....ROFLMAO). What baloney was that (4)......

      Let the records show who was for higher incomes and who spoke about inequality both wealth and income 4 years ago precisely. And who raised household debt Japan in the 1930 and all. I dont want to go there. You can at your leisure for its your blog and your archives. Got better things to do like grass, women and golf...yes golf as per my bourgeoisie lifestyle allows not to mention my Harley rides...u see I dont want to waste precious time for nothing before the nukes drop.

      2. You (from Mekah) said in that post last year you found my wage thingy interesting ...something interesting but probably wrong"...so why no response. Cos there was nothing wrong with it..all the wage data affirms it as does all the inflation data...

      You just dont want to admit something related to that post, dont you dude, kinda a slippery rascal are you.

      I just said that if Bernanke had released all that QE stuff into the system, classical or normal or traditional (or whatever moniker you want to provide) inflation theory kicks in. But he DID NOT do that so no hyperinflation or anything..instead he funneled all that stuff into corporate, elite accounts and stuff and that shot income inequality to pieces.Just like debt creation (but thats another story with data of course)

      The data(tonnes of it) show that to be the case and it created a false economy in the bargain..an economy wherein the super-rich leverage on their ill gotten gains to create bubbles everywhere (property, stocks, bonds etc) that further enrich them. Bernanke effectively robbed the future to save the present...but for the rich...


      but Bernanke is deluded if he thought QE as an escape hatch cos there is no real growth. Plus cos of him doing that, it was at the expense of the masses (their wages etc) thus effectively dousing global demand. And idiots elsewhere joined the bandwagon with their inane fiscal measures and doused it further.

      In short, he created a vicious circle and only plonkers embrace that garbage for its clearly the road to perdition. And thinking observant folks, like me, can see the reality of it all.

      I got tonnes of data including Bernanke's garbage about Japan's output gap problems in 2014 that show you economist lot have lost the plot...but as I have said I dont want waste my time writing pieces about a wanked up pseudo science that gives Math a disreputable veneer. Why bother when I can sit back with popcorn in hand and watch it come apart as predicted.Easy peasy.

      If you know economic history well as you claim...we are effectively in the 1930s..of sham growth and you know where it ended. The elites and people like you know it. Its only those farking species who kinda are mindblown with rosy expectations who need a reality check. And it will be a mother of all reality checks...for just like the 1930s it all gonna go up in flames...for thats only way they can break outta Bernanke's vicious cycle.....reset the button so to speak and start over. Problem is I dont see any starting over in a plutonium/uranium polluted wasteland called mother Earth.

      Warrior 231

    3. why cant u egg heads sticq to respectable usage of words instead of name calling!
      we liqe yr response but just pls sticq to good manners n responsible journalistic ethiquette. its easier to read the main contents flow.

  5. And just for the road dude, we, the meek humble, salt of the earth types read and think too mister besides our indulgences of course......hehehehe:


    Warrior 231