BR1M: Good Or Bad?

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

Will BR1M Destroy Malaysia from Within?

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

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

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

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

Two things I would add to the articles points are:

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

The First 100 Days

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

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

GST, Exports, and the Ringgit

This is something I had to explain a few times as well over the past couple of weeks, so again, committing this to writing.

The Pakatan Harapan manifesto promises to abolish the Goods and Services Tax (GST) and bring back the old Sales and Services Tax (SST). Analysts expect this (along with the other spending plans in the manifesto) to result in a sell down of the stock market, and a drop in the Ringgit. Contrary what people may think, this has nothing to do with “investor sentiment”. There are fundamental reasons for thinking this will happen, though I’ll only touch on the SST/GST effect.

Fiscal Realities

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

Issue 1: The Difference between Operating and Developing Expenditure

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