RM1 trillion debt? Don’t Panic

I realise in writing this that I’ll probably be a very lonely voice in the wilderness, but I think this needs to be said and intellectual honesty forbids doing anything else. I also promised years ago that I would defend a Pakatan government when keeping an elevated level of government debt. I’m going to keep that promise now.
As the news of the Malaysian government’s real debt position has been slowly been revealed over the past two weeks, the reactions have predictably ranged from horrified to furious. Unfortunately, the prevailing thought is mostly about how this debt is to be paid back, and the burden on taxpayers as this is being done.
Let me flip my usual practice, and begin with my conclusion, before going into the reasons why.

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.

Alternative Budget 2017

It’s that time of the year again!

I’m not going to comment extensively about the Alternative Budget (you can download it here), especially on the numbers. I’ve already spotted one whopper of an error, and another biggie that can be put down to lack of info (more on this later). Given the assymmetry in information between government and opposition, I’m not going to be too critical over these.

Rather I want to touch on the broad themes raised in the document. As an aside, I’d also note that mainstream media coverage on the Alternative Budget is far more widespread than it used to be. There was a time when barely anyone wrote about it.

Thoughts On Budget Recalibration

Assume you have 20 marbles. I take 4 and borrow 1 from you, for a total of 5. I then give back 5 to you. How many marbles do you have?

Start with the same 20 marbles. I take 3 and borrow 1, then give back only 4. How many marbles do you have now?

If the first scenario was the original government budget for 2016, last week's budget "recalibration" is the second. In aggregate terms, the revised budget is fairly neutral. With no change to the deficit, either in absolute or relative terms, the impact on the economy should be muted.

That's the theory anyway.

Graeber on Sectoral Balances

I touched on this a few times before, but here’s David Graeber on sectoral balances and flows (excerpt):

Britain is heading for another 2008 crash: here’s why
David Graeber

British public life has always been riddled with taboos, and nowhere is this more true than in the realm of economics. You can say anything you like about sex nowadays, but the moment the topic turns to fiscal policy, there are endless things that everyone knows, that are even written up in textbooks and scholarly articles, but no one is supposed to talk about in public. It’s a real problem. Because of these taboos, it’s impossible to talk about the real reasons for the 2008 crash, and this makes it almost certain something like it will happen again.

I’d like to talk today about the greatest taboo of all. Let’s call it the Peter-Paul principle: the less the government is in debt, the more everybody else is. I call it this because it’s based on very simple mathematics. Say there are 40 poker chips. Peter holds half, Paul the other. Obviously if Peter gets 10 more, Paul has 10 less. Now look at this: it’s a diagram of the balance between the public and private sectors in our economy:

2015 Budget Revisions

It’s neither as good as I hoped, nor as bad as I expected (you can read the speech here).

The government expects revenue to drop by RM13.8b in oil & gas related revenue, with some uptick from other sources. There will be cuts in operating expenditure along with the savings from the abolishment of petrol and diesel subsidies. Development expenditure will be held constant, based on the original budget estimates.

2015 Budget “Restructuring”

A quick note on this (excerpt):

Budget 2015 review

PETALING JAYA: Budget 2015 is to be re-examined, with spending cuts likely to be made in the face of plummeting global oil prices.

Prime Minister Datuk Seri Najib Razak said there was a possibility that the budget tabled last Oct 10 would be restructured.

Debt, Deficits, and Government Assets

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

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

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

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

3Q2013 Government Debt Update

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

3Q2013 Government Finance

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

Budget 2014: Highlights and Lowlights

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

First a look at the headline figures:

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

Live Blogging Budget 2014 [UPDATED]

As usual, I’m going to try live-blogging the budget announcement, commenting on things as and when they are announced. The PM is scheduled to start his speech at 4.00pm, so I’ll begin around then.

[Refresh the page for updates]

1. PM is in the House, and we’re off in a few minutes
2. Wasting time til markets close, as usual
3. I don’t think the KLCI hitting an all time high really proves anything
4. Forecast 2014 GNI per capita RM34k
5. Forecast 2020 GNI per capita to beat USD15k target (told ya so)
6. RM217.6 billion for opex, RM44.5 billion for development – pretty flat over 2013
7. Budget deficit forecast for next year at 3.5%, right on track
8. GDP forecast for 2014 is 5%-5.5% – not ambitious
9. Talking about rail and oil & gas investment – looks like no postponement of RAPID
10. Logistics masterplan – given our trade openness, this probably should have been done much earlier. Still we’re 29th in the world
11. Tourist development fund offering subsidised interest rates
12. RM1.8b for high speed broadband
13. 10% matching government contribution for voluntary EPF contributions – good move
14. Private retirement scheme – RM500 one-off incentive for those between 20-30
15. 12 minutes to market close, and the bigger news items
16. RM2.4 billion in subsidy and incentive for padi beras and fisheries
17. Further incentives for agriculture R&D through Biotech Corp
18. New plan for entrepreneur development to be developed by new dept under MoF
19. Malaysian Global and Innovation Centre (MAGIC) to boost R&D and innovation (one-step centre) with seed capital of RM50 million
20. Dunno about that – why would this be more effective than what we’ve done before?
21. RM120 million for SME development
22. Here it comes
23. Committee to investigate government waste identified in the A-G report
24. Government to switch to outcome based budgeting (I think this has been part of the GTP targets)
25. MoF, MITI and Health Ministries to be pioneers
26. No need to file tax return if salary deductions are enough to cover tax liability
27. Subsidies to be restructured and better targeted
28. Comprehensive database covering welfare
29. SST to be abolished (haha)
30. GST is here!!!!!
31. Low inflation is the best time for implementation (that makes sense)
32. GST to be effective April 1 2015
33. GST rate at 6%
34. Public goods and services exempted
35. So is property
36. One-off RM300 for BR1M recipeints
37. 1%-3% income tax cut; RM4k households will no longer pay income tax
38. Income tax bands to be adjusted. Maximum tax rate only applies for incomes over RM400k, instead of RM100k  as now (effective 2015)
39. For companies; 1% cut in corporate tax (effective 2016)
40. Income tax for cooperatives also cut
41. ICT accelerated allowance from 2015
42. GST related investment, GST related training and others to be given tax relief
43. Enforcement of profiteering act to be raised
44. Markets are going to be REALLY happy
45. After all that, everything else is going to be a bit of an anticlimax
46. Details of GST will be available eventually through Customs – bookmark this link
47. Flexible work arrangement to be introduced for women
48. RM100 school assistance program to be continued
49. Book vouchers also to continue (RM250)
50. Lots of investment to ensure LRT, MRT, and Komuter are easier to use
51. RM4.1b for rural development
52. Nothing much on housing so far
53. Lots of smaller allocations now – health, crime, flood mitigation etc
54. 2.6 million Malaysians above age of 30 have diabetes – sugar subsidy to be cut. Yes!!!
55. I still think we should tax sugar…and petrol.
56. RM2.2 billion for women’s development
57. This is the last time I try following TV, Twitter, and Whatsapp while blogging!
58. RM441 million for the assisting the disabled
59. Indian community to be assisted with RM100 million for education, mainly for pre-school; RM50 million for Indian entrepreneurs (Not nearly enough I think)
60. Now for housing
61. RPGT to be reviewed. RPGT raised to 30% for 1-3 years, 20% for 4 years, 15% for 5 years
62. Floor for foreigners raised from RM500k to RM1 million
63. DIBS is banned!!
64. 200k new affordable houses to be built in 2014
65. Incentives for private sector developers to build affordable houses (RM30k per house)
66. Standards being given for low cost and medium cost houses
67. Lots of other smaller measures for housing
68. For middle income taxpayers – tax savings up to RM480
69. Wrapping up now…finally
70. One thing more…for the civil service, salary scales to be adjusted?
71. And one more thing…BR1M goes to 3.0, increased from RM500 to RM650
72. For single person households, RM250 to RM300
73. BR1M insurance scheme to be extended to all households members who qualify (worth RM50-100)
74. RM3000-4000, BR1M will be given RM450, plus RM50 insurance coverage
75. Allocation of RM4.4 billion for BR1M 3.0 all told
76. Pensioners to receive RM250
77. Civil servants to receive half month bonus, with minimum of RM500
78. All over bar the shouting now

And that’s a wrap. I’ll be looking more closely at the aggregate figures later tonight, hopefully with something coherent to say about it.

2014 Alternative Budget

It’s now out, you can download it here.

Quick impressions:

1. It’s taken them a while, but this is a much better produced document, with considerably less annoying political rhetoric. I confess, last year’s alternative budget document read so much like the Communist Manifesto that it took a bit of effort to be objective about it.
2. The numbers are much more realistic – the revenue forecast for instance properly takes into account economic growth, and expenditure savings look reasonable given the proposed savings measures. Not that I necessarily agree with the cuts, but the estimates are reasonable. There’s unfortunately no breakdown of expenditure, but that means less chances of needlessly tripping up over messy details (yes, I’m the charitable type). I can’t imagine civil servants would be terribly happy though, especially over the proposed caps on household debt.
3. Most of the measures also look pretty reasonable (e.g. a graduated increase in the minimum wage, no more demands for a big jump immediately), though implementation and especially effectiveness will always be an issue. To be fair, that would be true for the government as well.

Shiller On Debt

Newly minted Nobel Laureate Robert Shiller is on Project Syndicate talking about the debt to GDP ratio (excerpt):

Debt and Delusion

NEW HAVEN – Economists like to talk about thresholds that, if crossed, spell trouble. Usually there is an element of truth in what they say. But the public often overreacts to such talk.

Consider, for example, the debt-to-GDP ratio, much in the news nowadays in Europe and the United States…Could it be that people think that a country becomes insolvent when its debt exceeds 100% of GDP?

Subsidy Rationalisation Rebooted

It’s about time (excerpt):

RON95 goes up by 20 sen

PUTRAJAYA: The price of RON95 petrol and diesel has been increased by 20 sen, as one of the measures to rationalise subsidies by the Government to reduce the country’s fiscal deficit.

Prime Minister Datuk Seri Najib Tun Razak announced the decision, saying that it would save the Government RM1.1bil from September to December this year and RM3.3bil annually.

Before the revision, the price for RON95 was RM1.90 per litre and RM1.80 for diesel. The [sic} price increase for RON95 was in 2010.

Contingent Liabilities: You Ain’t Seen Nuthin’ Yet

One of my favourite econs bloggers, James Hamilton, has a new working paper (abstract; emphasis added):

Off-Balance-Sheet Federal Liabilities
James D. Hamilton

Much attention has been given to the recent growth of the U.S. federal debt. This paper examines the growth of federal liabilities that are not included in the officially reported numbers. These take the form of implicit or explicit government guarantees and commitments. The five major categories surveyed include support for housing, other loan guarantees, deposit insurance, actions taken by the Federal Reserve, and government trust funds. The total dollar value of notional off-balance-sheet commitments came to $70 trillion as of 2012, or 6 times the size of the reported on-balance-sheet debt. The paper reviews the potential costs and benefits of these off-balance-sheet commitments and their role in precipitating or mitigating the financial crisis of 2008.

And people are complaining when Malaysian government contingent liabilities hit 15% of GDP. Makes you wonder, dunnit?

Of course, it’s not a totally fair comparison. The Malaysian number only encompasses government guaranteed debt, not the full extent of explicit and implicit contingent liabilities as Prof Hamilton has tabulated for the US.

Nevertheless, the US numbers are staggering – it’s the equivalent of about 500% of US GDP. While the bulk is made up of "safe” contingencies through the Federal Reserve and the iffier actuarially estimated future liabilities of the US social security and medical assistance programs, guarantees for housing and student debt take up 50% of GDP, or more than three times Malaysia’s total government guarantees. US Federal deposit insurance takes up another 50% of GDP, compared to approximately 30%-40% of GDP for Malaysia (based on PIDM figures).

Any comparable exercise for Malaysia would show piddling numbers by comparison.

Technical Notes

James D. Hamilton, "Off-Balance-Sheet Federal Liabilities", NBER Working Paper No. 19253, July 2013

The Fitch Rating Downgrade: Much Ado About Nothing

Right off the bat, I should say that the timing of the release of the report – just before Hari Raya – was purely coincidental, and not in any way due to hidden motives. It just so happens that Fitch’s annual rating review of Malaysia’s sovereign rating occurs about this time every year.

Nobody pays much attention when ratings are affirmed, but up or down movements are much more visible from a news-worthy perspective, and bad news trumps goods news every time. And yes, the good news/bad news phenomenon has actually got pretty solid research behind it.

Fiscal Policy Committee

This was announced yesterday at the 2014 Budget Consultation Session:

2014 Budget To Be Tabled In Parliament On Oct 25

PUTRAJAYA, June 18 (Bernama) -- The 2014 Budget will be tabled in Parliament on Oct 25, Prime Minister Datuk Seri Najib Tun Razak, announced here Tuesday.

Najib also announced the setting up of a Fiscal Policy Committee aimed at reducing fiscal deficit, strengthening public finances and ensuring nation's long-term fiscal sustainability.

Najib, who is also Finance Minister, said he would chair the committee which would include selected Cabinet ministers and heads of departments.

"This committee will be served by a fiscal policy office at the Treasury. This is to underline the seriousness in terms of managing our fiscal position and reducing our fiscal deficit," he said in his opening speech at the 2014 Budget Consultation sessions.

Independent Fiscal Assessment Redux

I seem to be returning to this issue more and more often.

Australia has in the past year just established a Parliamentary Budget Office, charged with "providing independent and non-partisan analysis of the budget cycle, fiscal policy and the financial implications of proposals."

Why can’t we have one?

Time For Independent Fiscal Assessment

I don’t see any of the papers or online media picking this up yet (maybe tomorrow?), so I will (quoted in full):

Academics call upon Barisan and Pakatan to declare policy positions on national finance and debt

Recent financial crises have visited economic calamity upon ordinary citizens in the countries of the East and West alike. Experience tells us that there can be no complacency about a nation's financial state.

Concerns voiced in various reports and the media call for special attention to Malaysia's finances and their management. These concerns are: