Friday 29 Mar 2024
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PRIME Minister Datuk Seri Najib Razak recently delivered a special address on current economic affairs and the government’s financial position. It was triggered by two main issues.

First, the decline in oil prices around the globe from a peak of US$115 per barrel in June 2014 to US$48 per barrel in mid-January 2015. Second, the depreciation of the ringgit against the US dollar from a peak of 3.15 in August 2014 to 3.61 in mid-January this year.

To be sure, a case could be made that a ringgit depreciation was coming and the decline in oil prices simply exacerbated it. A quick check on the currencies of our neighbours — Singapore, Thailand and Indonesia — shows that the Singapore dollar, the baht and the rupiah have also depreciated heavily against the US dollar.

Indeed, the depreciation of those currencies began in earnest in 2013, whereas the ringgit held relatively steady over the course of the past two years until only recently when it started depreciating more rapidly. Thus, dollar strength, rather than just ringgit weakness, is a hugely significant factor in the overall decline of the ringgit.

As for oil, analysts and researchers are still devising explanations for the incredible fall in its prices. If anything, this episode of declining oil prices should serve as a humbling one to financial analysts, economic analysts, forecasters and their ilk.

If a commodity that is so scrutinised and so widely tracked can move so far beyond the regular realms of predictability, then we must take our analyses, our forecasts and our opinions with a pinch of salt and recognise that any preconceived notions of forecasting skill are still very limited.

The obvious implications for the Malaysian economy were well highlighted by Najib, who is also the finance minister. Consequently, he announced that the government would revise its budget deficit from an originally planned 3% of gross domestic product to 3.2%, which is still a reduction from the 3.5% of GDP recorded last year.

Towards that end, Najib also announced a whole slew of measures to protect the economy from the deleterious effects of falling oil prices and a depreciating ringgit while helping to ensure that the government is still on a path of fiscal reform and consolidation.

I have some issues with those policies, particularly those that deal with government revenue and expenditure. Don’t get me wrong, I am supportive of many of those measures — for instance, I am all for a reallocation of development funds away from some projects towards the reconstruction and rebuilding of flood-hit areas in the East Coast and other such afflicted areas.

I am also glad that the government is reviewing its grants and allocations to the various statutory bodies, government-linked companies and Tabung Amanah Kerajaan, particularly those with consistent income flows and high reserves.

However, I found some fiscal policy measures somewhat puzzling. For instance, the government will encourage more firms to register with the Royal Malaysian Customs Department, thereby increasing government revenue from the Goods and Services Tax. This measure will contribute to an increase in GST collection of RM1 billion.

Should this not already be something the government is actively doing? If it is going to implement GST and firms above the threshold limit should, by law, register with the Customs Department, why is this a new policy that will earn the government a further RM1 billion? Shouldn’t this RM1 billion already be part of the government’s revenue under the original Budget 2015?

The government also said it would optimise its expenditure on assets and services, government meetings and conferences as well as professional services, which would provide savings of RM1.6 billion. My question is the same as the previous point on GST collections. Why is this not already done?

The fact that this is a “new” measure to reduce government expenditure implies that such spending was not optimised before. Why wasn’t this expenditure already optimised? Announcing this as a “new” measure in the special address is akin to admitting that there is at least RM1.6 billion worth of government expenditure that is suboptimal. Taxpayers and citizens should be very concerned.

Along this same line of enquiry, the government also announced that it would reschedule the procurement of non-critical assets, particularly office stationery and vehicles, which is expected to deliver a savings quantum of RM300 million. If these assets are non-critical, why is the government buying them in the first place?

Even if we agree with the finance minister that the economy is not in crisis, which I do, we can certainly agree that the current economic condition, particularly the falling ringgit and the upcoming implementation of the GST, presents a very challenging environment ahead for the people.

If the rakyat needs to be prudent, should the government also not be prudent? I wonder how many men in the street would approve of the government spending taxpayers’ money on non-critical cars for government officials. To be clear, I am not saying that this is a bad policy measure; I am asking, why was it not already being done before this?

As a matter of principle, I think the government should always be prudent in its expenditure, spending only where necessary. For the rakyat to place their faith in the financial management of the government, the government needs to show that it is being as fiscally responsible as possible.

I do not think that all of the measures announced necessarily reflect that. Indeed, the three policy measures I questioned in this article are steps I believe should already have been taken by the government. Why only undertake these measures now?

If the government is serious about fiscal reform and consolidation, then it should walk the walk. Any policy measures to increase revenue or reduce expenditure should actually be new and be difficult decisions that the government has to balance to deal with adverse economic conditions.

Nicholas Khaw is an economist-in-training at Harvard Kennedy School. Prior to this, he was an assistant vice-president of the research division of Khazanah Nasional Bhd.

This article first appeared in Forum, The Edge Malaysia Weekly, on February 2 - 8, 2015.

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