This article first appeared in The Edge Malaysia Weekly, on November 2 - November 8, 2015.
COME 2016, bureaucrats in Malaysia will be chasing a new magic number — 3.1% — the fiscal deficit to GDP target ratio that Prime Minister Datuk Seri Najib Razak announced in Budget 2016. Being just a notch above 2015’s target of 3.2% that the government expects to meet, it is “not great, but not terrible either”, as one research house puts it.
There should be little doubt that the Najib administration can achieve its fiscal goals, even in the current trying economic conditions. It has embarked on unpopular fiscal reforms such as the implementation of the Goods and Services Tax (GST) and a painful subsidy rationalisation programme. Broad-based subsidies for fuel, highway tolls and energy tariffs were trimmed and replaced with more targeted handouts for the lower-income groups. Soon, rail and flight travel subsidies will also be cut.
With these manoeuvres, the government’s operating expenditure (opex) declined 2.9% year-on-year in 2015 and is expected to grow only 0.9% in 2016 despite higher debt service charges. Subsidy spending is expected to reduce to RM26.2 billion in 2015 from RM39.7 billion in 2014 and stabilise at RM26 billion in 2016.
Such actions resulted in billions in savings in 2015 but it has been at the expense of Malaysian households. Now, Najib wants the government to shoulder its fair share of the burden.
The Ministry of Finance (MOF) will implement a three-year framework called the Middle-Term Fiscal Framework (MTFF), which will cap government spending.
According to the Economic Report 2015/2016, from 2016 to 2018, state opex will stand at RM685.7 billion, or 17.1% of Malaysia’s gross domestic product. The total allocation for development expenditure will be below the 11th Malaysia Plan’s total ceiling. The government will also implement measures including cost-effective procurement, streamlining the civil service and further encouraging government entities to be financially independent and less reliant on grants.
Attempts to rein in opex in 2016 are apparent, if not satisfactory. Emoluments growth has been contained at 2% in 2016 to RM70.46 billion. It forms the largest chunk of government outlays and consistently goes above the government’s expectations. Emoluments were initially planned at RM65.6 billion in 2015 but has been revised to RM69.1 billion. Other obvious cuts have been made, such as in grants to statutory bodies, which were reduced by 17.5% to RM12.9 billion, and asset acquisition allocation, which took a 34.2% slash to RM1.16 billion.
It is now mandatory for the government to ensure that outlays are within its means. This should come as a relief to those who still doubt Malaysia’s fiscal discipline.
Expenditure rules are valuable because they are easy to monitor, fully accommodate revenue shortfalls resulting from adverse economic conditions and are directly related to the formulation of the annual budget, the International Monetary Fund says in a February 2015 report.
“Unlike deficit caps, expenditure rules help create buffers in good times when revenue windfalls make spending difficult to resist,” it adds.
Shan Saeed, chief economist at IQI Holdings, says the spending caps are a step in the right direction and “sends a signal to the market players and financial institutions globally that the Malaysian government is willing to demonstrate fiscal brinkmanship in the long run”.
However, for those who look at past government spending, the MTFF may not inspire as much confidence.
“Don’t take the budget too seriously. The government never follows it, anyway. That is why you will have a supplementary budget tabled next February or March,” says a Malaysian economist based abroad.
The sentiment is not unreasonable. The tabling and approval of supplementary budgets has become an annual affair. Most recently in March, Najib asked for RM2.22 billion in extra funds, on top of the RM4.11 billion he requested in June 2014, to close the gaps of Budget 2014.
Moreover, the restraint on spending based on MTFF was made because of the need to respond to falling oil revenue rather than wanting to exercise fiscal caution. Even Second Finance Minister Datuk Seri Ahmad Husni Mohamad Hanadzlah has said that the government is prepared to increase spending after the tabled Budget 2016 if Brent crude surpasses US$48 a barrel.
Some quarters take the view that old habits die hard and the imposition of a spending cap will not change the government’s culture of overspending.
There is also the question of how and where government spending caps or cuts should be applied. Slashes in critical sectors may negatively impact Malaysia’s economic growth when it can least afford to, warns Izzuddin Yusof, economist at MIDF Research.
“We are positive on the government’s plan to put a cap on opex. However, we are concerned about which parts of the economy are going to take the cut,” he says.
Opposition lawmakers have questioned the priorities under Budget 2016, particularly the RM20.3 billion, or 7.6% of total budgeted expenditure, for the Prime Minister’s Office. They are heavily critical of the fact that the education sector’s allocation has been slashed by 16.7% to RM4.7 billion next year. It should be noted, though, that total allocation for social services will increase 5% and total development expenditure will inch up 5.4% to RM50 billion.
MIDF Research, however, explains in an Oct 26 note, “The decision may have been made due to the focus on pump-priming the economy in sectors with a more immediate impact on the economy, as investment in education is considered a long-term investment strategy.
“Due to that, trade and industry experienced the highest increment of RM1.6 billion relative to the estimated 2015 budget [allocation], while the allocation for transport remains high as the government proceeds with the LRT3 expansion plan.”
The longer-term priorities of the three-year MTFF period remains to be seen. But, some quarters argue that allocations and spending caps are not key to fiscal health. Spending less is not as important as spending wisely.
James Chin, director of Asia Institute Tasmania, says, “It is not the amounts allocated that worries me, but the efficient use of resources.
“(The) extra revenue (from taxes) raised is a pittance compared with the money lost to corruption and money moved overseas,” he adds.
For example, supplies and services, which will take up 16.9% of overall opex in 2016 and often the source of alarming leakages as revealed in the Auditor-General’s Reports every year, will only be cut by 0.9% to RM36.3 billion. At the same time, the government will still spend RM26.1 billion on subsidies (the Bantuan Rakyat 1 Malaysia scheme accounts for about 20%) despite its intention to rationalise subsidies further.
To be fair, it is too soon to judge how well the government will fare in a more controlled spending environment. If the MTFF’s fiscal targets are to be met, expenditure rules under the framework should be observed. Even doubters will want to see the MTFF address the expenditure pressures often seen as the origin of excessive deficits in Malaysia.
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