This article first appeared in The Edge Malaysia Weekly on September 3, 2018 - September 9, 2018
MALAYSIA is to be a developed country by 2020, but judging by the RM1 trillion debt and problems unearthed by the new federal government the past four months, the road ahead is even tougher than previously thought.
Not only is the national debt over RM1 trillion but the government will need to contend with at least RM35.3 billion less revenue next year on top of the RM23 billion shortfall in revenue collection from replacing the Goods and Services Tax (GST) with the newly expanded Sales and Services Tax (SST 2.0). The RM35.3 billion is made up of the RM19.25 billion in GST input tax refund owed to 121,429 companies and individuals and RM16.05 billion in excess income tax and Real Property Gains Tax owed to 1.65 million companies, individuals, societies, associations and foundations as at May 31.
The saving grace here is that the RM58.3 billion (19.25+16.05+23) is extra money in the hands of consumers and businesses, which would hopefully help power consumer spending as well as private investments next year and lift gross domestic product (GDP) growth.
The RM58.3 billion is almost 4% of Malaysia’s GDP, assuming the economy grows 5% this year and another 5% next year.
If one were to assume the budget shortfall of RM40 billion for 2018 is maintained next year and add to it the RM58.3 billion revenue shortfall, then the country’s fiscal deficit would rise to 6.6% of GDP next year from the projected 2.8% this year, back-of-the-envelope calculations show. That is not a projection that the budget deficit will rise to 6.6% next year.
Thankfully, the current government does not intend to spend the same way as its predecessor.
The Pakatan Harapan government, which needs to scrutinise every ringgit it spends more than ever, is rightly implementing zero-based budgeting for government procurement as well as the upcoming Budget 2019 — set to be tabled by Finance Minister Lim Guan Eng on Nov 2. Zero-based budgeting means budgeting on a needs and impact basis instead of modifying last year’s budget without much thought or justification for the money it spent or plans to spend.
“Zero-based budgeting could make it possible for the current government to maintain the RM10 billion savings from expenditure rationalisation [projected for 2018] next year … It is the right path to cultivate efficient spending,” says Julia Goh, senior economist at UOB Malaysia.
“It is also possible for the government to cut spending from having a smaller Cabinet and Prime Minister’s Department, even with the addition of an Economics Affairs Ministry, if every ringgit being spent needs to be justified and there are better procurement processes,” another economist says.
“If you can save 30% of the RM150 billion that the government [reportedly] spends every year on procurement [of goods and services], that’s RM45 billion — no more budget deficit immediately… The question is, how can this be implemented without too much shock to the government sector? It would be interesting to see other measures that would support consumer spending, especially if they do away with BR1M,” the economist says.
BR1M or the Bantuan Sara Hidup (BSH) cash transfer amounted to RM6.8 billion in budget allocation in 2017 and 2018 and apart from better targeting to ensure the money goes to the right people, experts have said the measure lacked an avenue to help the recipients move up the income chain so that they no longer need aid.
It is noteworthy that the Prime Minister’s Department’s actual spending of RM17.73 billion in 2016 was 8.3% of government revenue that year, comparable to the 10.7% received by the Ministry of Health but more than the Home Ministry (6%) and Ministry of Defence (6.8%). The current government has 28 ministers and 27 deputy ministers compared with 35 ministers and 33 deputy ministers under the previous administration.
A good budget will be no small feat, bearing in mind Budget 2019 is being tabled just six months since the watershed 14th general election on May 9.
The current government also needs to deliver the many election promises whilst having the unfortunate job of cleaning up after the previous administration. It might also need to deal with people’s angst as it plug leakages and implements safeguards and is forced to delay delivering some election promises due to lack of funds.
Some clues of the government’s immediate spending priorities could come from the mid-term review of the 11th Malaysia Plan (2016-2020) to be tabled by Economic Affairs Minister Datuk Seri Mohamed Azmin Ali in Parliament on Oct 18.
The 12 budget categories on the Treasury’s website may offer additional clues: cost of living; entrepreneurship and business; healthcare and healthy lifestyle; education and training; access to financing; housing, infrastructure and public safety; public sector reform; income and employment opportunities; social justice and balanced development; technology and innovation; welfare and well-being of the people; as well as environment and sustainable development.
Expectations are that the government would try to at least maintain the 2019 fiscal deficit at 2.8% of GDP, if not do better. That would require the government to have new revenue sources as well as spending cuts.
The RM58.3 billion potential government revenue reduction next year is sizeable — 25% of the RM233.3 billion projected government revenue for 2018 — although expectations are that some of it would be offset by new revenue sources.
The latter is necessary as debt service charges could grow to about RM33 billion next year, going by how it had been gaining at least RM2 billion a year in the past three years. Emolument, pension and retirement charges would likely require another RM104 billion, based on 2018’s budget estimate. Together, these two items would already take up 60% of government revenue, more so should the figure fall nearer to RM200 billion.
A soda tax had been indicated, but economists do not expect significant increases in government revenue from it. Other avenues expected include higher sin taxes (cigarette, alcohol and gaming), which are easier to justify.
A capital gains tax on equities or higher real estate taxes on foreigners may also be on the cards, but their introduction would need to be weighed against any undesired effect arising from such a move. Taxing the rich and inheritance taxes are bandied about in many developed economies but this could risk more money being moved to tax havens or pushing away desired talents.
More debt ahead?
There are those who reckon that the government might have little choice but to borrow to finance next year’s spending, while working on measures to cut overall debt and grow its revenue sources. The sale of some non-strategic assets may also be necessary to raise cash.
Malaysia has at least RM70 billion of debt maturing every year between 2019 and 2023, which would likely require refinancing if not paid down. The figure for 2022 and 2023 includes RM7 billion and RM14.4 billion required by 1Malaysia Development Bhd (1MDB) — near the end of the current five-year mandate for the Pakatan Harapan government.
It remains to be seen if the Tun Razak Exchange (TRX) development — for which the current government had pledged a RM2.8 billion additional “bailout” sum through 2024 (RM344 million in 2018) to avoid paying a RM3.5 billion compensation — would be able to realise the RM7.6 billion project value for the RM6.5 billion cost going into it to help pay down some of its debt.
There is also no telling just how much more money the East Coast Rail Line (ECRL) is going to cost the government from hefty compensation clauses it inherited from the previous administration, if the massive billion-ringgit infrastructure project is cancelled instead of deferred.
To be sure, debt itself is not necessarily bad if the social benefits or the potential returns on investment in the not too distant future far justify the near-term cost. If 1MDB is any indication, part of the Malaysian government’s debt problem is because of imprudent spending and “stupidly” negotiated contracts that have resulted in there not being enough returns to justify the debt taken.
Stop the structural deficit
In weighing the need for more debt, there is a need to commit to weaning Malaysia off the structural deficit.
Some will say just because the federal government has consistently spent more than it earned since 1998, it does not mean that the budget deficit is structural. Others will say Malaysia can go on having a structural budget deficit so long as creditors continue to be confident the country can service its debts for some time, whatever the debt-to-GDP figure really is. After all, the US has a structural deficit and continues to enjoy low borrowing rates.
But Malaysia is not the US — and the difference is not just the lack of Googles, Apples, Microsofts and Amazons. Malaysia’s education system has not yet been revamped to equip our children to adapt and thrive in the coming new world — neither is the bulk of the workforce. That is just one of the many problems that the Pakatan Harapan government needs to overcome even as it deals with immediate needs such as the rising cost of living and pricey homes.
Aid — such as the additional RM3 billion allocated by the current government for petrol subsidy — will have to be better targeted, even when the times are good.
Policymakers only have to look across the Causeway to find an example of how fiscal discipline has helped an economy grow stronger.
“While we spend to assure ourselves of a secure future, we run a balanced budget and keep government expenditure within revenue over the course of the business cycle. That is, what we spend is always equal to or less than what we earn or receive. Not only is the budget balanced in fiscal terms, but it seeks a good distribution of budget provisions for the many demands in economic development, social development, defence and security, and government administration,” Singapore’s Ministry of Finance says in its book Building Our Future Through Finance, in which a whole chapter is dedicated to a “balanced budget”, which it says is key to ensure public finances are on a sound footing. It also established limits to ensure public funds are used responsibly.
With SST 2.0 kicking in from Sept 1, Malaysians who love their cellphones, for instance, would have to pay 10% more than the tax holiday price. Many may forget that the increase is 4% and not 10% and that many more goods are not covered under the SST compared with the GST.
There are those who would be more understanding of the current government, including one economist, who had this to say when asked about pricier cellphones: “Think of it as an indirect contribution to the [Tabung] Harapan fund.”
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