Government spending to come under closer scrutiny

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WITH the implementation of the Goods and Services Tax (GST) next April, the government’s revenue is expected to increase by between RM5 billion and RM6 billion in the first year, according to the Royal Malaysian Customs. How the government spends this additional income will certainly be closely watched.

On top of the added revenue from GST, the federal government’s fiscal space will be further improved as it undertakes more subsidy cuts. The 20 sen per litre subsidy cut last year on RON 95 petrol and diesel saves the government about RM3.3 billion, according to analyst estimates.

Combining the savings and net increase in revenue, which comes up to RM8 billion to RM10 billion, there is expected to be closer scrutiny of the government’s expenditure and contracts to ensure financial prudence and accountability.

Budget 2015, to be tabled by Prime Minister Datuk Seri Najib Razak on Oct 10, will show the forecast revenue to be collected by the government along with the allocation to the various ministries.

Judging from past experiences, the way the federal government manages its finances leaves much to be desired. This is also reflected in the many shortcomings revealed in the Auditor-General’s Report every year.

“The government has done more auditing and plugged some loopholes to collect more revenue. You can see its revenue has increased quite a lot over the last two to three years. However, it is still not enough,” says Lim Chee Sing, RHB Research Institute’s economist, when contacted.

“The way the government manages supply and services leaves much to be desired. A lot of savings can be gained if the government sticks to a transparent open tender system for contracts and supplies.”

Between 2009 and 2013, the federal government’s revenue increased by almost 40% to RM220.4 billion. While most of the increase was attributed to the rise in commodity prices, credit should be given to the Royal Malaysian Customs and Inland Revenue Board for enforcing tax collection.

The 3.5% to 4.5% projected increase in fiscal space of between RM8 billion and RM10 billion from 2014’s projected revenue of RM224.09 billion should benefit the country, if the government gets its priorities right.

For example, 10 hospitals comparable to the Serdang Hospital could be built on a budget of RM7 billion. Seven full-fledged universities comparable to Xiamen University, which is being constructed in Sepang, could be built with the same amount of money.

The government could also be spending on defence assets. Recently, Defence Minister Datuk Seri Hishamuddin Hussein mentioned the need to upgrade the national radar system in the light of the MH370 tragedy.

What is important is that while the government spends on these assets, it must be done in a transparent manner to minimise corruption and leakages.

While defence, education and healthcare are all important, the government should prioritise areas that boost growth capacity, says Lau Zheng Zhou, senior economic analyst at the Asian Strategy & Leadership Institute’s (ASLI) Centre for Public Policy Studies.

“In the short term, there should be better targeted welfare transfers, such as BR1M. This should mean that only those who are truly deserving will obtain these payments. Emoluments should be compensated with greater productivity gains in public service delivery.

“There needs to be greater accountability on supplies spending. Also, public expenditure should be directed at increasing growth capacity, for example, higher quality education and healthcare systems and retirement plans,” he tells The Edge in an email response.

The Ministry of Education has been the biggest recipient of the federal government’s budget every year. In Budget 2014, the education sector received the highest allocation — RM54.6 billion or 21% of the total budget.

However, the standard of Malaysia’s education system is not comparable to those of the high-income and developed economies. This can be seen from the below average ranking of Malaysian students in the Programme for International Student Assessment (PISA) tests.

In the 2012 PISA ranking, only 1% of Malaysian students aged 15 reached mathematics literacy proficiency levels 5 and above, which is way below the average of 13% for the Organisation for Economic Cooperation and Development countries.

Malaysian students are also behind other developing countries, such as Thailand and Vietnam, in mathematics literacy proficiency, according to the 2012 PISA results. On the other hand, 40% of Singaporean students aged 15 scored mathematics literacy proficiency levels 5 and above.

There are also calls for the government to cut down on emolument. Malaysia has a bloated civil service — 10% of the total workforce, says Lim of RHB Research. Emoluments made up 29.2% of the federal government’s operating expenditure in 2014.

“Perhaps, utilising the existing resources is the best way to go about doing things. In particular, engagement with consultants should be minimised as the government has a pool of talented staff on whom significant amounts have been invested to enhance their skill set.

“The government may want to mobilise its existing resources whenever there are big campaigns or measures, such as GST, to explain to the masses. The key to this is optimising the existing resources,” says Afzanizam Abdul Rashid, chief economist at Bank Islam Malaysia Bhd.

GST was driven by the need for a fairer system of taxation based on consumption. However, the need for fiscal consolidation, partly due to pump priming following the 2008/09 global financial crisis, gives the matter more urgency. Not doing so may hamper the growth of the Malaysian economy as a whole, says ASLI’s Lau.

“This was seen when Fitch Ratings revised Malaysia’s outlook to negative in 2013. People naturally demand better public services for their tax dollar. However, delivery is not catching up with public demand or expectations.

“Improvement in public service delivery is a work in progress. This will continue indefinitely even as Malaysia achieves Vision 2020. However, there will be political and economic consequences if governance issues are not effectively addressed in the near term,” he adds.

This article first appeared in The Edge Malaysia Weekly, on September 22-28, 2014.