ON March 19, the Public Land Transport Commission (SPAD) announced that fares for taxis and express buses would be revised upwards and that similar revisions were being considered for rail — KTM and LRT — services.

There was an immediate uproar and the next day, the Cabinet decided that SPAD should postpone the hikes.  Even members of the government took potshots at SPAD’s decision, much to its chagrin, as I am sure it did not act independently in making the decision. This episode is a study in how decisions should not be made.

The reason given for delaying the fare hikes was that they would coincide with the implementation of the Goods and Services Tax (GST) on April 1 — which is understandable to a certain extent.

But I still don’t get why every decision that raises prices is tied to GST. Delaying fare increases for trains and LRT means all taxpayers — instead of just the users — will continue to pay for their operating losses.

Two things immediately come to mind.

The reaction to the fare increases itself explains the need for them. It was made known by SPAD that taxi and bus fares had not been revised for six years, LRT fares for 17 years and KTM Komuter service fares for six years. Meanwhile, KTM’s inter-city services fares have not changed for 25 years.

Quite clearly, we avoided the much less painful short-term decision to adjust prices incrementally and postponed them to a point when things become intolerable. But, given the time that elapsed, the required adjustment will be significant. Long delays in price adjustments produce price distortions, which make corrections harder.

The second point is that we are looking at the effects of both low-income levels and a distribution of income that is heavily skewed. Decision makers are rightly concerned about the rise in the cost of living for this very reason. While we have seen growth, Thomas Piketty’s “r>g” (returns on capital exceed the rate of economic growth) holds true for the most part, further separating those who depend solely on labour for wages and those who own financial and capital assets.

However, what bothers me is how such reactions and decision-making get things all mixed up. In the scheme of things, taxis are ranked up there in terms of choice of public transport, ahead of buses and trains. And unlike the publicly owned train and private bus companies, driving a taxi is mostly considered a private enterprise.

Taxi drivers belong to the low-income group whose income should be increased, but they have become victims of this confusing policy decision. Why can’t local taxi drivers benefit more from the 26 million tourists who supposedly spent an estimated RM65 billion in Malaysia last year?  Why just the hoteliers, retailers and restaurateurs?

There are many examples of the tension between wanting to help the rakyat, effectiveness of programmes and fiscal affordability. This leads to, among other things, procrastination and sometimes wrong decisions that run counter to policy objectives, often leading to increased fiscal burden.

The case of student loan scheme, PTPTN, is another example. There was pressure to broaden its coverage of public universities and selected private universities to all institutions of higher education, and from recognised undergraduate programmes to other areas, including diploma and  post-graduate courses. This expanded the demand for funding, mainly as a result of lobbying by owners of these institutions who looked at education as a commercial enterprise.

What was the distortion? The supply side of education proliferates on the expectation that students will be funded to attend universities. Quality was compromised, which effectively lowered the returns on education spending – what graduates are paid. This led to the inability to repay the loans as graduates were unemployed or got paid lower than expected.

In order to “help” the graduates, a policy decision was made to reduce the interest rate charged to the borrowers, which effectively destroyed PTPTN’s financial model. This decision, coupled with the poor collection rate, continues to impose a heavy fiscal burden, and yet, Malaysia’s higher education is not any better.

When a programme is developed, its raison d’etre must be clear, and the model of execution be designed to sustain the achievement of the objectives. Policy decisions cannot continue imposing a fiscal burden without having really achieved these objectives. The objective of consolidating the government’s fiscal situation, indeed overall national transformation, will require clarity of thinking and, dare I say, courage of conviction.

This government has taken some crucial decisions in effecting the country’s transformation. These are necessarily tough decisions that have been avoided in the past — something critics from the past should recognise: rationalising the overall subsidy scheme, broadening the government’s revenue base, repealing the Internal Security Act, continuing to empower the Malaysian Anti-Corruption Commission and admitting that the country needs a different economic logic to move forward, as contained in the New Economic Model.

But at the same time, it faces tremendous opposition on many other fronts, and has wavered on those.

Politics, so said Otto von Bismarck, is the art of the possible, but bent beyond a certain threshold, all models break down when they lose their internal logical consistency. It is best to recall what a model stands for when tinkering with it. This applies to specific programmes, and to countries and constitutions as well.

If the original Constitution is bent too far, or the social foundations of a country shift too much, the country is no more. We are facing challenges of that dimension today when man’s interpretation of God’s law is made law among men, but such is democracy.

There is “a brave new world” out there. Nations struggle to find themselves in that world to ensure peace and economic security. But that world is not Aldous Huxley’s “Brave New World” where people are mere automatons, programmed to accept their prescribed roles in obedience to a ruling order. The real world is noisy and has a mix of spirituality and the secular. It is populated by real people who are fickle and have indomitable spirits.

Those who mind the institutions have to get used to a different type and level of public scrutiny and commentary. There is no point or need to threaten action against those who are critical of how the institutions function.

The combination of humanity and technology will ensure a continuous stream of feedback, not all of which will be complimentary. In the final analysis, institutions will be judged by how they perform what they are entrusted to do, as will their members and leadership. History, when it is eventually written, will be cruel or kind accordingly. We have no control over that.

Back to the GST. It may have been implemented as a means to broaden the government’s revenue base, but will also prove to be an important transformative tool for the country, and not just the federal treasury. For too long, the government has got by on a broad range of revenue sources but whose base was narrow.

For example, we have personal income tax, but reportedly, less than two million people pay taxes.  While there are corporate taxes, an estimate of Malaysia’s informal sector is not insignificant. It was, however, fiscally tolerable because of oil and gas-based revenues, which consistently contributed about a third of total government revenues. Not only were people largely exempt from paying taxes, but also, quite a bit of the goods and services they consumed were subsidised.

The dominance of resource-based revenues, where there are strong governmental levers, has always been associated with less than optimal public governance. Part of the resource curse in the developmental sense is that countries without natural resources manage their finances better. This is because consumption-based taxes such as GST touch almost everyone.

It democratises the payment of taxes, and nothing makes people care about something more than having to pay for it. GST will increase public governance, thereby increasing public scrutiny of government spending and the performance of publicly funded institutions.

Hopefully, public policy formulation and decision-making will also improve, and politics perhaps will become a bit more civilised.

Dr Nungsari Radhi is an economist and managing director of Prokhas Sdn Bhd, a Ministry of Finance advisory company. The views expressed here are his own.

This article first appeared in Forum, The Edge Malaysia Weekly, on March 30 - April 5, 2015.

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