This article first appeared in The Edge Malaysia Weekly on October 22, 2018 - October 28, 2018

WATCHING Tun Dr Mahathir Mohamad table the mid-term review of the 11th Malaysia Plan (11MP-MTR) in parliament last Thursday brings back memories of him tabling the national budget 15 years ago in his former incarnation as both prime minister and finance minister.

Now, as Malaysia’s seventh prime minister at 93, he concurs that no one should hold both posts again as he pledges institutional reforms. He is also racing against time in more ways than one — not so much because his tenure has shrunk from 22 years to two years, but because the new Pakatan Harapan government needs to chase back Malaysia’s stolen years and re-engineer growth while juggling its RM1 trillion debt.

Indeed, every ringgit from the nation’s coffers spent wrongly is time and money stolen from the country’s growth potential and well-being of current and future generations.

“We have to spend wisely. The federal government’s financial position needs to be strengthened. Non-transparent financial practices will be discontinued and leakages at all levels will be addressed,” says Mahathir, who admits the government’s prudent spending through 2020 may temporarily affect economic growth but are necessary.

Even so, the limited room to cut operating expenditure in the near term, and the need to return more than RM35 billion in tax money owed to individuals and businesses by the previous government, could mean a temporary rise in the country’s fiscal deficit for 2019 before reducing again to the new deficit target of 3% of GDP (RM49.7 billion) in 2020.

“The government is confident its fiscal position can be restored by the end of 2020,” Mahathir said, referring to the path of fiscal consolidation, without specific mention of when a balanced budget can be achieved or if it is still a target beyond 2020.

Economists have previously said that a temporary rise in fiscal deficit can be tolerated by rating agencies, provided they do not think the fiscal slippage will be prolonged.

“Indeed, at times of heightened global uncertainty and fiscal constraints, budgeting should have a cautious bias. A credible timetable for the budget repair must be clearly spelt out. This is the clear direction the credit rating agencies and market investors are looking forward to,” says Lee Heng Guie, economist and executive director of the Socio-Economic Research Centre (SERC).

While the original 11MP had targeted a “balanced budget” or 0.6% fiscal deficit (RM9.9 billion) by 2020, the previous administration too had conceded they needed more time to reach that target. Previous fiscal deficit figures were also understated as federal government revenue was actually less than reported as it included billions in excess tax money owed to people and businesses.

In June, Mahathir said Vision 2020 — which he mooted during the tabling of the sixth Malaysia Plan in 1991 of Malaysia being a developed, inclusive, dynamic, prosperous and resilient industrialised nation — needs another five years or so with hard work and the right policies in place.

With the country’s economy expected to expand between 4.5% and 5.5% per annum from now through 2020, slower but more realistic than the original 11MP target of 5% to 6%, Malaysia is only expected to breach the minimum income threshold of a high-income nation by 2024.

As it is, Malaysia’s per capita income is estimated to rise from RM41,093 (US$9,556) in 2017 to RM47,720 (US$11,700) in 2020.

“Based on the minimum threshold of a high-income economy set by the World Bank at US$12,056 for 2017, there was a gap of 21% before Malaysia would graduate from its upper-middle-income nation status. Given the current pace of growth parameters, the target of a high-income economy is expected to be achieved post-2020,” read the 397-page 11MP-MTR report, which aligns the country’s medium-term policy and strategies with the Pakatan Harapan election manifesto and provides the broad framework for Budget 2019 (to be tabled on Nov 2) as well as Budget 2020 next year.

Yet even if Malaysia reaches that high-income threshold, the achievement is meaningless if there is no rise in purchasing power and much of the bottom half of Malaysians remain as they are. The relatively easier fix is making sure the disbursement of assistance is efficient, well-targeted and correctly measured for the desired progress. The greater challenge is making sure that those helped acquire skills to move higher and are challenged to be more creative and enterprising, instead of becoming so dependent on aid that they lose any initiative to better themselves.

To be sure, Malaysia wants to expand its social safety nets, especially when at least 15% of the population will be above 60 years of age in just over 10 years. To achieve equitable economic growth and shared prosperity, Mahathir says the government “has to be clean from corruption and abuse of power” so that the nation’s wealth “will not be robbed” and public trust and confidence on governing institutions can be restored.

Setting the stage for Budget 2019

Now that the broad policy direction has been spelt out, investors and businesses are looking to Budget 2019 for the near-term strategies and policies, including new taxes and how investment incentives will be realigned with the new growth direction.

“Domestically, Malaysia faces several difficult tasks ahead amid high expectations of economic and political reforms. Actions taken so far are mostly in line with the Pakatan Harapan government’s manifesto, particularly in the areas of combating corruption, improving transparency, and reforming key government institutions. The government has emphasised that it is not in an austerity mode, and continues to prioritise growth policies. Businesses have been cautious as mega projects are reviewed, while trade and financial risks rise. The private sector is looking towards the coming 2019 budget for new policies, growth catalysts, and fiscal clarity,” UOB Bank Malaysia economist Julia Goh wrote in a note dated Oct 18.

For now, we know that the government intends encourage digitisation and innovation, energise the manufacturing sector and modernise agriculture to boost growth. It also wants industries to move up the value chain and improve the export ecosystem.

At the same time, the government is looking to increase revenue from indirect taxes as well as non-tax revenue (see sidebar on page 80). Raising taxes would be much easier to swallow if businesses and people are making more money or are confident they will be in the near future. Some goodwill may come as the government returns the RM35 billion in extra taxes owed to them — RM19.25 billion excess Goods and Services Tax (GST) and RM16.05 billion from excess income tax and Real Property Gains Tax.

The 11MP-MTR shows the smaller role of public consumption and public investment towards GDP growth from now through 2020. Expectations of private investment’s contribution to GDP had also been scaled back but private consumption, however, is expected to feature more strongly on assumption of favourable labour market and income growth.

Some 4,000 ongoing people-centric projects on affordable houses, schools, hospitals and roads will continue but there is limited room to raise allocation for development expenditure in the coming two years due to near-term constraints in cutting operating expenses.

While the development expenditure ceiling for 11MP (2016-2020) had been cut by 15% from RM260 billion to RM220 billion, Goh says the average annual spent for 2018 to 2020 could still be RM44.3 billion, up 2.2% from the annual average of RM43.4 billion in 2016 to 2017. Lee, meanwhile, thinks the government still has about RM45.2 billion per year to spend on development expenditure even with the reduced ceiling, given that only RM107 billion had been spent between 2016 to end-June 2018, leaving about RM113 billion through 2020.

Lee, for one, views positively the special task force that will be set up to conduct a comprehensive audit across public sector institutions, agencies, statutory bodies and state-owned enterprises to assess their roles and functions to cut duplication and increase efficiency.

“We view the rationalisation of public sector institutions as a step in the right direction to help contain the operating expenditure on emoluments and pension payment, which has grown in magnitude relative to revenue collection. In 2007, total emoluments of public servants were RM32.6 billion or 26.4% of total operating expenditure (Opex) but increased by 8.4% per annum to RM73.1 billion or 34.8% of total Opex in 2016,” Lee says, noting that the government’s role in non-core services could be reduced through privatisation and outsourcing.

“We believe that there should be a smaller, less intrusive role for government, much more contained public service and a bigger role for the public-private partnerships under Malaysia Incorporated. Public sector must become an effective facilitator and not a deterrent to private sector. The outsourcing services should be evaluated under Good Regulatory Practice Guidelines. Monopolistic practices must be curbed,” he adds.

As it is, Lee says the new 3% fiscal deficit target for 2020 “highlights the bind that the nation is in as it seeks to rebuild its fiscal health” due to high committed expenses on emolument, pension and healthcare as well as social security, given the nation’s ageing population. “A significant cut in public spending, increasing new taxes and social security premium hikes to trim the deficit would be politically challenging and portend short-term dent on economic growth”.

It is worth noting that the 11MP-MTR document did not provide targets on public debt, which stood at RM1.087 trillion or 80.3% of GDP in 2017, with 50.8% or RM686.8 billion being official federal government debt, 14.6% or RM199.1 billion in government guarantees, and 14.9% or RM201.4 billion lease commitments under public-private partnership projects.

The original 11MP had targeted to cut debt to below 45% by 2020 from 54.5% or RM630.5 billion in 2015, which only takes into account the official debt figures. Still, the government has pledged greater transparency, including by setting up a new public debt management system and moving to accrual accounting.

The promise of stronger institutions will help ensure that these pledges for transparency and accountability are kept.

Last Thursday, Mahathir called upon all Malaysians to take part in the country’s development and jointly help Malaysia to once again roar as an Asian Tiger.

His plea to the generations younger than him applies to most of us: “Grasp all the knowledge that can make Malaysia a developed nation. Acquire all skills. Enhance self-identity. Hold on to religion and noble values. Reject corruption absolutely. Embrace truth, honesty and justice. Let us all work together and be united to create a more glorious future for Malaysia.”

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