This article first appeared in The Edge Malaysia Weekly on September 13, 2021 - September 19, 2021

THE unveiling of the 12th Malaysia Plan (12MP) on Sept 27 will likely see the largest-ever allocation for development expenditure under the country’s five-year plans. And rightly so, given the need for Malaysia to emerge stronger and remain competitive in a post-Covid-19 world.

Expectations are for the allocation for development expenditure under 12MP (2021 to 2025) to be between RM280 billion and RM350 billion, going by historical data and how the development expenditure for 2021 had been largely kept intact at RM68.2 billion (versus the RM69 billion tabled under Budget 2021 last November) in the recently announced pre-budget statement, despite the overall Budget 2021 being reduced from RM322.5 billion to RM314.8 billion. This was despite a development expenditure utilisation of only RM31 billion, or just over 45% of the revised allocation for 2021 as at July — slower than the 61.3% utilisation of operating expenditure (revised allocation of RM219.6 billion versus original allocation of RM236.5 billion) and 75.2% on the special Covid-19 fund (revised allocation of RM27 billion versus original allocation of RM17 billion).

The Edge’s back-of-the-envelope estimate of a development expenditure of RM280 billion to RM350 billion for 12MP — which works out to a simple average of RM56 billion to RM70 billion a year plus a very simple assumption of development expenditure rising RM1 billion annually from RM68 billion in 2021 — would make the estimated development expenditure allocation at least 12.7% larger than the actual development expenditure of RM248.5 billion spent between 2016 and 2020 under 11MP.

For the record, the 11MP had originally allocated RM260 billion for development expenditure when tabled in May 2015 but the allocation was revised downward to RM220 billion during its mid-term review in October 2018.

Between 2016 and 2020, actual development expenditure ranged between RM42 billion in 2016 and RM56.1 billion in 2018 (averaging at RM49.7 billion a year) — some RM527 million to RM8 billion below what was originally tabled, with the exception being a RM10 billion jump in 2018.

The shortfall in actual development expenditure versus what was budgeted largely corresponds with a shortfall in actual revenue receipt by the federal government, a quick check on official data shows. The largest shortfall was in 2015 and 2016, when global oil prices tumbled precipitously and resulted in the need to revise the annual budget. In 2016, when actual development expenditure of RM42 billion was RM8 billion short of the RM50 billion originally tabled, for instance, there was a RM13.2 billion shortfall in revenue. Similarly, the RM7.7 billion cut in actual development expenditure to RM40.77 billion in 2015 versus the RM48.5 billion originally tabled was when actual revenue came in RM16.1 billion short of what was originally projected under Budget 2015.

That is why economists largely expect development expenditure to fall whenever there is a significant shortfall in revenue, especially when a sizeable portion of operating expenses consists of emoluments, public pension payments and debt service charges that are hard to trim.

Going by the trend of the past 15 years (between 2005 and 2019), development expenditure only exceeds what is budgeted when there is a sizeable jump in federal government revenue. But an increase in operating expenditure always happens when revenue comes in ahead of expectations. In 2010, for instance, when revenue was RM11 billion more than expected, development expenditure only increased by 1.57 billion or 14% of the increase in actual revenue.

For 2011 and 2012, however, development expenditure fell by more than RM2 billion a year versus what was budgeted despite revenue coming in at about RM20 billion a year more — all of which went to additional operating expenses, official data shows.

The rare RM10 billion year-on-year jump in development expenditure in 2018 versus what was originally budgeted was largely due to a portion of operating expenditure — RM6.9 billion in 2018 and RM9.7 billion in 2019 — being reclassified as development expenditure. The reclassification was disclosed under the watch of former finance minister Lim Guan Eng who, like his predecessors, could only borrow to fund development expenditure but not operating expenditure.

The establishment of the special Covid-19 fund in the revised Budget 2020 and Budget 2021, however, allows Finance Minister Tengku Datuk Seri Zafrul Abdul Aziz to borrow as much as RM65 billion (RM38 billion in 2020 and RM27 billion in 2021) to cover operating expenditure related to Covid-19. This can continue to be used for Budget 2022, but the ceiling for the Covid-19 fund will need to be raised further from the current RM65 billion. Traditionally, debt can only be used to fund development expenses and not operating expenses. Malaysia’s development expenses have been largely debt-funded, given that operating expenses have taken up close to 99% of federal government revenue, for the most part, in the past decade.

There are those who reckon that the federal government can cite the pandemic to make a one-time request to Bank Negara Malaysia to help pay debt service charges, be it legally via borrowings (of up to 12.5% of revenue that needs to be repaid within one fiscal year) or debt monetisation, like what Bank Indonesia has done. The latter route is deemed less likely as it would need deft communication with the investing community and could attract negative repercussions on the ringgit.

The easier route is to tap government-linked institutions for more dividends, be it Petroliam Nasional Bhd (Petronas), Khazanah Nasional Bhd or Bank Negara Malaysia as well as to tap Kumpulan Wang Persaraan (Diperbadankan) (KWAP) for larger advances to cover the public pension bill for 2022.

Petronas has already said it is paying RM7 billion more in dividends to the federal government this year after paying RM10 billion more in dividends than originally pencilled last year. There is a chance other government-linked institutions could pay more dividends as well.

An area of interest is whether the reintroduction of the Goods and Services Tax (GST) will be mentioned in the five-year plan. When the 11MP was tabled in May 2015 (revised in October 2018), the additional revenue stream from GST over the Sales and Services Tax (SST) was credited as an enhancement to fiscal flexibility as well as the efficiency and effectiveness of the tax system. GST was implemented on April 1, 2015, but abolished in June 2018 (SST was rolled out on Sept 1, 2018) in Malaysia, which is one of three Asean member countries (alongside Brunei and Myanmar) that do not currently have a broad-based consumption tax.

To be sure, there was an overstatement to GST revenue, as attested by the overdue taxes that were not refunded and caused grief to businesses on top of low- and-mid-income individuals who were not adequately helped with a rise in cost of living. Yet, that has more to do with poor cash-flow management and execution and does not change the fact that GST revenue exceeded that of SST.

Datuk Seri Mustapa Mohamed, Minister in the Prime Minister’s Department (Economy), in August said policymakers must consider the Organisation for Economic Co-operation and Development’s (OECD) suggestion for Malaysia to bring back the GST when conditions permit. Zafrul too has said that Malaysia will not reintroduce any new taxes before economic recovery is well underway.

The potential additional income from the Special Voluntary Disclosure Programme (SVDP), which Zafrul said the government is considering in the pre-budget statement dated Aug 31, could well boost direct tax collection in 2022 but is not the kind of sustainable new revenue stream that data watchers are looking out for.

The fiscal and economic growth assumptions in the 12MP will be scrutinised by data watchers, given that the plan contains updated figures to take into account the twin health and economic challenges posed by the Covid-19 pandemic to lives and livelihoods. The need to update assumptions post-Covid-19 and the halting of parliament since January due to the emergency ordinance was why the tabling of the 12MP had been delayed for almost 14 months from the original date of Aug 6, 2020. It was first postponed to early 2021 and subsequently delayed to Sept 20 and now, Sept 27.

The importance of having greater fiscal flexibility was clear during the pandemic, with experts from various international agencies including the International Monetary Fund (IMF) noting how countries with strong fiscal buffers and muscles around the globe were able to cushion the pain caused by Covid-19 and support recovery a lot better than those fiscally constrained.

“The size and effectiveness of any policy measure and the availability of remaining policy space to deal with problems as they arise will be crucial in returning economies to a sustainable growth path,” the Asean+3 Macroeconomic Research Office (AMRO) wrote in a note released on Sept 10, when releasing its Divergent Recovery Index (DRI), which attempts to help policymakers gauge areas of strengths and weaknesses relative to their peers in the region where ongoing recovery has been uneven across sectors and businesses.

In his keynote address at a webinar titled “The 12th Malaysia Plan: Developing the Nation in the Spirit of Keluarga Malaysia” on Sept 7, Mustapa noted that the government’s priority over the next 10 years would be to increase income, eliminate absolute poverty and development gaps between states and regions, as well as ensure that the country grows sustainably, without compromising on the environment.

Malaysia, which did not cross the high-income threshold by 2020, is currently projected by the World Bank to attain the desired high-income status between 2024 and 2028 — which means the need to fix many long-standing structural short-comings. Whether the country succeeds in turning the pandemic into an opportunity to make long-overdue structural changes and the speed of the necessary reforms will be key to determining whether Malaysia can finally be free from the middle-income trap it has been in since graduating to an upper-middle-income country in 1992.

Growth projections in the 12MP will also provide more clues on how strongly government spending will feature until 2025 as well as Budget 2022, which is expected to introduce Malaysia’s official GDP growth projection for next year.

Another area of interest will be statements on minimum wage and ways to support the creation of higher-income jobs, given that the government has been wanting to raise the share of compensation of employees to GDP. In the mid-term review of the 12MP, the government had targeted to raise the compensation of employees to GDP to 38% in 2020 from 35.2% in 2017 with increases seen particularly for the agriculture and services sectors.

Success in lifting wages and eradicating poverty will go towards reducing inequality — essentially the gap between the haves and have-nots, which widened globally during the pandemic.

Given the urgency to minimise permanent scarring and damage to the engines of growth, the 12MP needs to be more than just another five-year plan — more than ever, we need one that can help Malaysia become a structurally more durable, competitive and inclusive economy post-pandemic.

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