This article first appeared in The Edge Malaysia Weekly on November 14, 2022 - November 20, 2022

ELECTION manifestos are often populist because they are essentially promises made to win the people’s votes.

To win the 15th general election (GE15), Pakatan Harapan (PH), Perikatan Nasional (PN) and Barisan Nasional (BN) all made promises that will need to be funded either via new taxes, sizeable borrowings or a significant reallocation of Budget 2023.

Observing how Britain’s shortest-serving prime minister Liz Truss and her first chancellor of the exchequer Kwasi Kwarteng were shown out of No 10 and No 11 Downing Street after their seemingly populist tax cuts (that the market knew had to be massively debt-funded) caused the British pound to plummet precipitously, The Edge did a quick back-of-the-envelope count of what we think these GE15 manifesto promises could cost the country and national coffers (see Table 1).

A number of assumptions had to be made when tabulating the costs owing to gaps in statistics on the number of potential beneficiaries and available details. Rather than fault-finding, this exercise is meant to raise awareness on the country’s fiscal standing and spur more active engagement between the people and their would-be-members of parliament, who may be in a better position to reveal what the manifestos were silent on — where money to keep the GE15 promises could come from.

All three main coalitions (PH, PN and BN) have promised to raise the annual healthcare budget expenditure to 5% of gross domestic product. PH and BN aim to do so within five years while PN promises to raise the healthcare allocation to above 5% of GDP without giving a specific time frame in its manifesto.

All three also promise aid to ease the cost-of-living burden for the lower- and middle-income groups. Promises have also been made to assist young adults on education costs and forgiving education debt, as well as reducing the cost of childcare in varying forms, including facilities and flexibilities that allow women to return to the workforce.

But the most attention grabbing promise is, arguably, BN’s “Assistive Basic Income” pledge that all Malaysian households will have a monthly income of at least RM2,208 if the coalition were to win GE15. While no doubt well-intended, the implementation of such a scheme needs to be well-thought-out to prevent unwanted secondary effects on the country, people, economy and ringgit. This is considering the fact that the prevailing minimum wage is RM1,500 per month and the median income of the bottom 10% of Malaysia’s 8.2 million households is RM1,929 per month. More on this later.

Using figures in BN’s manifesto, the five-year target to raise the healthcare allocation to 5% of GDP would require the doubling of expenses from the current RM36 billion to RM77 billion by 2027.

Assuming a straight-line phased increase, the healthcare allocation would need to rise by about RM8.2 billion a year to RM44.2 billion in 2023, RM52.4 billion in 2024, RM60.6 billion in 2025, RM68.8 billion in 2026 and lastly, RM77 billion in 2027.

As the RM77 billion is based on the 2021 nominal GDP, increases would likely need to be higher to hit 5% of GDP by 2027.

A simplistic RM8.2 billion top-up to Budget 2023 (which was tabled on Oct 7 before parliament was dissolved and which PN’s manifesto says will be maintained and improved), would raise the projected headline 2023 fiscal deficit by about half a percentage point from 5.5% of GDP to 6% of GDP, above the revised 2022 fiscal deficit of 5.8% that uses a much higher nominal GDP figure.

If this were a one-off commitment, the go-to solution can and would likely be to reprioritise spending and tap national oil company Petroliam Nasional Bhd (Petronas) to keep the 2023 fiscal deficit at least at par with, if not below, that of 2022. To realise their promise and sustainably maintain it thereafter, it is obvious that a new revenue stream would be necessary unless spending can be trimmed elsewhere.

And this is just for one of the promises that all three rival coalitions had made in their manifesto. Even PN, which did not provide a timeline, would need to show progress by the next election if they win this round.

A bigger question mark is the proposal for “Assistive Basic Income” at a rate that is much higher than proposed in discussions on a universal basic income in Malaysia to widen the social safety net to cover the aged and persons with disabilities.

At a glance, BN’s “Assistive Basic Income” promise to give a leg-up to all Malaysian households that do not already have a monthly income of at least RM2,208 should cost about RM5.6 billion, or only 0.3% of GDP.

That’s going by the amount that the government would have to top up based on existing income estimates as well as the number of households that the Department of Statistics Malaysia (DoSM) says earn less than the poverty line income of RM2,208 per month, hardcore poverty income of RM1,169 and relative poverty income of RM2,605 per month, which is derived using 50% of median household income of RM5,209 per month (see Table 2).

It also assumes ceteris paribus, all else remaining the same, which in reality may not be the case. This assumes that there are no conditions attached to the assisted income top-up.

An income “top up” of up to RM2,208 per month would certainly be attractive relative to the prevailing minimum wage of RM1,500 per month and the RM1,929 monthly median income of the bottom 10% of Malaysia’s 8.2 million households.

But the cost to the government could balloon from RM5.6 billion a year to over RM35 billion a year, if the heads of all 1.3 million households earning below the relative poverty rate of RM2,605 per month decide to stop working altogether and just receive the full RM2,208 monthly “top up” from the government.

That RM35 billion is about 2% of GDP but the bigger worry for policymakers is the potential second round impact to the labour force.

The country’s labour force, which currently stands at about 16 million, would experience a significant shock if 1.3 million people were to suddenly decide to not work. Even if they decide to just take on part-time employment to supplement their income, there could still be significant disruptions to the operations of retailers, the food and beverage industry, factories as well as plantations and estates. Bringing in that many foreign workers to close the gap may give rise to other issues, as the total number of non-citizens already exceeds that of citizens of Indian ethnicity.

This is an area that needs more clarity, and where execution and practical issues need to be ironed out and thought through before implementation. The possibility of a mass exodus of lower-income workers from the workforce — which is unlikely to be the intended outcome of this policy — must not happen because that would hit the country’s economy and exports. If export-related industries and economic growth were to be hit by a manpower shortage, the ringgit could face greater headwinds than what it is already seeing in a very strong US dollar environment, and Putrajaya may risk being compared to an iceberg lettuce like Liz Truss was.

Those familiar with the state of Malaysia’s finances would know that a budget reallocation is easier said than done because there is a sizeable chunk of “fixed” expenses — civil servant emoluments, public pension obligations as well as debt service charges — that already takes up 61% of existing federal government revenue.

And, whoever wins Putrajaya in GE15 will inherit a sizeable blanket subsidies bill that has already forced other expenses to be cut in 2022 and still required extra dividends from Petronas. At RM77 billion, blanket subsidies are more than 4% of GDP in 2022, sizeable considering that the revised 2022 fiscal deficit of RM97.5 billion is 5.8% of GDP while the RM98.7 billion fiscal deficit in 2021 was 6.4% of GDP.

By March 2023, Putrajaya will also have to pony up an extra RM14.7 billion to repay the US$3 billion 1Malaysia Development Bhd (1MDB)-related debt-paper issued a decade ago with a 4.44% coupon per annum (assuming US$1 = RM4.70). This RM14.7 billion is at least 0.8% of GDP.

PH’s promise to further reduce PLUS toll rates (including LPT2 or East Coast Expressway Phase 2) and eventually cancel them is another big-ticket promise that is not impossible to deliver by securitising the cash flow of the concession. However, it would require significant resources, possibly in terms of additional guaranteed debt and/or reallocation of public investments at the country’s strategic investment arm, Khazanah Nasional Bhd, as concession agreements need to be honoured and the roads will still require expenditure to manage when the tolls are abolished. Without the details in the concession agreements, The Edge could not tabulate the exact cost of this promise. It is public knowledge, however, that PH in 2020 announced an 18% discount on toll rates for PLUS, which is 51% owned by Khazanah and 49% by the Employees Provident Fund, which manages its members’ retirement savings.

The reintroduction of a broad-based consumption tax like the Goods and Services Tax (GST) would help shore up the government’s revenues to give it better fiscal space to implement proposals that help build up the country’s healthcare system, reduce the burden of the lower- and middle-income groups as well as widen the social safety net.

Even when taking out the RM19 billion in excess taxes that were owed to businesses with GST tax refunds, revenue receipts from the broad-based GST should still be at least RM10 billion a year more than the current sales and services tax (SST) (see Chart 1).

Timely refunds to businesses are essential should GST be re-introduced in any name or form. Targeted assistance to people who need help coping with the consumption tax should be easier with a better database after the Covid-19 pandemic.

Introducing GST alone would not be enough to deliver all promises, especially if government expenses continue to grow faster than revenue.

To be fair, it is normal for politicians to make promises, especially during election time. A number of proposals in the various manifestos have longer-term benefits. For instance, the country and its people should see longer-term benefits with higher healthcare spending as the people will become healthier and should need less medical help. Children fed with more nutritious food would not be stunted and should fare better in life. Policies to encourage more women to return to the workforce as well as reduce the burden of families taking care of the aged as well as young children also have positive knock-on effects on the country and economy.

What’s missing is an honest discussion on what is practicable and what is being done to ensure that these promises can actually be delivered in a timely manner to the people and funded sustainably for the country’s benefit in the longer term.

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