This article first appeared in The Edge Malaysia Weekly on March 6, 2023 - March 12, 2023

WHETHER it is the broad perspective and thinking that goes into the country’s national budget planning or the nitty gritty behind the scenes at the Ministry of Finance to support its delivery, there’s perhaps no better person with whom to engage in a conversation than Malaysia’s newly minted Treasury secretary-general Datuk Johan Mahmood Merican, who has been director at National Budget Office since the country’s watershed 2018 general election.

Speaking to The Edge even as the retabled Budget 2023 is being debated in parliament, Johan — who has been on back-to-back engagements on Prime Minister Datuk Seri Anwar Ibrahim’s Belanjawan Madani 2023 — began by contextualising how time was “one limiting factor” to the extent the national budget tabled on Feb 24 could be completely different from the one tabled on Oct 7. Anwar, who is also finance minister, formed his cabinet only three months ago on Dec 3 last year, eight days after he took office as the country’s 10th prime minister heading the nation’s first unity government.

“The old budget process can’t be replicated,” says Johan, reminding that budget consultation usually kicks off in March. Rather than delivering a typical “laundry list”, he says “the prime minister spent more time explaining where he is coming from and where this government is going”.

“The messaging that I received from the prime minister and minister of finance is that Budget 2023 is the first step of that holistic Madani framework, which we have divided into six platforms and three thrusts — driving economic growth, reforming institutions and governance and upholding social justice [to combat inequality] … There is the high-level vision of Madani, and the Budget translates it one level down, and these signals are backed up by specific measures.”

Certainly, there is a progressive element [to Anwar’s] thinking, says the chartered accountant, who read economics at the University of Cambridge.

Citing the personal income tax cuts that would have cost the government RM1.2 billion in lost taxes if not for the RM300 million in additional taxes of between RM200 and RM10,950 that hits only 150,000 individual taxpayers earning more than RM20,000 a month, Johan shared how Anwar had wanted to weave in the element of “those more fortunate sharing some responsibility towards the welfare of the broader Malaysian”.

“On the economy, the prime minister is very clear that he wants to be fiscally responsible but at the same time also drive and accelerate economic growth, putting emphasis on quality investments and creating better quality jobs.

“On the governance part especially, the prime minister is certainly in a hurry … He wants to [remove] instances of corruption in the past, break down silos to deliver results and resolve [long-outstanding] things like dilapidated schools and clinics and getting GLCs [government-linked corporations] to be more supportive of development and growth,” he adds, relating how Anwar cut short a five-year poverty eradication programme and insisted that they do it in one year, two at the most. “He asked us how we could sleep at night knowing that there are still 130,000 households living below RM1,000 and we have a budget of some RM1 billion. Surely we can reorientate programmes and, rather than doing so many things, focus on the specifics … Hardcore poverty is one … He also asked how 60 years after Independence, wooden dilapidated schools are still being used out there by schoolchildren.”

Asked whether subsidy rationalisation is actually on the cards, or if politics are in the way, with a RM63.8 billion allocation for subsidies this year, Johan points out that electricity tariffs have already been adjusted for large commercial users.

“The current thinking is certainly towards better targeting,” he says, but there is no specific timeline because the government wants to ensure that the process is done right. “It is certainly high up on the priority list.

“Historically, we’ve had this sizeable subsidy structure [but unwinding it needs to be carefully considered, as] the Department of Statistics Malaysia (DoSM) estimates that inflation would spike into double digits if subsidies are lifted immediately. That would lead to uncontrolled inflation, so we need to sequence it and we need to figure out how to sequence it. And in trying to sequence it, we look at which subsidy is really a burden and match that against the ease of implementation and the impact on the rakyat. I’m not saying that’s how it will happen, but conceptually, if we rationalise subsidies, we first need to look at it holistically and have a plan to sequence it and manage the potential effects on inflation and on the rakyat and industries.

“If I use that equation, thinking as a technocrat, the government would probably start with rationalising the electricity subsidy first … probably in the second half, electricity first, and thereafter maybe diesel is another priority,” he adds, noting that the diesel subsidy is currently as large as the petrol subsidy, which traditionally should not be the case, as there are not that many diesel vehicles in Peninsular Malaysia.”

According to him, every 10 sen change in the current RM2.05 ceiling for RON95 petrol could mean a savings of RM100 million a month for the national coffers.

“The commitment of the government is that we still want to safeguard the welfare of the poor, not just the B40 but also, to an extent, the M40 … shield them from undue increases in the cost of living. But there is something wrong with the system now that we’re giving a lot more subsidies to the wealthy — electricity is an example,” he says, noting how more than 50% of the electricity subsidy goes to only the 10% of largest domestic and commercial power users.

Johan admits, though, that resolving the blanket subsidy issue is not easy. “Subsidies are certainly high on the agenda. It is not an easy thing to do, particularly in Malaysia,” he says, noting how giving cash transfers when lifting petrol prices in 2008 during Tun Abdullah Ahmad Badawi’s tenure as prime minister “did not go so well”.

“Sometimes, it is too simplistic to say it didn’t work out politically. We also need to cater for policies that work for the people,” he adds, reiterating the need to think through how blanket subsidies can be unwound well with the least impact on vulnerable groups.

Even among the target groups, a straightforward cash transfer to cope with higher prices may not be ideal for some in Malaysia. While Johan understands why economists are in favour of floating prices with cash transfers, the reality on the ground, he says, is that there have been instances where people spend the lump-sum cash transfer on something else and then struggle with the price transfer. “It does appear that, for cash transfers, what was once a gift, once given, has become a right … ‘I want that [but] not the price increase.’ So, that puts the government in a bit of a quandary.”

Does that mean an outsized blanket subsidy bill could be yet another drag on fiscal consolidation?

“On subsidies, I’m fairly certain there will be developments this year. [Apart from new revenue measures] there is still room to reduce leakages…the Prime Minister is also passionate about the shift [away from] direct negotiated contracts. Hopefully that means that even on existing budget [size], there should be more impact because we should be able to do more with the same amount,” he says, noting how the prime minister chose to be pragmatic in telling the Ministry of Health to remove vape from the poison’s list and regulate and tax it.

At current juncture, Johan says there are no plans by the government to make large asset sales to bring down the national debt and rein in debt-service charges.

While the number of civil service pensioners almost equal the number of civil servants in active service and a recent study was done on the government’s public pension obligations, no deadline has been imposed on when a decision needs to be made on the suitability of switching new civil service recruits to an EPF-like defined-contribution system instead of the current defined-benefit system that adds to the government’s public pension liability.

As for the lack of broad-based revenue measures in Budget 2023, and why luxury taxes and capital gains tax on unlisted companies were announced without precise scope and details, Johan explains that the Prime Minister has said that now is not the right time to introduce a broad-based consumption tax but reckons that those who can better afford it should do a bit more for the country. “We understand the concerns of both tourism industry and retailers and will certainly do engagements and define what products subjected to it and what should be the threshold value [within this year],” he adds, assuring that the government do not intend to expand capital gains tax on listed companies.

Johan points out that Malaysia last saw a budget surplus in 1997 when Anwar was finance minister and that fiscal sustainability is also high on his agenda. “There was a clear signal, even in this budget, that he wants to be fiscally responsible and he has gone for a lower deficit than what was previously announced on Oct 7. And as long as we get back to the 3% to 4% [fiscal] deficit level, it is already considered sustainable for a country of our growth potential.”

Save by subscribing to us for your print and/or digital copy.

P/S: The Edge is also available on Apple's AppStore and Androids' Google Play.