Malaysian Federal Government Budget – 28 years of misguided policies?

I would say that the 28 years (understudy) of policies made us be where we are today, as far as the Federal Government budget is concerned. Years of policies driven by purely economic growth (in GDP terms), produced massive build-ups of imbalances. Slowly, the budgets had been increasingly social and political driven (probably to increase the popularity of the ruling government), with insufficient measures to counter the surging increase in some areas of expenditures, in particular the Subsidies and Grants, as opposed to the increase in the economic-driven source of revenues (i.e. in form of increasing tax-base). This led to the introduction of wide-base taxes, such as GST to counter the deficits accumulated. Both practices further led to double-incidents of distortions, which aggravates the society’s economic conditions. And at the same time, funding developments by way of debts has its own natural limits. It seems that by now, the limits had been reached. Unless the society is willing to shoulder more debts, then development expenditures would stall.

Pakatan Harapan, which inherited the above-mentioned problems have very little room to wiggle. The only option is to be UNPOPULAR, which among others would include choices between massive cuts on Subsidies and Grants versus increasing the tax-base (such as SST), paring down debts versus increasing development expenditures, reducing the long-term budget commitments such as cutting down or freeze on government employment. Whichever way, only UNPOPULAR moves are the only way to correct what went wrong for the last 28 years.

Approach to Analysis

I wish to summarizes my analysis on the Malaysian Federal Government budgets, based on the trends over the last 28 years (since 1990 to 2018). By studying long-term trends we could see what went right or wrong over those years of BN/UMNO administrations. Note that this would include the period of Tun Dr. Mahathir (1990 to 2003), Tun Abdullah Badawi (2003 to 2008), and Dato’ Seri Najib (2008 to 2018). 

First of all, it is always easier to blame someone else for certain policies of the past, for things that we see now. But blame game will not take us far unless we could analyze and see what’s are the wrong thing of the past. For any systems to be wrong in the past, they do not happen overnight, instead, it accumulates over a very long period until it reaches a certain point of non-sustainability. Similarly, for any corrections to the wrongs of the past, couldn’t be corrected overnight as well. It may take as much time to undo something that had been accumulated over the years.

Based on this logic, let us try to summarize what went wrong (assuming that you agree that something had gone wrong, to begin with).

GDP Growth versus Revenue Growth

Facts: The GDP growth of Malaysia for the last 28 years averaged about 9.13% in Gross Ringgit values and yet, the growth of Federal Government Total Revenue grew at 7.77% (in Gross Ringgit values). Total Revenue was at 25% of GDP (in 1990), and now it stood at about 16% of GDP (in 2018).

Comments: 

  1. While the growths do not have to match perfectly, it led to few long-term problems, namely the ability of the Government to play the major role in the economic development is on an increasingly diminishing scale. This trend will not change much since it can’t be altered in a short time, and any alteration will produce massive distortions.
  2. More alarmingly is the wealth and income gaps, between the upper strata versus the lower strata of the society, must have widened by some great measures. The main growth factor for the Total Revenue is by growing the tax base. The trend indicates a clear indication of non-expanding tax-base.
  3. The pressure to increase the tax base produces the GST measure. The main effect of GST is to widen the tax base, which includes all lower income strata of the society.

Revenue Growth Factors

Facts: The Direct Taxes growth (at 9.50%) is almost comparable to GDP growth (at 9.13%), however, Indirect Taxes growth is lagging too far behind (at 5.60% without GST, 6.80% with GST). Furthermore, Returns from investments (at 6.90%) lags as well. The lags in these two factors produce lower Revenue growth rate (of 7.77%).

Comments:

  1. The non-expanding tax-base as indicated earlier is due to low growth in the tax-base for Indirect Taxes.
  2. Furthermore, this is aggravated by slower growth in Returns from investments as compared to the GDP growth.
  3. Revenue could only grow further if these two factors could produce a higher growth rate. Any policies to increase these two factors are extremely costly (at least in terms of Indirect Taxes), and increasing revenues would mean higher tariffs by the GLCs on the public. Both are problematic and unpopular measures.

Controlling Long-term Operational Expenditures

Facts: Major long-term pre-committed Operational Expenditures are growing much faster (Emoluments at 9.60%, Pensions at 11.54%, Debt services at 9.91%) than Direct Taxes (at 9.50%).

Comments: 

  1. Prudent planning requires that long-term pre-committed operational expenditures must be matched with long-term steady income, which is represented by Direct Taxes.
  2. It is clear that growth in the three items must be curbed (i.e. in Emoluments, Pensions and Debt Services). However, curbing these items means massive layoffs in government employees and reduction in debts. Both are impossible within a short time. 
  3. The only possibility is by NOT increasing the government employees (no new hiring and freeze on increments), and NOT incurring new debts.

Controlling Subsidies, Grants and Other Expenditures

Facts: Subsidies, Grants, and Other Expenditures were growing out of control (Subsidies at 22.57%, Grants at 22.98%, Other Expenditures at 12.43%), against the growth of Indirect Taxes (of 6.80%, including GST).

Comments:

  1. Prudent management is to match these temporal items (Subsidies, Grants and Other Expenditures) with Indirect Taxes.
  2. Over the years, the matching between the items and Indirect Taxes produces large deficits (of up to RM40 billion), which then calls for the sudden increase in Indirect Taxes in form of GST.
  3. The policies are clearly wrong on both counts: provisions of massive subsidies and grants, which are known to be distorted and imbalance, and yet at the same time, taxing the people in the form of GST, which is another source of distortion. Instead of having one type of distortions, we have both sides of distortions. What is wrong here is not only the GST itself was introduced at a wrong time, but it was used for wrong purposes (subsidies). Both distortions would largely affect the lower income group more than anyone else.
  4. Removing GST and replacing with SST, and yet while maintaining the Subsidies, Grants, and Other Expenditures at the current levels wouldn’t correct much of the wrong.
  5. However, removal of Subsidies, Grants, and Other Expenditures would also mean massive cut downs in educational services (since the IPTAs, MARA are among the major recipients), as well as healthcare services. This won’t be popular among the public, especially among the Malays.

How about Development Budgets?

Facts: Development budgets are driven by two factors: Non-tax Revenues and borrowings (i.e. debts). The Total Revenue minus Operational Expenditures have been consistently in deficit, and the deficit accumulated is rather large over the 28 years, since Total Revenue is growing at 7.77% whilst Operational Expenditure was growing at 8.31%, while Non-tax Revenues was growing at 6.90%. Development budget for the last 15 years (at least) was funded mainly on a 1-to-1 basis with the increase in the debts.

Comments:

  1. Prudent management is to somehow match Development budget with Non-Tax Revenues receipts, and at the same time, to ensure that the federal government debts are within control. As the growth figures above indicate, the mismatch had been consistent for the last 28 years. And as a result, the federal government debts grew, to cover the cumulative deficits.
  2. As the total federal government debts grew, it did a few more things: i) it crowds out private sector debts; ii) the amount of debt services requirements increased. Today, the total federal government debt stood at circa between RM700 billion and RM1,000 billion.
  3. As the Development budget is fully funded only by increasing the debts, year-on-year, the cumulative development budget for the last 15 years, is almost equal to the total debts accumulated over the same period.
  4. Furthermore, the growth of the Development budget had been relatively flat over the last five years, indicating another serious issue, namely the Development budget had been squeezed out by the requirements of repayment of old debts versus issuance of new debts. The net debt increase had been somewhat curtailed. 
  5. This points out to another question: is the growth in the Development budget is stalled forever? If the answer is yes, then the country is facing another major problem: there will be not many new development projects. In fact, based on the current public information of over-commitment to projects such as ECRL, HSR, etc., it is very likely that development budgets for the next few years ahead had in fact been committed (and spent).
  6. What’s wrong is in the long-term planning of Development budgets and Debt management. We can’t grow debts forever, for the sake of development. We need higher income from Non-Tax Revenue to cover the services of the past debts taken so that we could gradually ease out the space for development budgets. Increasing Non-tax Revenue, however, could also mean increasing tariffs for the GLCs, which have almost the same effects with widening the tax-base as explained before. Almost any measures are unpopular.

Dr. Wan M. Hasni (*)

LeadUS (**)

(*) Dr. Wan M. Hasni is from LeadUS.

(**) LeadUS is a Think-Tank organization consists of Malaysian professionals which graduated from the universities in the United States and other overseas higher-learning institutions. As professionals, LeadUS promotes analysis, discussions, and opinions on the Malaysian Social, Economic, and Political issues, backed by scientific approach and methods. LeadUS seeks to define the New Malaysia within this context. 

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