Government has to operate like a private company

THERE are big differences between how the private and public sectors operate. One of a Government’s main objectives is the welfare of people whereas the bottomline of a private company is just that, profit.

Over the years, there has been a slight blurring of lines between the two distinct entities. Private companies are more engaged in corporate responsibility programmes, running initiatives that benefit people. Doing so helps a company gains goodwill at the expense of focusing solely on the monetary returns, plus its what is expected of corporations these days.

For Governments, the debt crisis in Europe has been a lesson in fiscal responsibility. Governments no longer run up big deficits in perpetuity as the price it will pay is manifested through the loss of investor confidence and the economy as debt becomes too large and unsustainable.

Hence, with prudence being the buzzword with more governments these days, the trimming of deficits with an eye towards budget surpluses makes the public sector behave like private companies when it comes to financial discipline.

Which brings me to this week’s big event: The revision of Budget 2015.

The percepitous fall in crude oil prices from a forecast US$105 a barrel to today’s price of more than half of what was forecast when the Government presented Budget 2015 last year, has meant that whatever the Government thought it would be receiving in terms of taxes, royalities and dividends is not going to be enough to pay for what it had planned to spend this year.

Revising its spending plans was inevitable as one of its biggest sources of income, petroleum production, has fallen.

Cuts were mainly made in the operating expenditure of the Government and given its size, it was natural that most of the cuts were going to come from such expenses.

The issue is that the rise in the Government’s operating expenditure almost mimics that of large oil companies. Most oil majors were focused on revenue growth and really did not look at cost containment.

For the Government, the rise in its operating expenditure in just over a decade has been almost an act of largesse.

From RM97.74bil in 2005, the Federal Government’s operating expenditure has grown to RM212.4bil in the revised Budget 2015. Its revenue, driven by oil receipts, has risen from RM106.3bil to RM222.9bil over the same period.

In that 11 years, the Government’s operating expenditure has grown by a compounded annual rate of 7.31% compared with by a 6.96% growth in revenue.

The one area that has seen the biggest growth in the Government’s operating expenditure was the salaries and wages it pays to civil servants.

Generous pay hikes were given in the good times when oil prices spiked upwards and now that prices have reversed, revenue is affected but what stays stagnant is the fixed cost of salaries and wages.

The one reason why the Government’s deficit has grown because of the role it took to be the engine of growth for the economy since the Asian fianancial crisis. Government support for economic activity was needed during the many downturns that have happened over the years but what should have been pursued with more vigour is moves to inject more vibrancy into the economy.

The Economic Transformation Programme helped a lot with plans to see more investments into the economy but that should have been done in parralel with greater liberalisation within the economy.

Freeing up the ability to do business would lead to greater risk taking and entreprenuerism as business activity surely improves when there is greater avenue to make money.

Coming back to the issue of expenditure, what could have happened if the Government had mirrored what private companies do when it was sitting on huge increases in revenue?

Most companies would have invested their money (i.e. increase development expenditure) and possibly declared higher dividends (i.e. reduce the fiscal deficit).

There would have been increases in costs by paying their employees better but not to the extent seen in government.

The cost increases by the private sector would have been measured based on requirements to support a bigger business and new opportunities a company would have ventured into.

What the Government needs to do is to now look at how it is spending its money. For a long time, the public perception has been that there is a lot of wastage in government and bloated contracts as well as unnecessary costs have been incurred.

That is the fastest way to bring the deficit under control. In fact, expenditure growth has to be lower than revenue growth and to generate more business activity and tax revenue, greater emphasis should be on liberalising the economy.

Cost rationalisation has to be a big focus of the Government as it is now with many companies worldwide including Malaysia.

The International Monetary Fund has trimmed its forecast for global economic growth worldwide to 3.5% from 3.8% and with slower economic activity, cost containment has been the focus of many corporates. It should be the area of priority for the Government too.