Getting ready for a lean budget

MALAYSIANS are now in for three phases of change in the role of government in New Malaysia. During the period of political and economic policy transition, we have to endure some adjustment and transition costs.

There will be plenty pain to come (short-term pain for long-term gains) if the Government wants to be leaner, meaner and better.

First, is to restore the rule of law and accelerate institutional reforms for better Government and governance.

Second, fiscal reconstruction to maintain fiscal discipline and a responsible budget as well as debt control through reduced waste, leakage and weeding out corruption; and third, restructuring the government (public sector) and institutions to restore public trust; to become a more effective and responsive enabler as well as good regulator.

All will be delivered on a leaner and meaner government and public sector agenda. The end results will be a smaller, less intrusive role for government, much more contained public service and a bigger role for the public-private partnerships under Malaysia Incorporated.

Faced with RM1.0873 trillion debt and liabilities or 80.3% of GDP (comprising RM686.8bil direct debt and RM400.5bil liabilities at end-2017), and having endured unbroken 21 consecutive years of fiscal deficit since 1998, this leaves the new government with no choice other than to return to “austerity” to keep the budget deficit and debt under a sustainable and comfortable zone.

The fiscal reconstruction measures taken so far include the reduction of Cabinet Ministers’ salaries by 10%, termination of the contracts of 17,000 political appointees; limit of 10 special officers for each Cabinet member; and the deferment or cancellation of estimated RM175bil worth of mega public infrastructure projects (ECRL, MRT3 and HSR).

On revenue side, there will be an estimated full-year revenue shortfall of RM23bil from the reintroduction of Sales and Service Tax (SST). On the operating expenses, RM3bil has been allocated for fuel subsidy to stabilise the retail price of RON95 at RM2.20 per litre. Rising global crude oil prices would mean higher fuel subsidy. The buffer against the shortfall in SST revenue is high petroleum income tax revenue and Petronas dividend, thanks to still high crude oil prices. Petronas has upped its dividend contribution to federal government from RM19bil to RM24bil in 2018. For every US$1 per barrel oil price, it will bring in RM300mil oil revenue.

Another large amount of money due to taxpayers are the GST refunds of RM19.2bil and the refunds of excess income tax and real property gains tax of RM16.05bil.

Putting the big budget numbers in perspective, it’s high time to ask this administration how to make the federal budget lean in times of facing slowing economic growth and increasing global risks.

The Finance Ministry would have to calibrate a responsible yet discipline budget that can smoothen out the impact of expenditure rationalisation on the economy. It is indeed a tough balancing act.

It is worth reminding that debt and deficits aren’t good as they potentially threaten our policy flexibility in the face of future downturns and distracts us from our long-term economic challenges. They are also unfair to the future generations that will pay for them with lower growth, fewer jobs and higher taxes.

At this point, many of you would expect some necessary yet unpopular fiscal restoration measures and new taxes to help plugging the large gap in the budget. Spending cuts or reforms in both unproductive and over-inflated cost of operating and development expenditure would be happened right away.

The government will start using the zero-based budgeting method for its ministries and departments to reduce wastage and unnecessary spending. Zero-based budgeting leads to the identification of opportunities and more cost-effective ways of doing things by removing all the unproductive or redundant activities.

The RM6.8bil cash transfers (cost of living aid) benefiting 7.1 million households with monthly income ranging between RM1,000 and RM4,000 will be reviewed, including reducing the amount over time to make them conditional and will be prioritised for the truly under-served and vulnerable groups.

Will the resumption of fuel subsidy for RON95 be revamped to help the targeted users? It is a tough balancing act between economic and political considerations when it comes to whether the extra revenue from higher oil prices should go towards a petrol subsidy or channelling to development.

What mechanism that is being considered to eliminate blanket fuel subsidy? Should subsidised fuel program eligibility take into consideration household income and engine capacity of vehicle. The practicability of implementing and administering such a system would also have to be considered.

Talk of new taxes under consideration are soda tax to discourage unhealthy diets; inheritance tax; capital gains tax on share transactions; and e-hailing or e-commerce/digital business tax. Some disposable of government’s assets may be on the cards.

Based on past countries’ experiences, the spending-based adjustments are more effective than tax-based adjustments at reducing the debt-to-GDP ratio if they focus on reforming entitlement programs. The spending-based adjustments impose lower level of short-term costs on the economy compared to tax-based fiscal consolidations.

The International Monetary Fund’s research findings indicated that while spending-based adjustments imposed a short-term slowdown, the declines in consumption and GDP are three or four times smaller than tax-based fiscal consolidations. The fundamental questions of what it is that government should actually do and how it should go about doing it.

The government is clear that it wants a lean, responsive and less intrusive public service. Ministries and government agencies’ functions will have to be systematically reviewed to determine whether the bureaucracy (in whole or in part) should be further streamlined or whether they should continue to be performed exclusively by government.

This will have implications on both the scope and size of the public service. In the case of some government-linked companies and states-owned enterprises, they should be reviewed and restructured in terms of better governance or are subject to parliamentary oversight, the optimisation of resources and mandates as well as opened up to the winds of real competition.

Lee Heng Guie is Socio-Economic Research Centre executive director.