In a global downturn, the confidence factor is all-important, so the Government has chosen to spend in its RM7bil stimulus package.
WHAT do you do when you want to spend – but not too much – to keep confidence up and to make up for the restraint in expenditure when people turn cautious?
If you want to be prudent you spend from your savings, otherwise you borrow.
The Government has done it through savings – oil prices have fallen, which means that it does not have to spend as much as it anticipated in subsidies for oil and related products. This can be diverted to other areas without increasing Budget expenditure.
That’s precisely what the Government chose to do in its RM7bil stimulus package announced by Finance Minister Datuk Seri Najib Tun Razak in Parliament yesterday.
It’s a smart way to go, but doesn’t government revenue go down when the oil price goes down because we are a net exporter of oil?
Well, if you thought you caught Najib out, no you did not. You see, the national oil corporation, Petronas, pays out dividends to the Government based on the previous year’s earnings.
In 2009, the dividends the Government gets from wholly-owned Petronas will be based on 2008 earnings.
That will be high because for most of 2008, oil prices were at record levels.
But a year further out in 2010, and if oil prices remain at these levels, government revenue from oil would shrink. And what is it going to do then?
Well, it can only hope that by that time the major part of the crisis would be over and that the private sector would have regained some confidence and begun to spend more.
In which case, it may be possible for the Government then to cut back its expenditure.
If confidence still remains low, implying that the world economy has not recovered sufficiently from the problems that it has been through, then it will be a time to tighten the belt, grit the teeth and bear the pain.
What the oil price drop and the still buoyant revenues from Petronas in 2008 have given the Government is a window of opportunity to step up spending in selected areas to have maximum impact on the economy in terms of income and activity generation.
Because that window will close a year down, the Government should and has taken the opportunity to help shore up confidence by taking up some of the slack that may appear in spending. That will help keep growth up for next year.
In a global downturn, the confidence factor is all-important, even if Malaysia is relatively insulated.
The very apprehension of the future can produce bad times when too much caution chokes off economic activity and brings things to a crawl in a self-fulfilling prophecy.
The measures that the Government has undertaken recognises that there is a problem which needs action and soon.
As Najib said in a briefing to editors: “We are not in denial. Otherwise, why would we announce these measures?”
But new ways of doing things have to be examined. The plan to raise revenue by selling government land through tenders must be welcomed.
But the Government should seriously consider adding value by breaking up the parcels and selling smaller pieces to maximise value.
Voluntary cuts in Employees Provident Fund contributions have been tried before.
The three-percentage-point cut proposed is not something we are in favour of because it will reduce the eventual retirement benefits of those who will probably need it the most.
It would have been better to reduce taxes where possible so that consumers can get more bangs for the same buck.
Still, that cut is only for two years and therefore the long-term impact may not be too adverse on retirement savings.
All said, there is little to fault the package and a lot to praise in terms of helping to mitigate the fall-out from a crumbling global economy following the financial meltdown in the US and Europe.
That’s however for the short term. As the conversation with editors drifted to Obama and McCain and how open the US was and how it would recover quickly because it was so open, Najib made an observation.
“Any society which is open tends to do well. The only way Malaysia can move forward is to be more open.”
It would be interesting to see what the Finance Minister and the future Prime Minister will do in the longer term to help secure Malaysia’s place in the future and in the world.
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