About Nick: i am an economist based in malaysia. I write about development economics, while sneaking in a pop culture reference or two.

Towards Actual Fiscal Reform and Consolidation

Published in The Edge Malaysia, February 2015.

In mid-January, the Minister of Finance, Dato’ Sri Najib Tun Razak, delivered a special address on current economic affairs and the government’s financial position. The special address was triggered by two main issues. First, the decline in oil prices around the globe from a peak of $115 per barrel in June 2014 to approximately $48 per barrel in mid-January 2015. Second, the depreciation of the Malaysian Ringgit against the United States Dollar from a peak of 3.15 in August 2014 to 3.61 in mid-January 2015.

To be sure, a case could be made that a Ringgit depreciation was coming and the decline in oil prices simply exacerbated it. A quick check on the currencies of our neighbors – Singapore, Thailand and Indonesia – shows that the Singapore Dollar, the Thai Baht and the Indonesian Rupiah have also depreciated strongly against the Dollar. Indeed, the depreciation of those currencies began in earnest in 2013, whereas the Ringgit held relatively steady over the course of the past two years until only recently when it started depreciating more rapidly. Thus, Dollar strength, rather than just Ringgit weakness, is a hugely significant factor in the overall decline of the Ringgit.

As for oil, analysts and researchers are still devising explanations for the incredible fall in oil prices. If anything, this episode of declining oil prices should serve as a humbling one to financial analysts, economic analysts, forecasters and the ilk; if a commodity that is so scrutinized and so widely tracked can move so far beyond the regular realms of predictability, then we must take our analyses, our forecasts and our opinions with a huge grain of salt and recognize that any pre-conceived notions of forecasting skill are still very limited.

The obvious implications to the Malaysian economy were well highlighted by the Minister of Finance. Consequently, he announced that the government would revise its budget deficit from an originally planned 3.0% of GDP to 3.2% of GDP, which is still a reduction from the 3.5% of GDP recorded for the year 2014. Towards that end, the Minister of Finance announced, as well, a whole slew of measures to protect the economy from the deleterious effects of falling oil prices and a depreciating Ringgit while, at the same time, helping to ensure that the government was still on a path of fiscal reform and consolidation.

I have some issues with those policies, particularly those that deal with government revenue and government expenditure. I am supportive of many of those measures, do not get me wrong; for instance, I am all for a reallocation of development expenditure funds away from some projects towards the reconstruction and rebuilding of the flood-hit areas in the Malaysian East Coast and other such afflicted areas. I am also glad that the government is reviewing its grants and allocations to the various badan berkanun, GLCs and Tabung Amanah Kerajaan, particularly those with consistent income flows and high reserves.

However, I found some fiscal policy measures somewhat puzzling. For instance, the Minister of Finance stated that the government would encourage more firms to register with the Customs Department, thereby increasing government revenues from the Goods and Services Tax. This measure will, according to him, contribute to an increase in GST collections of RM1 billion. The reason I am puzzled with this is because I do not understand why this is a ‘new’ measure. Should this not already be something the government is actively doing? If it is going to implement GST and firms above the threshold limit should, by law, register with the Customs Department, why is this a new policy that will earn the government a further RM1 billion? Should this RM1 billion not already be expected to be part of government revenue from the original Budget 2015?

Next, the Minister of Finance announced that the government would optimize the government’s expenditure on assets and services, government meetings and conferences as well as professional services which would provide a savings of RM1.6 billion. My question is the same as the previous point on GST collections. Why is this not already done? The fact that this is a ‘new’ measure to reduce government expenditure implies that such expenditures were not optimized before. Why were these expenditures not already optimized? Announcing this as a ‘new’ measure in this special address is akin to admitting that there is, at least, RM1.6 billion worth of government expenditures that are sub-optimal. Taxpayers and citizens should be very concerned.

Along this same line on inquiry, the Minister of Finance announced that the government would reschedule the procurement of non-critical assets, particularly office stationary and vehicles which is expected to deliver a savings quantum of RM300 million. If these assets are non-critical, why is the government buying them in the first place? Even if we agree with the Minister of Finance that the economy is not in crisis, which I do, we can certainly agree that the current economic conditions, particularly the falling Ringgit and the upcoming implementation of the GST, present a very challenging economic environment ahead for the rakyat. If the rakyat needs to be prudent, should the government also not be prudent? I wonder how many citizens on the street would approve of the government spending taxpayers’ money on non-critical cars for government officials. To be clear, I am not saying this is a bad policy measure; I am asking why is it not already being done before this?

As a matter of principle, I think the government should always be prudent in its expenditure, spending only where necessary. For the rakyat to place their faith in the financial management of the government, the government needs to show that it is being as fiscally responsible as possible. I do not think that all of the measures in the recent special address by the Minister of Finance necessarily reflect that. Indeed, the three policy measures I questioned in this article are policy measures I believe should already have been done by the government. Why only undertake these measures now? If the government is serious about fiscal reform and consolidation, then it should walk the walk; any policy measures to increase revenue or reduce expenditure should actually be ‘new’ and actually be difficult decisions that the government has to balance to deal with changing adverse economic conditions.

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