Business

Tuesday July 10, 2012

Preparing the 2013 budget

Comment by Tan Sri Dr Sulaiman Mahbob


External factors pose challenges to economic policies

WHILE busy preparing for the coming general election, the national leaders of the party in power are now equally busy preparing the 2013 annual budget.

The budget is expected to be tabled with the international economic environment in mind, which poses many challenges. Our major markets, namely, the United States and eurozone have not fully recovered from the crisis, while the major Asian economies, especially China and India, are reducing their speed to a lower gear.

Malaysia has been able register respectable growth rates in the last several quarters, which was made possible by our domestic consumption and private investments.

If the international economic scenario does not improve in the next two quarters, our growth this year may be dampened, as our domestic source of growth alone cannot sustain a more respectable momentum. In any case, the public sector, with its deficit, will not be able to pump-prime the economy again.

The budget is always made up of two major components, namely the revenue side and the expenditure component. Both are not without stresses.

The revenue side is always under immense pressure as raising revenue from tax sources is not popular and the lingering general election makes such measure even more unpopular. Appreciation must go to the tax collectors who have done a tremendous job, given this year's tax collection.

Equally, the expenditure side is also under pressure. The bulk of the Government's operating expenditures are “locked-in” expenditures covering salaries, subsidies and grants and are not easily cut back. Development expenditures, which are capital formation in nature, are important in raising economic growth but difficult to increase significantly due to the need to contain the deficit, which has been in existence for many years.

Thus, the elbowroom for the Treasury to manoeuvre is indeed narrow. One window of opportunity is the aspect of financing by means of greater public-private partnership arrangements. The new chief secretary is adept at this and he is most competent to advise as to how this mode of financing can be explored.

Any change in financing policy that leads to greater private-sector role in the economy is most welcomed. One related issue here is that many officers are not acquainted with this approach and may view it negatively.

Back to the main philosophy of budgeting, we have to begin to infuse more elements of simplicity in our tax system and the element of efficiency in our expenditure.

High rates of taxes but at the same time allowing too many exemptions introduce much arbitrariness and wastage of officers' time in processing. My experience at Mida confirms the latter. In the end, the amount of revenue collected is about the same with minimum rates but without exemptions. Even GST can be readily introduced at minimum rates with zero-rating targeted only for exports and fresh food.

A hard look at our public finance is long overdue. This is not to say nothing much has been done. The Government has been able to reduce the deficit and has taken a long-term view in solving the issue.

Perhaps, a fiscal reform programme, or whatever it is called, by taking the whole issues of public finance from all angles, including the stubbornness of our subsidies, may be initiated to ensure that the fiscal problem can be eradicated within five to eight years.

In addition, the issue of expenditure is equally demanding. Government expenditures are part of domestic demand, which is important especially during uncertain global economic environment. In as much as the Government has to sustain expenditures when the private sector is weak, the Government is also constrained by its revenue position when overall economic activities slow down.

Any reduction in expenditure is an improvement in the deficit position. A cut in expenditure reduces aggregate demand and therefore softens economic growth. A policy balance between the two contrasting positions depends upon the priorities of the Government to achieve economic stability and employment levels.

In our context, we may still raise the efficiency of our public expenditures by reducing wastages and low priority expenditures, and instead, concentrate expenditures in areas that can contribute to productivity and human capital improvements, export markets, private investments and mobilisation of private-sector resources.

The slack in public expenditures must be reciprocated with private-sector expenditures, both consumption and investments. The more than ample private-sector liquidity, amidst a savings-investment surplus of about 11% of GNI, strongly argues for this position.

It is in this context that it is often argued that the approach of public-private partnership must be examined and tried out vigorously, subject of course to the caveat that there is equitable balance of risks between the private-sector operators (concession companies) and the Government. Malaysia including its finance sector has come to the stage where this modality of financing can be experimented and subsequently implemented.

Who knows we may lead again the way we did with land development schemes beginning with the Bilut Valley in the early-60s or thereabout, and the unorthodox measures that we did to overcome the East Asian contagion of 1997/98.

Tan Sri Dr Sulaiman Mahbob is the chairman of Malaysian Institute of Economic Research and can be emailed at sulaimanbmahbob@gmail.com

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