Saturday September 22, 2012
Making it more than an election budget
A QUESTION OF BUSINESS
By P. GUNASEGARAM
AH, yes the Election Budget! Everyone expects the goodies to be handed out left, right and centre. But what should we really be doing?
For a budget that is efficient and effective, one has to look at the current key conditions prevailing in the economy and take measures to overcome the blocks to promote growth and income without endangering the health of the economy or government finances.
The world economy continues to be in the doldrums.
The US recovery is anaemic and Europe continues to wrestle with problems in some of its countries and struggles to keep the eurozone together even as efforts to channel help to affected countries continue.
Asia is the star but the light from it is waning as both China and India struggle to keep growth up.
In short, the external sector offers little prospects for growth and the prognosis is for slower growth further out.
Under the circumstances, Malaysia's growth has been respectable at around 5% a year in terms of increase in gross domestic product (GDP goods and services produced in the economy in a year) but even that will slow.
So despite what the pundits and the rating agencies say, now is not the right time to rein in government expenditure there still needs to be government spending to keep economic growth up but it should be in the right direction.
One cannot really argue with spending on infrastructure such as transport and a mass rapid transit system for Kuala Lumpur but there is a need to be very efficient about such expenditure.
Wastage must be cut to the bone and the best deals obtained.
Even as we spend more, it is necessary for the Government to explain what it is doing to cut down wastage by outlining specific measures it will take to get more value from every ringgit spent.
Monetary policy tools such as interest rates have been easy in their application to promote economic expansion and this should be the stance of budgetary or fiscal policy too but with greater focus.
Encouraging the private sector to take a greater role in the economy is fine but this cannot be always via giveaway incentives including lengthy tax breaks. We should concentrate on making procedures and processes for investment much easier and capitalise on our inherent advantages such as availability of work force, good infrastructure, strategic location and so on.
Any more incentives for foreign direct investment, and we will be giving away too much. Instead we should be thinking in terms of giving uniform benefits across the board for all businesses such as reduced income taxes. If revenue to be lost is too much, then a goods and services tax (GST) can be introduced.
Unfortunately, given the proximity of the general election and the ruckus that a GST will create, it is almost a given that there will be no talk of the GST in this budget and therefore quite unlikely that income taxes will be reduced. Ditto for subsidies.
That's unfortunate because that is what the economy needs. Reducing income tax makes us more competitive with other countries and also makes it less necessary to give expensive tax breaks to foreign investors.
The revenue foregone could have been recouped by a GST which is much broader based and will cover everyone who spends instead of the relatively few who pay income tax now.
The GST is also useful because it imposes a tax at every stage of adding value and requires meticulous paperwork for intermediaries to claim their rebates. This paper trail is a means of tracking down tax evaders and will potentially increase the efficiency of tax collection.
A good rationalisation of subsidies can ensure that relief goes only to those who need it and not to all and sundry as it is now, including to foreigners via smuggling and leakages. This will save the country billions of ringgit annually.
A positive thing is consumer spending in Malaysia which continues to be strong and has been an impetus to growth. But household debt, including housing loans, have gone up sharply and rising house prices have raised legitimate concerns of a housing bubble.
This is a problem that has to be addressed by the Government and firm measures should be taken to reduce speculation and choke off the easy availability of credit. The 5/95 scheme for instance enables buyers to put down 5% of the purchase price and nothing for two years, enabling them to make a leveraged bet on property.
It will be necessary to consider imposing higher real property gains tax and doing away with schemes such as the 5/95 to cut undue speculation in the property market.
As far as the goodies are concerned, it will be anybody's guess what they will be but one must hope that for the sake of probity they be kept to the barest minimum and do not threaten either government finances or the broad economy.
In fact if there is evidence that the handouts have been excessive and beyond reasonable bounds, the effect on the electorate can be quite the opposite because they will question the integrity and ability of the Government for putting the economy in danger.
In that sense, it's much like fiscal policy what you need is just the right amount of injection of funds by the Government into the right sectors to keep the economy rolling but not so much that it crowds the private sector out or endangers the country's financial health.
Like almost everything else, it's a question of balance but right now it is so delicately poised it takes very little to tilt it.
P Gunasegaram (email@example.com) is an independent consultant and writer.