Now that the debate on the 2017 Budget is going on in earnest in Parliament, it is essential to take a harder look at the big picture of where we are and what to look forward to in the coming year.
Like in many countries, budgets in Malaysia have become something of a political circus. This is unfortunate, because good fiscal policy should be made in the national, and not partisan, interests. Oftentimes, sacrifices and pain are called for.
Budgets are also forward-oriented documents. Consumers must be assured that their jobs are safe and incomes will, if not rise, at least remain stable. Investors need to know that business plans and investment projects will not go awry. Yet, so many of the arguments about the 2017 Budget are on the minutiae of the here and now. So many are about competitive populist measures, rather than those that stimulate quality private investment, employment and incomes.
The Malaysian economy is around RM1.2 trillion in nominal terms. This is more than 60 per cent larger than when the 2008 global financial crisis hit, or growth of 6.2 per cent per annum. Given the gloom and doom during that time, this is encouraging.
In macro terms, the 2017 Budget is by no means expansionary. Fiscal spending growth is in the low single digit and the budget deficit is being held pretty much constant. If this is an election budget, then it is not a very good one.
Government revenue today is hovering around 18 per cent of the gross domestic product (GDP), lower than the 22 per cent in 2008, but still a huge relief given the oil price crashes and revenue losses from late last year.
If not for the introduction of the Goods and Services Tax (GST) last year, government revenues would be much lower and severe austerity measures would, almost certainly, need to be implemented.
Opponents of the GST would do well to get off their hobby horses and look at how the money is to be spent, rather than bemoaning the fact and attempting to tinker with a system that they appear not to understand very much.
Of the latter, the operating expenditure (OE) of the Federal Government has come under fire. It is one of the — if not the — fastest growing fiscal components, and greatly restricts the fiscal options of policymakers.
Of the RM260.8 billion allocated for the 2017 Budget, OE alone accounts for RM215 billion, with emoluments and retirement benefits taking the lion’s share (38 per cent).
Much more can and must be done to bring this under control. There has been some attempt at a moderate cut back so that OE is expected to run at 17 per cent of the GDP from more than 20 per cent in recent years, but this is hardly sufficient.
Development expenditure has also shrunk to around 4 per cent of the GDP from 6 per cent in the past. Deficit spending by non-financial public corporations (NFPC) and off-balance sheet liabilities are greatly multiplying.
As it stands, Malaysia’s national debt is already more than 250 per cent of the GDP, with private sector debt accounting for about half of this. The federal government and NFPCs account for the balance.
Given the nature of the economic activities going forward, mainly infrastructure and large-scale property development, even more debt financing is going to be required, both explicitly financed and guaranteed, as well as implied. The fact that federal government indebtedness is not increasing past the self-imposed limit of 55 per cent of the GDP is some measure of comfort, but not sufficient if an external shock of past magnitudes were to be felt.
This is especially so given Malaysia’s diminishing current account surplus, which is estimated to be around 0.5 per cent of the GDP, compared with 12 to 15 per cent in recent years. (This could increase, however, if massive Chinese investments materialise.)
The economic risks — and, for the moment, they are just that — cannot be taken lightly. The GDP is a flow that is based on many assumptions and, thus, a lot more volatile than debt, which is a stock and contractual.
Add to this government guarantees and payment commitments to the private sector and Malaysia’s liabilities quickly snowball. In short, the Malaysian economy is moving forward without a great deal of fiscal policy discretion.
The numbers from the 2017 Budget may not seem that controversial. A great deal, however, is riding on assumptions, and you know what they say about those who assume.
Datuk Steven Wong is deputy chief executive of the Institute of Strategic and International Studies Malaysia