IT is the season of national budget preparation for the federal government again, an annual exercise, the results of which will help steer the economy for the short and medium term.
The exercise will definitely be a challenging one, in view of the global economy which is somewhat impacted by the trade war and a domestic economy that is softening.
The immediate challenges of addressing the budget deficit by trying to strengthen the revenue position and applying judicious control of public expenditure increases shall remain a measure that will be continuously observed by the officials.
Indeed, the fiscal initiatives and changes that have been made to address the deficit have been incrementally applied so as not to cause major setbacks to economic growth and employment levels in the short term, a consequence that no government would like to see.
The public sector, in particular the government, has been consistently borrowing domestically, to carry out development projects. Total revenue is just about adequate to meet operating expenditures. Thus, a total of about RM40 billion is often borrowed annually to meet development expenditures which are mainly fixed capital formation in nature.
If the option not to borrow at all is exercised so as to wipe out the deficit, then the deficit would have been erased a long time ago. However, this would mean many social projects would not have been carried out and, as such, economic growth and social development might be hampered.
Although the government is in deficit, the nation itself is not. The surplus, therefore, is within the private sector and this surplus has to be harnessed and mobilised to finance the economy and development.
Given the uncertain prospects in the global economy, brought about by the trade war, and a subdued domestic economy, there may be a case for an expansionary public sector budget, a small one perhaps. This is because there has been much talk around that small businesses and industries, as well as small-time businessmen, have been affected by the moderation in the economy and the budgetary control.
One way to support aggregate demand is to utilise more public- private partnership (PPP) initiatives to carry out public sector development projects. The experience of PPP projects in the past has led to inequitable risks on the government side. This, perhaps, might have been true.
The above situation may be the result of poor selection of contractors, imbalance in risk sharing between the government and contractor, and the practice of giving a public sector guarantee to loans to finance the related projects. More serious than that is the whole economics of the undertaking. These practices are not observed in other places where PPP initiatives are implemented and they are successful nevertheless.
Thus, if we are to finance development projects based on PPP, a strict set of criteria must be put in place first, and these include competitive bidding, good track record, equitable sharing of risk between the government and contractors, and there should be no guarantee by the government of loans raised by the selected contractor.
The banks that will give the financing will evaluate the projects on the economics of the undertaking and be very cautious on the risks they are exposed to. Some good candidates of PPP projects are schools, student hostels, staff quarters, to name a few whose beneficiaries can be easily identified and the value of services rendered can be quantified and priced accordingly.
On other concerns of public sector budgeting, the issues of efficiency, effectiveness and impact of expenditures will always remain pertinent. There may have been too much focus on physical performance and financial achievements in the past when public sector revenue was strong given the high level of petroleum prices then. Thus, the outcome and qualitative impact of public expenditures take a back seat. Additionally, we should be encouraging greater capacity utilisation, greater sharing of facilities such as training and sports facilities, avoid having large halls (in universities) when their utilisation is hardly 20 days in a year, focus on quality improvements rather than quantity-based results.
It is also necessary to get the public to assume cost sharing in the delivery of public services too. In the past, too much subsidy has been provided in social services such as health services. Perhaps a more preventive health approach can be used in health services rather than priding ourselves in curative health programmes, such as the large number of specialist hospitals and clinics that we have built.
As a matter of fact, the whole fiscal concern involving improving revenue, making expenditures more efficient and impactful, and enhancing public sector capacity utilisation to reduce wastage, has to be the concern of all officials, especially heads of department.
If this is not well understood and internalised by all, the deficit will remain, inefficiency and wastage will prevail, and public sector borrowing will continue to balloon, affecting our overall welfare in the long run.
The Budget, after all, provides the right to the authority to extract surpluses from the population to finance “public good”. It nevertheless, has to be exercised judiciously. That is what good public finance is about.
The writer is adjunct professor at International Institute of Public Policy and Management, Universiti Malaya