OCT 26 — budget 2014 is arguably a controversial bill with regards to the under-performance of the Malaysian economic outlook. Still, this budget revolves around the passing of the Goods and Service Tax (GST), the implementation of which has been long delayed. bold and brave measures had been predicted since Malaysia’s public debt is at an alarming rate.

Relatively, Malaysia’s public debt accounts for 53.8 per cent over its gross domestic product (GDP), with the budget’s deficit capacity at 4.0 per cent over GDP of the same year. Steps were taken to reduce the accumulated debt because of government overspending and its continuous deficits with less progressive tax regime. Some might claim that this budget is a pre-emptive action before the looming storm, as it addresses unpopular moves by introducing a tightened fiscal regime.

Apart from that, Malaysia is set to move beyond the “subsidy mentality” that has raised concerns. Over-reliance on government aid impedes economic growth. Malaysia is blessed with abundant resources, but further dependency on the government’s shoulder may impede people’s capability to contribute actively in developing the economy. This might dissuade participation in the domestic market.

However, there are loopholes in the budget. If we go through the details, it reveals some of the weaknesses to accommodate the pressing fiscal demand. These are the blindspots that require in-depth analysis.

These are a number of issues:

1) This is not a good time to implement the GST.

GST is a regressive form of taxation. Many Malaysians are unhappy with a stagnant growth in wage, plus they have to provide.

GST is applied at all points of the supply chain at 6 per cent. This is high compared with other countries when they first introduced a consumption tax such as a goods and services tax or value added tax (VAT). When Singapore introduced GST in 1994, the taxable rate was 4 per cent. Singapore had its budget surplus while implementing the tax. It is a different scenario in Malaysia.

Most developed nations such as Australia, United Kingdom and other Scandinavian countries are implementing GST only after the majority of their citizens are obliged to pay income tax. More than 60 per cent of UK citizens pay tax at the highest bracket.

In Malaysia, only 6.4 million of the 13 million workforce meet the minimum requirement to pay income tax. That means almost a half of the Malaysian workforce earns less than RM2,500 a month.

With GST, every value-added item incurs tax, albeit there are a few exempt items such as education fees, electricity and water bills, food ingredients and so on. GST is a potent cause of price inflation.

The current minimum wage is not enough to offset the cost of living. GST will be a burden on most people, especially the poor. The value of tax applies to rich and poor. We can expect the rich might have less issue to pay tax, but what about the poor? They don’t even earn enough to look after their family, yet they have to pay tax.

2) More operational expenditure (OPEX) with less development expenditure (DEVEX).

Budget 2014 allocated RM264.2 billion to implement programmes and projects. Of this, RM217.7 billion is for operational expenditure — from RM201.9 billion in 2013 — while only RM46.5 billion is provided for development expenditure, from RM49.6 billion in 2013. This represents a decrease in allocation for development purposes. To encourage a sustainable pace of economic growth, a higher allocation for development is a must. The government should be able to balance its allocation for both expenditures at an appropriate ratio — perhaps 60:40 of operational expenditure over development expenditure.

If we look at the potential breakdown of the budget allocation, RM63.6 billion of the operational expenditure goes to emoluments. A sum of RM36.6 billion is provided for supplies and services, while from the development expenditure of RM46.5 billion, only RM29 billion is allocated to the economic sectors.

This indicates that the proportion of the Federal budget’s budget allocation is not consistent with Malaysia’s expectation to boost its economic growth pace at 6 per cent every year to meet the objective of developed-nation status by 2020. This year’s budget is unbalanced in its proportion of OPEX over DEVEX. The government has to allocate the biggest amount of its budget to staff emoluments. So it is necessary for the government to increase its allocation to bolster sustainable economic growth . Or else it would defeat the purpose.

3) Less allocation for East Malaysia i.e. Sabah and Sarawak.

The budget offers nothing exclusive to East Malaysia. Prime Minister Najib Tun Razak has wavered in his commitments to allocate more to East Malaysia. The 33-year-old cabotage policy that incurs a higher cost of goods for people in East Malaysia was not reviewed for any policy replacement.

Amidst escalating cost, fewer people in East Malaysia reap any benefits from the budget. The Poverty Line Income (PLI) of East Malaysia per household is slightly higher than that in Peninsular Malaysia. According to the 2012 Household Income Survey (HIS), the PLI is RM1,090 in Sabah and RM980 in Sarawak, compared with RM830 in the peninsula.

Najib’s gratitude to Sabahans and Sarawakians for helping him and Barisan Nasional retain Putrajaya was focused on a RM500 million allocation to complete the long-overdue Pan Borneo highway linking the two states, new underwater Internet cable, and upgrades of airports in Kota Kinabalu, Sandakan, Miri, Sibu and Mukah. There are no tangible measures to increase their household income, particularly in the rural areas of both Sabah and Sarawak.

4) Government should cut wastage, not impose more taxes.

The worst of it, there are no specific mechanisms to invigorate the enforcement of government wastage. Revelations from the Auditor-General 2012 report showed that wastage and corruption in government procurement is extensive. An estimated RM5.7 billion was lost owing to government ineffiency in handling public spending.

Tony Blair and his team in New Labour published a “Comprehensive Spending Review” in July 1998. It provided an efficient strategy to cut spending to avoid wastage. One mechanism was the introduction of “cash limit” at each government agency.

Pakatan’s shadow budget unveils measures to curb wastage through cost-containment and savings-initiative programmes such as Liquidated Ascertain Damaged (LAD) system to avoid postponement of government projects to comply with international standards. This will help reduce wastage too.

The government’s introduction of Outcome-based budgeting (OBB) to improve the budgeting process

is praiseworthy. However, this is not enough to compensate for losses incurred every year through wastage. The government will be able to generate extra revenue if it spends wisely. Perhaps the government could avoid the implementation of regressive taxes such as the GST to trim fiscal deficits.

5) Contingent liabilities excluded from the budget’s announcement.

Revisions from the budget outlook are attempts to hide official debt under contingent liabilities. Fitch Ratings’ recent downgrade of Malaysia’s credit rating is an indication of the seriousness of our debt situation. Fitch doubts that the government can achieve its interim 3 per cent deficit target for 2015 without additional consolidation measures. Fitch sees “risks even to the achievement of the agency’s 3.5 per cent deficit projection”.

Most pertinently, Fitch repeated its concerns over the government’s off-budget expenditure and liabilities. Fitch highlighted that the Federal Government guaranteed debt rose to 15.2 per cent of GDP by end-2012 from 9 per cent at end-2008. This is a drastic increase to nearly RM150 billion in 2012 from RM96.9 billion in 2010. Based on current government accounting practices, the Federal Government debt and budget deficit calculations do not include “government-guaranteed-debt”. This is despite the official government statistics that Federal Government debt is “only” at 53.7 per cent of GDP.

* Muhammad Nazreen is associated with Institut Rakyat, a Keadilan-affiliated think tank. He can be reached at [email protected].

** This is the personal opinion of the writer and does not necessarily represent the views of The Malay Mail Online.