What the Budget should contain

Publication: NST

Date of publication: Aug 5, 2013

Section heading: Main Section

Page number: 018

Byline / Author: By Tan Sri Dr Sulaiman Mahbob

THE concern to address the public sector deficit is more than justified if we are to ensure long-term fiscal sustainability.

The case of Greece and Spain is still topical although, unlike them, we do not have the problem of external deficit. Nevertheless, our trade balance is narrowing fast in view of the feeble market prospects.

As we have taken several measures for many years to address the persistent deficit, perhaps in preparing for the 2014 Budget, we have to be a bit a little more adventurous.

Measures to address the deficit invariably will zero in on revenue and public expenditure management. The government's revenue position appears to have improved lately in view of better collection and rising compliance.

However, controlling expenditures may be more challenging in view of the expected public sector role in undertaking development projects, many of which are obligatory in nature, such as education and health projects. In addition, curbing the rise in operating expenditures is quite difficult because of the "locked-in" nature of these expenses.

For a start, it has to be reiterated that implementing the goods and services tax (GST) is a must in order to augment revenue. The current situation of a low inflation environment may justify its introduction.

The private sector has been given ample notice since 1987, to prepare itself for a value-added tax (VAT, then). GST is less arbitrary and is more efficient. Any increase in prices, is just a one-time change. However, we need a strong will to introduce the GST.

It is also good to reintroduce the real property gains tax or raise it if it is in place. The high property prices have been influenced partly by speculative demand of the rich.

Some operators can be practising non-competitive practices such as pre-booking so as to benefit from resale at higher prices. RPGT imposed upon sales of houses less than five years after purchase can curb this demand. It will also add revenue to the government.

We may also need new ways of looking at things. The Budget should facilitate the private sector to spend more on investments. This can be done by encouraging it to undertake social projects, on the basis of privatisation or public private partnership arrangements.

A greater sharing of financing economic growth and development by tapping into private sector liquidity can enable more projects to be carried out without increasing the deficit provided the risk is shared equitably.

Some of the government's allocations can be passed to the private sector, now that our private sector is strong. Two items can be considered immediately; they are housing and car loans. These can be sourced from the banking system, which is now flushed with liquidity.

The authorities may instead consider subsidising only the interest rate differential between government rates (four per cent) and the market rates (six to seven per cent) to ensure equality of treatment of all officials.

Public subsidies provide one avenue where judicious reduction in some areas can be tolerated. The subsidy on petrol for private vehicles and diesel can be reduced so that the retail prices approach market prices in the shortest time.

Neighbouring countries are paying higher energy prices. Our petrol subsidy does not discriminate between the rich and poor, thus the rich having more and bigger cars enjoy much more. Leakages on diesel subsidy for fishermen are also well known.

The pricing for higher education needs a review, too. Tuition fees in the public universities are much lower than in private institutions. Hence the private return exceeds social return; the latter was higher in the 1960s and 1970s. However we need to support students from low-income families through financial assistance.

On the broader front, financing health in this country needs a long-term review and some initial steps can be introduced in the 2014 Budget for health insurance so as to increase the private sector's share in healthcare cost.

We need to send a message that people have to plan for a more market-based social services pricing. The government is, however, expected to maintain its social responsibility to the low-income group even under a policy of market-based subsidies.

The idea has been mooted for some time. It would be good to revisit this matter so that work on it can be advanced and a constructive programme be implemented within a few years.

Finally, the issue of efficiency of public transfers, the 1Malaysia People's Aid included, has to be re-examined. Transfers cannot be done without equal contribution of the recipients.

Yes, transfers have increased retail activities. It would be better to insist recipients undertake simple projects to qualify for such assistance. They can be paid for self-improvement schemes, such as attending some form of training or doing social work in consideration of the transfer.

This Budget preparation has to implant the seeds of prudence among all, and greater revenue enhancement while maintaining the nation's competitiveness.