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Friday, October 25, 2013

Why does this Government find it so hard to reduce government expenditure? - Ong Kian Ming

OCTOBER 24, 2013

Every year, during the budget session, the Barisan Nasional Finance Minister announces a certain government expenditure figure and the following year, without fail, the Minister comes back and reports an actual expenditure that is significantly higher. For example, the projected expenditure for the 2012 budget was RM230.8 billion but the actual expenditure was closer to RM249.5 billion, a difference of RM18.7 billion, a not exactly insignificant amount.

How does this government get away with this time and time again? Why do the professional economists not call them out for this profligacy?
The fact that the government seems incapable not just of hitting its budget projections but far exceeding it is directly related to perceived need to introduce the regressive Goods and Services Tax (GST) during the upcoming budget 2014 speech and to be fully implemented in 2015. The government tries to massage the so called need for the GST by saying that it will be a broad based tax that will be more effective in raising taxes and at the same time reduce leakages by bringing in the informal sector. At the same time, the government will put in a strategy that will reduce expenditure of subsidies. These supposedly sound arguments mask the fact that the government refuses to share in the pain which the people will feel when the GST is introduced along with the removal of subsidies.

Here, I want to outline a few plausible reasons as to why this government finds it almost impossible to reduce government expenditures and by doing so, avoid the need to introduce an unpopular tax.

Firstly, no minister would voluntarily ask for the budget of his or her ministry to be reduced. This is normal since a smaller budget means less power and influence, even putting aside issues of graft and bribery. Only if the Prime Minister and / or the Finance Minister plays the role of chief ‘whip’ to demand that each minister sacrifices a portion of his budget can there be an across the board reduction in government expenditure.

In the case of Malaysia, the Prime Minister who is also the Finance Minister would find it hard to justify asking everyone else to cut their expenditure when he himself is not willing and able to cut expenditure in the Prime Minister’s office (PMO), which is arguably the most bloated of all the Ministries, given its rapid expansion under Abdullah Badawi and the continued expansion under Najib. Remember, agencies such as Pemandu and Agensi Innovasi Malaysia (AIM) which employ many expensive contract staff are under the PMO. Remember too, that the budget of the PMO has doubled from RM7.1b in 2008 to a projected RM14.6b in 2013, slightly more than a two-fold increase. During this time, the projected federal expenditure has only increased by about half, from RM168.8 billion in 2008 to RM248.6 billion in 2013. Given Najib’s non-confrontational character, it would be difficult for him to ask for other Ministers to sacrifice without doing the same for his own Ministry.

Secondly, the ‘pain’ that would be felt by each Minister in the context of Malaysia may be more than just a loss in influence and power but also a loss in economic gain through the awarding of expensive and bloated contracts to cronies. For example, more than 60% of the estimated RM800 million cost to run the National Service Program (Program Latihan Khidmat Negara or PLKN) is spent on camp trainers and supplies for these camps. Any minister who may benefit from these contracts would be out of his mind to ask for this program to be reduced or abolished.

Thirdly, the government has been very fortunate in that actual revenue collections have also exceeded projected revenue on the consistent basis. With the exception of 2009, when there was a global economic crisis, actual revenue has always exceeded projected revenue by at least RM10b over the past 5 years (Table 2 below). What this means is that the government has never been under real pressure to tighten their belts. If let’s say, the dividends from Petronas were to fall by RM20 billion because of a global collapse in oil prices or some major hiccups with their oil fields in politically unstable places like Sudan and Iraq, the government would be forced to carry out significant belt-tightening.

Fourthly, the government has managed to ‘hide’ much of the growth in government expenditure by shielding them in off-budget items. This usually means that setting up of a special purpose vehicle such as Dana Infra to issue bonds to fund infrastructure projects like the MRT project that is placed under a government incorporated company such as MRT Co. None of the MRT spending spending appears officially on the government budget. These contingent liabilities – bonds which are government guaranteed but not in the official budget – totalled some RM150 billion at the end of 2012 and will only rise as the cost of projects such as the LRT extension, the MRT project and the much delayed KLIA2 project continues to rise. If these costs were properly reflected in the budget, it would be much harder for the government to justify the continued rise in operating expenditures.

The question then becomes, why do the economists, who are supposed to ‘warn’ people of the dangers of government profligacy, allow the government to get away with this? I propose a few plausible answers.

Firstly, most economists are concerned about rising government debt and the continuing deficit but their proposed solutions usually involve (i) reduction of subsidies especially the oil subsidy and now, increasingly, (ii) the introduction of the GST. Not many local economists would call for significant cuts in other parts of the government’s operating expenditure and certainly not specific programs in specific ministries.

The subsidies are a much ‘safer’ area to touch on since it involves a big chunk of change (over RM20 billion a year in the past 4 years) and is easily calculable. The GST is also put forward as an easy fix because of the supposed benefits on paper which I’ve outlined earlier.

Very few local economists would trawl through the Auditor General’s report to estimate the potential cost savings from each of the projects and to recommend that some projects be abolished. This is usually a political judgement and most economists would fear to tread into this arena. Their superiors in their organizations would probably not appreciate it if these economists were to start making calls on which departments to downsize or which programs in the Ministry of Education which should be cut.

Secondly, using conventional wisdom, the ability of the Malaysian government to continue to service its debts seem sustainable. Debt servicing takes out approximately 10% of government expenditure. The debt to GDP ratio is at a seemingly manageable 52% of GDP. Even if contingent liabilities were added, our debt to GDP ratio would rise to between 65% to 70%, which is significantly less than the levels in development countries such as the UK, Japan and the US, just to name a few.

If the professional economists are not very worried, why should the average Malaysian worry about government profligacy and wastefulness? Is Pakatan Rakyat making much ado about nothing? I do not think so. We are on a trend in which we can easily slip over the economic precipice in term of our government debt. If Petronas’ overseas revenues get hit hard by unforeseen circumstances, if a few of companies with significant contingent liabilities have to be bailed out at the same time – think 1MDB, MAS, Prasarana and MRT Co, if the 10 year business cycle drags the global economy down again in 2018, we could easily see out budget deficit and debt levels skyrocket. The Irish economy was chugging along nicely and its debt to GDP ratio was as low as 25% in 2008 before it had to bail out its banks and now its debt to GDP ratio stands at 120% just 5 years later in 2013. While we are not in the same position as Ireland, FITCH IBCA has warned of a possible cut in ratings and Forbes columnist, Jesse Colombo, has warned of an impending property and economic bubble in the country. I still remember how government officials and BN politicians were arguing about how Malaysia is ‘different’ from Thailand when the run on the Thai baht started in 1997. We were not spared from the Asian economic crisis then. We will not likely be spared if another crisis hits the region.

To end, I want to quickly propose how Pakatan is better placed to reduce government expenditure compared to the BN. A new Prime Minister without any attachment to the existing institutions and structures within the PMO would have fewer doubts in cutting the PMO down to size. Pakatan has already made such a promise in the 2012 alternative budget. We have followed up by identifying specific departments such as PEMANDU which would be abolished under a Pakatan government. Our latest 2014 budget spells out more programs and specific targets in terms of operating expenditure reduction. With a Prime Minister leading the charge, there will be more impetus for other Ministers to cut the expenditure of other Ministries. Furthermore, there will be less incentives for Ministers to maintain certain programs for ‘personal’ benefits once a check and balance system which empowers the MACC and which reduces corruption is put in place.

Of course, this involves hard work and difficult decisions but I am very confident that between Pakatan and the BN, there is no question that Pakatan has less baggage, has promised do to more and is better placed to cut government expenditure by reducing waste, corruption and unnecessary programs. This is a much better alternative to introducing the GST which hurts the poor while the government does nothing to tighten its own belt - October 24, 2013.

* Ong Kian Ming is the Serdang MP.

* This is the personal opinion of the writer or publication and does not necessarily represent the views of The Malaysian Insider.

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