All eyes on Budget 2014

Published: Saturday September 14, 2013 MYT 12:00:00 AM 

Updated: Saturday September 14, 2013 MYT 9:37:04 AM

Wan Zuhairi Wan Yaakub

Budget 2014 will be keenly watched for a number of reasons. The biggest is to see just what the Government will announce to improve its fiscal position in light of a rating outlook downgrade by Fitch Ratings. That warning led to a cut in fuel subsidies and other measures and the Government has explained why that had been done. StarBizWeek editor Jagdev Singh Sidhu met with Minister in the Prime Minister’s Department Datuk Seri Abdul Wahid Omar for a greater understanding on why cuts were needed and the rationale behind policy changes that have been made.

Q: The Fitch warning certainly appears to kick things off. From the Government’s standpoint, how do you approach this issue?

A: First of all we need to be clear about the challenges we are facing. We are in a situation where growth is slower than what we had expected. Last year when we prepared the budget for 2013 we expected the external environment to be very conducive, manageable growth in China, didn’t expect commodity prices to come down so hard and certainly did not expect the kind of reaction we are facing now in the reversal of the quantitative easing by the Fed.

For the first quarter of this year, the GDP was 4.1% and 4.3% in the second quarter. Although it was better than the first quarter it was below what we had forecast and that had necessitated the revision by the central bank to 4.5% to 5%.

Secondly, it’s the way we manage our fiscal position. Last year we had a fiscal deficit of 4.7% of GDP and we made the commitment to reduce the deficit to 4% this year and to 3% by 2015.

In an environment where GDP is lower than what was anticipated, the need to manage our spending becomes more urgent.

That’s why we had to accelerate whatever rationalisation we had to have in terms of spending on subsidies and broadening the tax base and so on.

The third challenge that we have is in respect of the Government’s debt position. Last year we were at 53.3% and we are limiting it to the 55% debt ceiling that we have set for ourselves.

It’s in the context of trying to contain the deficit and the economy not growing at the rate we expected. There is a lower denominator and therefore there is a need to conserve more.

The fourth issue is about the narrowing current account surplus. We had a surplus of RM8.7bil in the first quarter and in the second quarter it was RM2.6bil.

We need to make sure that we don’t get into a deficit situation. We must understand that the reason for the contraction in the current account surplus is from the lower exports of our commodities. CPO exports in the first 6 months of this year actually came down by about 20% compared with last year.

At the same time we have imports of lumpy items, among others imports of vessels and aircraft, not only by Malaysia Airlines and AirAsia but also by Malindo.

That contributed to the narrowing of the trade surplus. On top of that, in arriving in the balance of payments of the current account you also have capital flows.

While FDIs continue to be good, Malaysian companies are investing abroad in recent times such as Petronas, Maybank, Axiata and CIMB.

That contributed to the net outflow, and then there are investments in properties by both Malaysian funds and companies in places like London, Singapore, Australia and so on.

When you add all that, it contributed in the narrowing of the current account surplus. We have to therefore track this carefully to make sure we do not get into a negative of deficit situation.

Is it an issue of managing the perception and then tackling the problem?

Before any decision will be made, we have to be very clear what the diagnosis is. What is the cause and effect and be clear about the possible measures we can undertake. Then we have to prepare a few steps ahead to make sure we are able to deal with those issues.

That’s why no decision is made on the basis of impulse.

Whatever issues faced by the rating agencies were not new. We were already aware of the situation and before we made any move, we needed to make sure we considered all aspects. That’s why it took us a while to make the decision to rationalise subsidies.

The subsidy rationalisation represents the first step. Why fuel and what more can we expect?

If you look at our spending on petrol subsidies, in 2012, we spent some RM24bil. That’s a lot of money as a percentage of income that we have. This year we are looking at RM209bil. That is 11.5% on just a single item - subsidy on fuel.

I think that’s not sustainable. When fuel is subsidised to that extent, it not only distorts the market but it’s not making the subsidy targeted. That means those who do not deserve the subsidy will enjoy them and because of the distortions in the market, there are issues of leakages in terms of smuggling and usage of fuel by people who are not actually meant to get them.

Therefore, you need to start somewhere and we believe that doing it now is timely.

When you want to reduce subsidy with the consequential effect of increasing the price of fuel, no time is a good time. When you do that, there is always a negative reaction. From our perspective, it is actually timely on a few counts.

At the current inflation level of 2%, it is at a very low level and therefore the effect of the reduction of the fuel subsidy should be able to be contained. In this respect, we anticipate that the impact will be a 0.3% increase in the CPI both direct and indirect increase. That’s for 2013. Secondly, in terms of the need to benefit from the savings.

The RM24bil per annum, in the context of the petrol and diesel subsidy we are trying to save, by cutting the subsidy by 20 sen per litre we are able to save RM1.1bil for 2013. On an annualised basis, that’s RM3.3bil.

If you were to delay the implementation, there will be less savings we will get from this current fiscal year. Under the normal circumstances, it will translate to about RM300mil of savings per month.

In the context of a narrowing GDP, that will help.

In the need of addressing this issue in terms of the expectations of rating agencies wanting a clear resolve from the Government, this is timely too.

We do not expect any revision of the rating agencies’ view just purely based on a single event but we are saying is this is actually the start of a number of measures that will be underaken. The bulk of which will be announced in the Budget 2014.

In the past when subsidies are cut, it was later reinstated. Is there a resolve to permanently cut the subsidies from here on?

I think there is that resolve. Looking at the subsidy of RM24bil per annum, that’s not sustainable for any country. Therefore, reducing it is the right way to go while addressing the needs of the people.

Apart from subsidies and sequencing the projects, some say the Government must have a hard look at how it spends its money such as national service. When you look at the cost-benefit analysis, is it worthwhile to have certain projects or programmes?

Efforts to optimise the spending of the Government will have to continue. There are many areas where that can be looked at and for each programme we undertake we have to look at the cost-benefit.

Where we think the benefits are not there, it is a matter of reviewing it and making sure we reduce the cost to make sure the benefits outweigh the cost, or we come up with alternative programmes that can be more effective to achieve our targets or original intention in undertaking a certain programme in itself.

That will have to be looked at in Budget 2014 in terms of the annual operating expenditure and the 5-year plan that we have.

When you start looking at reforming expenditure, is it just subsidies or how the Government spends its money?

Obviously, priorities will be on big ticket items. Having said that we believe in the need on optimising spending overall whether the amount is big or small.

We must make sure we spend money based on what is needed and taking into account the cost-benefit. In terms of procurement, it’s the priority to get the right product at the right price and at the right time in terms of delivery of the items.

Sometimes when you go through the process of normal tendering, you must also be able to test whether the actual price is actually reasonable or not.

And that’s when you start to benchmark against the price of what’s available out there in the market. This will be part of the vigorous improvements we will continue to make.

In this respect, it will be for all ministries although driven by the finance ministry. We at EPU will lend full support in terms of improving the overall effectiveness of procurement.

There is the pilot programme - outcome based budgeting. Can you explain how this is going to change how the Government will spend its money?

Typically in the past when we come up with a budget, it’s based on what’s required by each ministry, look at our revenue and then start to allocate. Once allocated, one is expected to spend and the amount not spent will get deleted and (the process) starts afresh the next year.

In this context, there will be a lot more focus on the outcome, notwithstanding certain projects that have been budgeted. Along the way if you find the needs are not there or there is a need to refine them further, there will be the continuous improvement in the process.

A lot of people are saying that the GST will be announced on Budget day. Is there a need to have GST and if so why?

Whether or not it will be in Budget 2014 we will leave that to the Prime Minister who is also the finance minister.

I’m speaking broadly as a former banker. When you look at the experience of other countries in how they manage their finances, one of the most effective ways in ensuring sustainable revenue and growth is to put in place an indirect taxation system which will cover as much taxpayers as possible. For income tax, the number of taxpayers is very limited and (they represent) a small percentage of the total population. In implementing a tax such as GST, it will be very broad-based.

And this is very much consumption driven. In that context, it will enable the tax base to broaden. That has been the experience of most countries and in the case of Malaysia, it shouldn’t be any different. When you look at the current base of income tax, it is pretty small compared with other revenue. So I think there is a need for us to look at broadening our tax base as well.