All-round fiscal responsibility

Posted on 11 September 2013 - 07:26pm

Last updated on 11 September 2013 - 10:13pm

Tricia Yeoh

THE government says it intends to pursue fiscally responsible policies, but this must be consistently applied throughout its bureaucracy from top to bottom, and in all areas.

Last month, ratings house Fitch Ratings downgraded Malaysia from a "stable" to "negative" outlook, noting the poor state of Malaysia's public finances and uncertain prospects for budgetary reform and fiscal consolidation.

Indeed, there have been concerns expressed over recent years of the country's federal government debt, which has risen up to 53.5% of GDP at the end of 2012.

The two budgetary vulnerabilities it identified were the reliance on petroleum-derived revenues, and the high and rising weight of subsidies in expenditure.

It is likely for these reasons that the Najib administration decided to revert to its "subsidy rationalisation" plan, namely the announcement last week of the fuel price increase of 20 sen for RON95 and 15 sen for RON97 at the petrol pumps, which will reportedly save government up to RM3.3 billion annually.

From a fiscally responsible point of view, removing petrol subsidies both ensures that government is reallocating resources to better target aid to the poor, as well as reduces the dependency people (including the rich) have on cheap fuel. The same argument would go for the goods and services tax (GST) that may be announced in the 2014 budget.

Both reducing subsidies and introducing the GST would, in the long run, certainly help boost Malaysia's debt situation, thereby improving our international ratings. But the real reasons for which people are questioning these decisions have little to do with economic theory.

First, subsidies to independent power producers (IPPs) contribute an estimated RM8 billion annually out of the total subsidies paid a year (RM42.4 billion in 2012). Although some IPP contracts are being renegotiated, there is a need for greater transparency as to the terms of these new contracts. A legitimate question is therefore why the subsidy rationalisation scheme is not being uniformly implemented across the board.

Second, leaders had previously committed to the maintaining of petrol price before the general election. Although one understands the need for politicians to be expedient, this does not help Malaysians in their financial planning. Knowing one's potential rapid increase in living costs would allow for adjustments to be made accordingly. Surprise price increases are not helpful in this case.

A third and most common complaint by now is the exorbitant and excessive spending of government, many foolish practices of which are reported year after year by the auditor-general.

It is all well and good for government to responsibly raise revenues so that the national coffers do not run dry. But an equally, and perhaps more, responsible thing to do would be to watch where the money is being spent, and to do so in an accountable manner.

The Resources Governance Index 2013, which measures the quality of governance in the oil and gas sectors around the world, ranked Malaysia 34 out of 58 countries and scoring only 46 out of 100. Placed in the "weak" category, Malaysia performed poorly in the areas of "institutional and legal setting" and "safeguards and quality controls".

Transparency in government procurement is another equally important area. The Auditor-General's Report in 2011 revealed that the open tender process was not conducted for several projects. It is particularly important for projects that are privatised under either PPP (public-private partnerships) or PFI (private finance initiatives) arrangements to be awarded under open tenders, which is not necessarily the case at present.

Finally, the greatest concern is that incomes are not rising in commensurate measure with the rise in living costs. A more open and competitive economic environment would allow for greater job opportunities that accompany investments, especially that of higher value functions. Malaysia's performance in the Economic Freedom Index 2013 dropped slightly, affected by declines in monetary freedom, trade freedom and freedom from corruption.

It is important for information to be made available in the value chain of money both going in and out of government accounts. Although recorded in the thick budget books of "Estimates of Federal Government Revenue and Expenditure" respectively, there are still elements that could be made more transparent.

In short, while the government waxes lyrical about the need to exercise fiscal responsibility, this must be applied in all areas of its policymaking. There must therefore be a visible drive to reduce wastage and excessively lucrative pay-outs to companies at the expense of the public. Without this, the level of trust in what these funds are being used for will not improve, subsequently making all justifications of economic efficiency futile.

Tricia Yeoh is COO of an independent think-tank. Comments: letters@thesundaily.com