The Democratic Action Party released its proposed 2010 federal budget this week.[1] This is definitely a good move as it brings substance to debate. It gives all of us an opportunity to debate on policies rather than engaging on ultimately empty rhetoric that boils blood.
This is not the first budget proposed by the DAP. The consistency on producing such document thus far deserves commendation and future production should be encouraged to develop policy debate in public sphere. PKR and PAS need to work with DAP or emulate DAP on this front.
Now that the pleasantries have been dispensed off, it is time to get down to business.
While I have yet to read fully the proposal, I disagree with a number of issues. One is the tweaking of contributions to the Employees’ Provident Fund (EPF). Two is the creation of entitlement culture.
For the uninitiated, the EPF is a social security fund providing retirement benefits for its members that, basically, includes all employees employed in Malaysia, making EPF a payroll tax. Employees in Malaysia are required to contribute a certain percentage of their wages into the fund. Employers are also required to contribute some kind of percentage into their employees’ account. Employees will be able to withdraw that money after retirement or at any other point of time before retirement for certain purpose that is not worth going into here.
Early in the section (Section 9.1.3 on page 37), the proposal begins by stating how important savings is, how low-income Malaysians have trouble saving and how unequal wealth distribution in Malaysia is. After stating so, it proposes that employers’ contribution to EPF account of low-income and middle-income workers be increased.
The problem with this relates to a typical argument against such benefits and payroll tax. Employers will compensate whatever required payment on top of direct pay to employeees imposed on them by law by reducing total wages and benefits paid to employees. The idea is that there is only a certain amount of total wages and benefits, which includes the contribution, that employers are willing to pay. Increasing the contribution requirement affects only the composition of total pay, not the pay itself, at present time.
For low-income worker, this is particularly worrying because it reduces their take-home pay. This in turn goes back to the problem of intertemporal choice. While savings is important, it is useless to individuals who are desperately in need of consumption today in the following sense: what is the point of having one million dollar of savings if one cannot use it today to avoid death from hunger?
The example is extreme but it aptly captures the time value of money and intertemporal choices. The time value of money remains material even if death is removed from the equation.
Furthermore, there is enough empirical studies to suggest that low income earners spend large proportion of their income compared to those with higher income. This impresses further on the need to strengthen these workers’ take-home pay given a certain total pay, making their savings less of an issue. I stress, not unimportant, but less of an issue compared to take-home pay.
However, different path is laid out several paragraphs later, with respect to EPF contributions.
As part of its FairWage initiative, DAP proposes to decrease workers’ contribution to EPF for those earning from RM900 to (but not inclusive of) RM1,400 and waive entirely for those earning below RM900. This addresses the concern on take-home pay but notice how it starts to contradict DAP’s point on insufficient savings for retirement of low-waged Malaysians.
As part of its FairWage initiative as well, employers’ contribution is proposed to see reduction to make these workers more employable. This is the right idea but again, this proposal suffers the same contradiction as the first FairWage point.
The third component of the FairWage initiative is a set of entitlements that comes partly in cash transfer and partly transfer from government coffers into the account of certain classes of workers. This perhaps plugs the the gap in saving caused by the two FairWage points but it raises a question of unnecessary complexity.
Notwithstanding the contradiction (it seems to me that there was a war between the left and the right in preparing the proposal; what else can explain the inconsistency? Or is it a case of trying to please everybody?), looking at the FairWage initiative as a whole, the bottom line is really about cash transfer from the government to those who the DAP considered as earning low and medium level income. In the proposal, the DAP states that this is practically an earned income tax credit scheme. It is basically a negative income tax regime where those earning below a certain level of income gets money or tax credit instead of paying tax to the government. In a sense, it is already in place in Malaysia, where, if I am not mistaking the number of I saw on my tax form, the government of Malaysia gives Malaysians tax credit worth RM8,000 for living expenses. I think the proposal by DAP only enhances it.
Whatever it is, the whole design seems overly complicated. Ignoring the normative issue which I will touch later, would it not be easier to not tweak the EPF configuration and just do the transfers instead? Instead of tweaking EPF, the government can, or rather, DAP could, tweak the composition of transfers instead to achieve the same goal sought by the reduction, or in general, changes in contributions to EPF by employees and employers.
That is issue one.
Issue two is the normative aspect of the whole proposal and perhaps, more seriously and more holistically. Without writing too many words, it risks creating a culture of entitlement. The FairWage is just one factor that suggests how entitlement mentality predominates the proposal. RM1,500 is proposed to be given to non-working spouse whose partner earn less than RM3,000 (per month, I assume). This simply robs incentive to work. Individuals are rewarded for not working. This may potentially lower local labor participation rate and eventually, lower output for the economy. To note, low labor participation rate is much worse than low employment rate.
Greater suggestion of creation of entitlement culture is the granting of citizenship bonus labeled as Malaysia Reversed Bonus. That is not the only citizenship bonus. Senior Malaysian Bonus another one. These bonuses are mentioned in other sections which I have yet to read thoroughly.
There is one aspect of the proposal that I like that falls within the section. It is a limit to employers’ contribution for those earning beyond a certain level of income. That decreases cost of doing business and even increases take-home pay of workers.
I will comment on the proposed federal budget by DAP further as I go through it slowly.
[1] — [Democratising Malaysia’s Economy: DAP Alternative National Budget 2010. DAP. 2009]
