In the days after the tabling of the 2009 Budget in Parliament, the zeitgeist of the week for the economically and politically inclined was the fiscal deficit. Various quarters have leveled various criticisms against the deficit and many of these are on target while others are merely hyperboles. Amid the flying mud balls, the sincerity of two camps critical of the fiscal deficit is questionable.
With 2009 being the 12th consecutive year of a deficit budget, it is easy to understand why so many people are worried about how the government is spending its resources. A source at Bank Negara has stated that the ongoing deficit is the single biggest factor preventing the rating of Malaysian bonds from improving.
For those struggling for a freer market, the involvement of the government in the workings of the market is always of concern. The deficit in so many ways indicates the prevalent presence of the state in the market.
Lest there is a misunderstanding, I have to make it absolutely clear that I am not defending the deficit in any way. I am merely pointing out that certain groups have no moral authority to criticize the fiscal deficit.
The first camp comes from the proponents of subsidies for various items, especially fuel. They should be the last ones on this planet to complain about the fiscal deficit because the policy which they are advocating contributes massively to the deficit.
A huge chunk of the operating expenditure of the government is attributable to subsidies. As stated in a document prepared by the Treasury for the purpose of the 2009 Budget, the government is allocating RM33.8 billion to fund all subsidy programs. It is a challenge for a two-day worth of research over the weekend to find out how much of the RM33.8 billion is expected to be dedicated to fuel subsidies but according to a report by Forbes, the expected answer is RM21.0 billion.
With RM154.2 billion meant for the running of the federal government, 22 per cent of the operating expenditure is expected to fund all subsidy programs. Approximately 14 per cent of the operating expenditure is expected to be dedicated to fuel subsidies alone.
If the figures 22 per cent and 14 per cent fail to impress subsidy proponents the monstrosity of their policy, they must compare the size of the subsidy to the size of the much criticized fiscal deficit.
The revenue of the government is projected to be RM176.3 billion while its expenditure is expected to reach RM205.9 billion. Therefore, the people of Malaysia can expect to see our government borrowing RM29.6 billion in 2009 to fund the fiscal deficit. In other words, that is 3.6 per cent worth of the country’s expected 2009 gross domestic product.
Here is the killer: a total elimination of the subsidy would easily turn the deficit into a small surplus. A total elimination of subsidy, however, might sound too harsh and so, let us just concentrate on the fuel subsidy.
A near total elimination of fuel subsidy on the other hand may not sound too shocking since the Minister of Trade and Domestic Consumer Affairs has forwarded the idea earlier by virtue of his suggestion to float local retail fuel prices to free-market level earlier this year.
An elimination of the fuel subsidy could at most cut RM21 billion off the operating expenditure, assuming the figure from Forbes is right. This would directly reduce the fiscal deficit significantly, bring it down to approximately 1 per cent instead.
Here is another point that should shake the world of subsidy proponents: a larger fuel subsidy program or simply subsidies in general is very likely to worsen the deficit.
Therefore, how exactly can those who support increasing the size of subsidies back the criticism against the fiscal deficit, which in a large part is caused by the current size of subsidy? What exactly gives the proponents of subsidies the moral authority to criticize the fiscal deficit? Where is the sincerity in their criticism of the deficit?
Or, are they at all aware of the contradiction which stares at them?
Now, proponents of subsidies may insist that leakage and corruption is a major problem which contributes to the deficit. Nobody can really argue against that but removal of subsidies and reduction of leakage as well as corruption are not two mutually exclusive policies. Both policies can be run concurrently and indeed, the savings from the two policies will lower the fiscal deficit.
Hence, calls for a reduction of leakage and corruption do not adversely affect the arguments against subsidies. In fact, the removal of subsidies goes a long way in eliminating opportunities available for leakage and corruption to take place, do you not think so?
Finally, the members of the second group are the advocates of big government. They are better known as statists. While the first group is really a subset of statists, the former is not actually driven by an overarching philosophy unlike statists. The statists demand for larger government intervention in the market far beyond the issue of subsidies.
To the statists, I have only a couple of words: deficit smeficit, go fly a kite instead.
A version of this article was published in The Malaysian Insider.
