Category: Economics

I am curious at some of the projected fiscal deficit figures which have come out from the internet. A number of them are fanciful.

One that I have read has the deficit under Pakatan Rakyat manifesto rising to close to 12% of nominal GDP while BN would be as low as 4%. The 4% figure is really the number that is stated in the 2012/2013 Economic Report as published by the Treasury for the 2013 budget back in September 2012. This number was published much earlier than 2013 BN manifesto and I doubt the 4% incorporates most if not all of BN manifesto. So, citing the 4% is misleading. In any case, I have written how that 4% in fact is increasingly an incredible figure. I have in fact wrote about this at work as early as October 2012. It is just common sense if you know your stuff and have been monitoring government finance for some time.

First, I have a gripe on some of the numbers. Many projections appear to be based on 2012 nominal GDP figures. Obviously, any ratio based on that number will overstate the deficit ratio since the 2012 GDP figure will very likely be smaller than the 2013 GDP figure.

Second, some take the whole manifesto expenditure and lump it up in just one year when it is clear that many of those spending will be distributed across multiple years. Naturally, you will get a humorously humongous number if you do that.

So, I am annoyed. And to disprove those numbers, I need to produce one of my own.

I hate to disprove Syed Hussein Alatas but I am lazy. I am taking manifesto expenditure figures estimated by The Malaysian Insider and comparing it to Treasury’s 2013 nominal GDP figures. I am not fully convinced of the numbers estimated by TMI but like I said, I am too lazy to produce my own estimates. After all, these are numbers for my blog. If it were for work, I would be more diligent. So, the TMI is the best I have. In my defense, the TMI numbers do not suffer from the two criticisms I have listed down.

TMI has it that BN manifesto in the first year would cost RM12.5 billion while PR’s to cost RM25.6 billion. I do not know the assumptions behind it but I am taking it in good faith.^[1]

The Treasury in its Economic Report projects the nominal GDP for Malaysia in 2013 to be slightly more than RM1.00 trillion.^[2] The Treasury also projects a fiscal deficit of close to RM40 billion in 2013.^[3] So, the base case has the fiscal deficit as 4.1%.

Taking a simple view that all manifesto expenditures are unaccounted for in the 2013 fiscal deficit, that would mean BN manifesto would increase the deficit to 5.4% while PR manifesto would push it to 6.7%.

As you can see, the numbers are less alarming than what political hacks all around have been brandishing. That is not to say those figures are acceptable and I am sure Fitch, S&P and Moody would stand up and yields to spike a bit but it is not the end of the world.

Now, the definition of first year is problematic because the winner of the election will have only about six months to implement their manifesto in 2013. Furthermore, the expenditure for 2013 has been set, notwithstanding possible additional unbudgeted spending that may come later in the year. Furthermore, the six months of 2013 will likely be months of firefighting for both sides.

Because of that, it is probably better to look at the deficit number in 2014 instead.

Now, let us say that the nominal GDP in 2014 would grow at its 2011-2013 growth average (inclusive of the 2013 projected figure), which is about 6.6%. That suggests the nominal GDP in 2014 would be close to RM1.07 trillion.

Let us also assume that the deficit stays the same at RM40 billion however unlikely that will be.

So under a base case scenario before accounting for manifesto spending, the 2014 deficit-to-nominal GDP ratio will be 3.7%.

Accounting for manifesto spending, for BN it might be 4.9%. For PR, it might be 6.1%.

Now, PR manifesto cost might be slightly overestimated. This is especially so because the TMI figures is a gross number. PR will likely institute open tender system more widely and that may reduce overall expenditure by a bit.

As for BN estimate, it is likely slightly overestimated given the base case because I would think some manifesto expenditure would have been included in the budgeted expenditure. Furthermore, some the MRT spending is a kind of contingent liability expenditure: it is “off the balance sheet”. It is just not included in the official deficit calculation.

And the revenue side has not been considered yet. But I am not going to do the revenue projection. After all, the purpose of this entry is to show that it is not the end of the world.

There is just too much uneducated fear mongering and I hate that.

  

[2] — [Gross National Income by Demand Aggregates. Economic Report 2012/2013. Malaysian Treasury. Accessed May 1 2013]

[3] — [Federal Government Finance. Economic Report 2012/2013. Malaysian Treasury. Accessed May 1 2013]