Category: Economics

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Economics

[2606] Dear The Edge, direct tax collection did not “soar”

Among all the local newspapers in Malaysia, I reserve my utmost respect for The Edge. Unlike other papers, it has critical analyses and is less susceptible to explicit political bias. The Star and the New Straits Times (the NST especially) are political hacks. Others like the The Sun which can be objective more than once are just not in the big league yet. As for the Malay dailies, well, I will hold my tongue lest I digress from what I intend to write here.

Notwithstanding my respect for The Edge, I am disappointed after reading its front page yesterday. In big bolded letters, the headline “Rise and rise of IRB”[1] painted the picture of soaring direct tax revenue but failed to give the proper context behind the massive increase. The headline is misleading because really, there was no soaring growth.

As mentioned in the article, direct tax revenue is expected to increase by nearly 60% in 2013 compared to 2010. To be exact, approximately 54%. That is the highlight and there is no context except the point about improved tax collection efficiency. I disagree with the point on improved efficiency and I will come back to that later.

I need to state why the highlight of “almost 60%” increase is the source of my disappointment.

Here is the proper context for the massive increase. In 2009, there was a recession and that hurt tax collection in general. In fact, in 2009 and 2010, collection was depressed. Collection only improved in 2011 as the economy fully recovered from a very global recession. You can see it from the following graph:

Some rights reserved. Creative Commons. By Attribution 3.0. By Hafiz Noor Shams

Note what happened in 2009 from the graph.

The following may show just how impressive the so-called almost 60% increase is:

Some rights reserved. Creative Commons. By Attribution 3.0. By Hafiz Noor Shams

Upon recovery, it is only expected that collection improved and such improvement should not be breaking news. It is a reversion to mean with respect to growth. It would be breaking news if there was no reversion to mean, i.e. revenue continued to be depressed.

And here is how the reversion to mean as far as growth is concerned is really unimpressive. Average growth of direct tax collection was only a mundane rate of slightly less than 7%. The rate is calculated from the last peak before the 2009 recession. Maybe, I am a little bit verbose. The last peak happened in 2008.

Why did I calculate it from the peak (and not from the trough)?

The trend before the recession appears to represent the business as usual trajectory. If there was no recession and the economy more or less continued to grow as it did prior to the recession, then that would represent the business as usual case (calculating from the trough as the article did is, to put it politely, wrong for the purpose of the article. Calculating from the trough will paint an excessively bright picture that is worthless in ascertaining reality. Most of the times, we want to know whether we are back on track, not how well we have grown from the depth of the recession. Point: You can have the economy growing by 100% from the trough and you can still be worse than the local peak before the recession. That particular growth does not overcome the total loss in output). Hold on that thought on business as usual as I address the article’s assertion of improved tax collection efficiency.

Remember the average 7% growth? That is based on the expected direct tax revenue in 2013 compared to 2008 base.

If there was improved efficiency, previous average growth should be lower than 8%. Improved efficiency must suggest better collection and somehow, better growth. Unfortunately for the hypothesis, past average growth was higher than 8%. Between year 2008 and year 2000, direct tax revenue grew at the average of 12%.

But would the 2000-2008 period not be arbitrary a pick?

Maybe and so, let us calculate the average growth from 1970 to 2008. The average growth rate was 13%. I took 1970 as the beginning because that is the earliest data I could get from BNM Monthly Statistical Bulletin and so, I hope that will dismiss any accusation of arbitrariness on my part.

So, it appears that the normal long run growth (a.k.a. business as usual) is something between 12% and 13%.

And what was the average growth since 2008? 7%. Yes, I am repeating myself.

If improved efficiency could be translated into improved average growth, then clearly there was no improvement and in fact, there was an efficiency loss in direct tax collection (I do not like the term efficiency as used here but I will let it slide).

But I am not making that argument about efficiency here. All I want to suggest as far as tax collection efficiency is concerned, efficiency is a non-issue. It is an insignificant issue. A short and simple analysis should have revealed that and clearly, The Edge team failed to do the necessary analysis.

Now, because the current average growth since 2008 is below the long run average, one must expect tax collection growth to be strong if reversion to mean (in terms of growth) is a reasonable assumption, and it is. It is happening after all.

Finally, the article sounded as if direct tax revenue had soared by 60% but the 2013 numbers are projected numbers. I do not doubt it will ”soar” when used in the wrong context. I just think it is important to not represent expectation as things that have happened. This is something that The Edge is not alone being guilty of misrepresentation.

Mohd Hafiz Noor Shams. Some rights reserved Mohd Hafiz Noor Shams. Some rights reserved Mohd Hafiz Noor Shams. Some rights reserved
[1] — KUALA LUMPUR: The mainstray of the federal government’s revenue over the last three years is from direct tax collection — mainly from individuals and companies — which has increased by almost 60%. Based on estimates of the federal government for 2013, the total revenue is RM208.65 billion, of which RM121.95 billion comes from direct taxes, a testament of the Inland Revenue Board’s (IRB) efficiency. [Rise and rise of IRB. Sharon Tan. The Edge. October 1 2012]

Categories
Economics

[2605] How well does the government project its expenditure?

After reading a number of commentaries in the market, in the Malaysian econosphere and various research houses’ research papers, I became curious of the accuracy if government projection with respect to its finance. I was also curious at how serious I should take the government’s plan to cut its expenditure.

So, here is part of the answer.

Below is the percentage deviation of actual total expenditure from budgeted expenditure all the way back to 2000. I obtained the budget data from various Economic Reports published by the Ministry of Finance and the actual expenditure from BNM Monthly Statistiscal Bulletin.

On average, the government underestimates its own expenditure by 8.6%. From the graph, it is quite clear that there is a unrandom negative bias in the projection. Even if you remove 2008 (which is an outlier, and potentially 2009 too), the average does not change by much.

Categories
Economics Pop culture

[2603] A theme song for our recession

If there was a theme song for every age, I think I would like this as the theme song of our Recession.

[youtube]OvA64O2LySc[/youtube]

Categories
Economics

[2602] 2013 Malaysian federal governmet budget is smaller!

The tabling of the federal government budget is still ongoing but the Economic Report for 2013 by the Ministry of Finance is already out. Here is where the projected GDP figures and government finance are available for the first time.

I think the biggest point about this year’s budget is government spending. In most years, the fiscal deficit ratio (fiscal deficit to nominal GDP) dropped because the nominal GDP grew and not because actual deficit was down. This year, government spending is projected to come down.

Operationing expenditure is projected to fall by 0.3% and development expenditure is projected to fall by 4.2%. Overall expenditure is expected to decline by 1.1%.

The drop in operating expenditure is projected to come mostly from a drop in emolument (the civil service, really) and subsidies. For most people, this suggests that there will be a large subsidy cut in 2013. Pensions and gratuities are also projected to come down. This is a signal that something right is happening in the overly fat civil service. But then again, money to the civil service grew massively in 2012 that the cut in 2013 is pale.

Having a declining total government spending is rare. Between 1975 and 2012, there were only four times when total government spending decreased: 1983, 1985, 1987 and 2010.

Being a libertarian, I might be happy with this particular budget. But as I have been warned, I should wait until it happens.

This also means one thing. With the projected drop in government spending, politically, election must be held early in 2013 or even in 2012. It will be hard to achieve the reduction if election is held very late up to the constitutional limit. The later the election, the more electioneering will there be.

Mohd Hafiz Noor Shams. Some rights reserved Mohd Hafiz Noor Shams. Some rights reserved Mohd Hafiz Noor Shams. Some rights reserved
errata — the peril of rushing. I made a number of mistakes in the earlier version of this entry, ranging from grammar to the numbers themselves. First, I had asserted that if the government stuck with the budget, it would have been the first time in ages that total government spending would decrese. While such year is rare, the last time that happened was in 2010. Second, I incorrectly calculated the overall expenditure growth rate.  I apologize for that and I have corrected those mistakes. 

Categories
Economics

[2601] A thought, or two, about federated and unitary states finance, and consolidated public sector finance

I have been doing some preparatory work for a report on the 2013 federal government budget. The budget will be tabled at the Parliament this Friday.

In the course of doing so, I have come to wonder if the comparison of budget deficit (as typically understood) across governments of the world is really fair. Specifically, I do not think it is fair to compare the fiscal balance of a federated state with that of an unitary state, especially if one is concerned with the health of the overall economy and not just the financial health of the government.

This suspicion came after I read the consolidated public sector account for Malaysia.

One reason for the suspicion is this: one way to measure the solvency of the government is to see if the government can finance its operating expenditure and pay all of its borrowings interest purely by its revenue. This is called the primary surplus/deficit or the primary balance.

The reason is that through this, the government can fulfill all financial claims against it without embarking on new investments that require further financing while providing essential services to citizens and others largely unimpeded. To put it in another way, for government finance to be sustainable, it should be able to purely finance its consumption through its revenue only, and not by borrowing further (this comes with the assumption the interest rate is above zero. If the rate is zero and below, well, borrow away).

Looking at the federal government, most of the times there were no problem. According to the latest Bank Negara Malaysia’s Monthly Statistical Bulletin, most quarters registered a surplus as far as the primary balance is concerned. On yearly basis, there have been surpluses since 1981 (the earliest data available in the bulletin) with the exception of 1987 and 1986.

But according to the consolidated account (the Treasury identified it as consolidated public sector account which includes the finances of the federal government, all state governments, various statutory bodies and all local governments), then there is a huge deficit to contend with. In fact, it is estimated that there was a RM35 billion primary deficit for the first half of 2012. In 2011, it was estimated to be RM30 billion.

A little word of warning: the numbers for the federal government revenue from the Treasury significantly differ from the ones produced in the BNM Monthly Statistical Bulletin. So, the comparison is somewhat off.

Even so, if the Treasury numbers are right, then the consolidated public sector account tells a very different story than the one we used to. This may suggest that the wider public sector may have a problem balancing its primary balance.

As far as comparing federated and unitary states is concerned, maybe only the federal and the state government accounts should be combined to allow for a truer comparison. Without the necessary adjustment, a federation may have better financial health than a unitary state only artificially.

Another thing about the consolidated account is that it tells us that in 2011, the public sector suffered from 9.9% deficit to nominal GDP. This is much higher than the federal government’s 4.8% deficit to GDP.

On the 9.9% deficit to GDP, the point of comparing the deficit to nominal GDP is to incorporate the idea that a growing economy allows for more fund raising by the government. More generally, it informs whether there is space in the economy to raise more money through borrowing. The deficit derived from the consolidated account suggests that there is less room compared to what is suggested by the federal government finance.