Categories
Economics

[2944] Run higher deficit, let the economy recover first

We are not out of the woods yet.

Yet, already there are individuals wanting to shift attention away from the economy towards government finance. The latest of these individuals are Najib Razak, who has the guts to talk about new taxes in the next two years when he is not paying his, with amount that would rival some of the taxes he proposes:

“I propose a temporary Covid-19 recovery tax package for two years. This, for example, will include a windfall tax, luxury condominiums development tax, stamp duty on transactions, inheritance tax, stock market trading tax, and higher personal income tax on high-income individuals.

“After two years, we can end this temporary tax.”

He also suggested that the government tax tech giants that have a presence in Malaysia, such as Amazon, Netflix, YouTube, Google, and Facebook, which have raked in a lot of profit, but have never been taxed here.

He said this should not impact consumers, and instead be levied on the companies’ profit margin. [Azril Annuar. Tax the rich: Najib proposes 2-year temporary recovery tax. The Vibes. September 15 2021]

While taxes in general will have to come, we cannot impose it as soon as possible and then pretend it will not jeopardize recovery the Malaysian economy is experiencing. Recovery so far has been weak. It has been so bad that the government are now celebrating base effect. Such is the quality of our leaders today.

From the look of it, 2021 GDP will likely still be smaller than the one in 2019. This just shows the incompleteness of our ongoing recovery. Unemployment is another measure to worry about, with the latest rate (July 2021) remains stubbornly high at 4.8%, well above of the 3.2%-3.4% range recorded during the pre-pandemic year of 2019. The incoherent management of the pandemic has exerted additional costs to the economy.

Here, we still need to prioritize the overall economy over government finance. While both are important and both are linked, the government has more room to run a loose fiscal policy more than families as well as small and medium-sized businesses. As I have mentioned before, the only barriers to greater borrowing are legal restrictions and there is nothing ‘economics’ about those legal restrictions. Furthermore, borrowing costs are low, with yields on 10-year MGS at 3.30%.

For this reason, it is better for the government to keep their hands off those onerous tax levers and instead run higher deficit ratio (or stay at the current ratio). Allow the economy to grow first. Let the economy recover properly before pushing of any kind of taxes. Once the economy comes, the taxes will also come too.

Only once the economy has returned to its pre-crisis level and trend can we begin to introduce new taxes. In the meantime, while the economy is still below pre-crisis conditions, other non-punitive measures should be introduced first.

Tin identification number (TIN) is one of those measures that will improve transparency in the market without imposing new tax burden to the economy. TIN would require all persons and entities be assigned a unique identifier, which must be appended to any transaction (like the opening of account, transfer of money, purchase of large assets like homes and cars). This will allow the tracing of money better. A little bit like the VAT/GST, but without the tax. Once the system is stabilized, data from TIN could be used to better design new taxes that are needed, including some of the taxes Najib mentioned. Things like wealth tax for instance need data on data on wealth in Malaysia is horrible. TIN can improve data collection by leaps and bounds, which will assist in designing a good tax.

TIN was in the works under Pakatan Harapan as part of their reform program (unfortunately, it was opposed by Muhyiddin in 2019 over concern the opposition would attack the move as a new tax. That was not the only reform that was sabotage by multiple people, which hobbled the overall institution reform efforts). One good news is that there is a good chance the TIN would finally be instituted beginning next year, based on signals given out by the Ministry of Finance.

I would like to reiterate that sequencing is important, and Najib ignores that factor.

The timing and sequencing inappropriateness are not the only concerns here. The other is its temporary nature of the proposal. Najib wants those taxes to last only two years. This is detrimental to longer term attempt at reforming the taxation regime.

Unlike Najib, I am in favor of having a 10-year or 15-year tax reform program, which makes permanent some of the taxes Najib mentions. Easy measure like TIN would happen within 2-3 years. Making the income tax more progressive is another easy move that could happen within 5 years, for instance. This longer-term plan solves several problems (underfunding of public sector, the need for off-budget financing, low taxbase, unfair treatment between labor and capital income, the growing digital economy relative to brick-and-mortar model, etc) more permanently while taking into account the state of the economy.

Having temporary tax measures as soon as possible ignores the state of the economy, and does not address some of the fiscal (and economic) challenges faced by the government.

Categories
Books & printed materials Fiction

[2943] From Afghanistan to Algeria

These days, I generally prefer reading non-fiction to expand my knowledge. So far, it has been mostly history, mixed with a little bit of politics and economics. And it has been Malaysiana-heavy. So, I thought I needed a break from this and picked up some fictions for a change.

I recently finished reading two of them. One was The Art of Losing by Alice Zeniter, which is set in Algeria and France. The other is Khaled Hosseini’s The Kite Runner, set in Afghanistan, Pakistan and the United States. Both have the protagonists having lost their country to armed conflicts, and ended up as refugees in foreign but adopted lands.

I enjoyed them. And I thought I learned a little bit about Algeria and Afghanistan.

After completing almost every chapter, I found myself consulting Google Map and Wikipedia trying to comprehend the context sets by the both authors in their respective work. In The Art of Losing, I was attracted to paragraphs of Hamid the little boy remembering Algeria as Algiers, the white city on the coast of the Mediterranean despite only passing by the capital and having not living there, ever. He and his family were fleeing the country, and hectically catching a boat in order to cross the sea to get to France. That was the last time he saw Algeria.

Zeniter’s description of Algiers made me curious. A white city by the Mediterranean. That made me read more about it and searched for pictures of the city from the sea. On Google Map with its 3D feature, Algiers looks as described: a city of layers of white 3-4-5 storey buildings lining up the Algerian coast. And I did not realize the northern part of Algeria was quite green. When I thought of northern Africa, I could only think of mountains and deserts. I had extrapolated wrongly.

There is a scene in The Kite Runner where Hassan and his father were escaping Taliban-ruled Afghanistan. They were smuggled out of the country in a truck through the famed Khyber Pass. They needed to reach Peshawar in Pakistan that lies on the eastern end of the pass. I watched a couple of Youtube videos to understand the geography of the pass and comprehend the difficulty of the journey.

I have never been to either country, although I think I have flown above Afghanistan before en route to Europe several times. From what I could make from high up in the sky, the Afghan terrain is absolutely rugged.

But between Algeria and Afghanistan, I know the latter more. I was in the United States when the September 11 Attacks occurred, and Afghanistan was a constant feature in American politics for much of my time in Michigan. The Kite Runner makes reference to the US invasion and occupation of the country. More than that, the characters in the Kite Runners celebrated the fall of the Taliban:

That December, Pashtuns, Tajiks, Uzbeks, and Hazaras gathered in Bonn and, under the watchful eye of the UN, began the process that might someday end over twenty years of unhappiness in their watan. [Khaled Hosseini. The Kite Runner. Page 316. 2004]

People have been telling me The Kite Runner is an emotional book. Some cried. I did not, but I felt some sadness upon reading the sentence above, knowing the Taliban has returned, twenty years later. I personally feel the US leaving Afghanistan is a mistake. But never mind.

Algeria is more of a mystery to me. I know where it is located: sandwiched between Tunisia and Morocco. know the capital, and I know it is a Muslim country. I recognize its national flag. I may know a little bit about general classical history involving the Romans. But little else. Ask me about modern Algerian history and I will draw a blank. I have an Algerian French friend that I have not met for a long time, but I was not about to bombard her with questions. So, I read additional material online about modern Algeria, about the FLN that fought for Algerian independence and other relevant topics.

I have a copy of Tournament of Shadows by Karl Ernest Meyer and Shareen Blair Brysac sitting on my book shelf. The book would tell me about Afghanistan much more than The Kite Runner could. But the non-fiction is 700-page long, and has been left unread and untouched for more than 5 years. Moreover, I do have a long list of other books I want to read. So, until the day I start reading that thick book, The Kite Runner (and The Art of Losing) will do.

Are the two poor substitutes to non-fiction as far as learning goes? Maybe, but I enjoyed them thoroughly.

Categories
Books & printed materials Personal

[2942] How’s your book?

The most common question I get these days is, “how’s your book?”

I think it is done. It is at the really, really tail end as far as writing is concerned. I have been re-reading it several times to keep myself happy with the arguments I made. Yes, there are several more feedback to come, and forever reading papers and books to convince myself of the stuff I wrote. But really, I don’t think I will make big changes to the document anymore.

Still, I keep editing it. I have lost track how many rounds of edit from front to back I have done. I keep telling myself, I am editing the manuscript closely to make it perfect. For this latest round, I am editing the penultimate chapter.

But maybe, I am forever editing it because I do not want it to end. After 5 or 6 years working on it, it has become a routine I am comfortable with. I do not want to break the routine.

Such a perverse incentive.

Categories
Politics & government

[2941] Ismail Sabri does not deserve 100-day honeymoon

In his speech revealing the Cabinet line-up, Prime Minister Ismail Sabri Yaakob said each ministry had to prove their early achievements within 100 days. He said that after stressing the Cabinet needed to have short and long-term plans.

That 100-day period might have been acceptable under normal circumstances. And it might be acceptable, if the Cabinet had a new line-up.

But this Cabinet is the same as the last one that failed miserably, with minor changes inspiring no confidence. The clueless Minister of Education is still the same. Ditto for MITI, and almost all other ministries. One improvement might be the promotion of Khairy Jamaluddin to the Health Ministry, but this could be negated by the silly switch: the ridiculous former Health Minister now takes over Khairy’s old portfolio. The health ministry under Adham Baba had been the source of dark comedy since March 2020, and only god knows what the Ministry of Science, Technology and Innovation has in store now. Good luck all the technologists out there.

So unchanged the line-up, that it is impossible to divorce the failure and incompetence of the previous Cabinet from the new one. The Prime Minister himself is the source of the current Covid-19 wave with his lack-of-quarantine mistake.

The largely disappointing line-up does not deserve space to breathe. This government does not deserve 100 days. They should be judged now. They must be put under pressure.

For heaven’s sake, there is an ongoing pandemic and we just do not have 100 days.  Thousands have died. If this government needs 100 days more, then we collectively as Malaysians have made a mistake and will pay a heavy price for it.

Categories
Economics Politics & government

[2940] Immediate fiscal agenda for the new (old) government

The next finance minister is unlikely to be thinking too far ahead since election is just less than 2 years away. It is short time to set any long-term agenda. There will not be enough time for learning and there will not be enough to start implementing. For the most parts, the new finance minister will likely be carrying on with established policy until the general election is called. Even if he or she dares introduce new long-term measures, there is a good chance it would be overturned once a new minister takes the Level 12 office in the Treasury Building in Putrajaya after the election.

Nevertheless, given the situation we as a country are in, the 2-year period is important. I think there are two items of concern during this period that could affect the long-term fiscal policy of the country:

  1. The 2023 fiscal cliff
  2. Fiscal consolidation.

The Perikatan Nasional government that Umno was committed to a quick fiscal consolidation exercise that necessitates a 2023 fiscal cliff and I think there is a question whether the same policy would be taken up.

What is the 2023 fiscal cliff?

To handle the Covid-19 crisis, the government changed certain law that allowed it to practically have a current deficit. Without the changes, the government’s current balance must always be in surplus, or in balance. In other words, total revenue must exceed all operating expenditure. Here is a restatement of: the government can only borrow for investment purposes (or in public sector jargon, development expenditure).

More specifically, the government created a Covid-19 fund that officially neither operating or development expenditure (but in fact, mostly operating expenditure). It was a necessary accounting trick that bends the law. Revenue dropped substantially during 2020 and 2021 relative to previous immediate years, while the need for spending rose dramatically. If the laws were not changed, we would have faced a worse version of this already bad recession. Even so, actual spending done was insufficient (the comic I drew below) due to the then policymakers’ naïve belief in V-shape recovery, and failure to adopt precautionary approach. This was the costly mistake of Budget 2021.

This fund is set to expire on December 31 2022. Upon expiry, the normal way of doing things—current balance cannot in deficit—becomes the rule again. This means any borrowing must be repaid (or from what I am seeing, I suspect it would be absorbed into development fund despite a large chunk of it is not developmental in nature. The 2020-2021 RM21 billion drop in Covid-19 is almost as large as the sudden RM19 billion increase in the corresponding development expenditure).

Based on Ministry of Finance publication, the fund had RM17 billion in it as of end-June 2021. It is likely higher given additional spending announcement made during the quarter. Expiry would mean (assuming it is not reclassified lock, stock and barrel as development expenditure) paying off that RM17 billion to meet the current balance requirement. It could also mean a percentage point worth of government spending unmade if it is paid off. That RM17 billion is roughly equivalent to a percentage point of 2021 deficit ratio.

So, if the fund expires in 2022 and the borrowing gets paid off (instead of reclassified as development expenditure), there will be a fiscal cliff: a stark drop in spending, which would take some steam off GDP growth, and more importantly, recovery.

Remember, economic recovery is not merely about growing again after a recession. Neither is it just about returning to pre-crisis level (which by the way, we are a risk of not doing so in 2021). A comprehensive recovery is one where current level would match the level it would be if no crisis had happened. Our insufficient spending had left the gap big, and catching up with that pre-crisis level and trend is hard.

Inappropriate time for fiscal consolidation

This is on top of fiscal deficit-to-NGDP ratio that the government might target. It is unclear now what the deficit ratio target is. Former Finance Minister Zafrul Abdul Aziz had stated that the figure for 2021 after accounting additional unplanned Covid-19 spending could rise to 6.5%-7.0% of NGDP, from the unrealistic Budget 2021 projection of 5.4%. It is unclear if this accounts for lower-than-expected GDP growth. If it does not, it will go higher.

If the new government (if it could be called new given the composition is… the same) insists on fiscal consolidation still, there will be pressure to let the Covid-19 fund expire while cutting services to keep spending under control.

Two immediate agenda for the next finance minister

Malaysia is clearly behind the curve by a big margin in terms of economic recovery. Getting recovery on track is the immediate concern. Unfortunately, as much as I hate to say it, the government is likely the main driver of growth in these times.

The government can start playing that role properly by first, extending the expiring date for Covid-19 fund and second, postponing any fiscal consolidation exercise. The second can be done by maintaining deficit ratio high, possibly in the range of 6%-8% in the next several years.

Ideally, this should followed by a long-term agenda of tax reform to increase government revenue, which the Pakatan Harapan government, and the previous Perikatan Nasional government, as I understand it, was willing to go ahead with parts of it.