Tag: fiscal deficit

Categories
Economics

[2761] What if there was no expenditure revision?

The Prime Minister announced the government’s plan to slacken its 2015 deficit target from 3.0% of GDP to 3.2%. While it is an easier target, it is still a cut from the expected 3.5% last year. I think we can relax it further but the revision is in line with my sentiment although not fully. There are several measures which I disagree, especially after the PM mentioned the phrase “import substitution” but I will not go into that.

The budget revision involves a number of expenditure cuts and other, I guess, less orthodox measures.

But what if there was no cut to expenditure?

I have made a simple calculation showing how the deficit ratio would react based on changes in the NGDP and government revenue. The original 2015 budget had the NGDP growing at 9% while revenue increasing at 4.5% from 2014, as I have highlighted in yellow below.

20150120Budgetrevision2015Malaysia

I suppose I could add a range of expenditure cuts too, but a 3-dimensional table or chart makes my head spins without the proper software at hand.

Also, I think it is good to use those figures and compare it with historical ones, just for the context:

20141013MalaysiaDeficitNGDP

Categories
Conflict & disaster Economics

[2760] The deficit can wait

I have been supportive of the government’s attempt at closing the deficit. I do celebrate the significant fiscal progress made over the past five or six years.

In retrospect, it was easy to back the cuts because the times were generally good. After a recession in 2009, the Malaysian economy grew quite well almost every quarter and that made tough policies easier to swallow.

But times are changing and what was swallowed easily yesterday will be tough today. Those tough policies will be hard on almost everybody now if executed too religiously.

The situation has changed so fast that I feel almost nobody ”• at least as far as I can see in the financial market ”• still believes the original deficit target of 3.0 per cent to GDP for 2015 is credible anymore. It will be challenging to meet the target and if the government insists on meeting it anyway, something has to give and that something will be overall economic growth.

Growth here is not merely an economic figure appearing in someone’s spreadsheet. It is people’s livelihood which is at stake.

Partly in my effort to be pragmatic and partly from observing from afar the horrible European experience arising from the wrong timing of its austerity program, I have come to believe in having a counter-cyclical policy. We commit to tough reforms making the economy more efficient during the good times and then we give it a slack when things are not so sunny and cheery.

What I am saying here is that the government here in Malaysia should be flexible with its deficit target for the time being.

I sincerely believe we can afford to do so because we have done serious fiscal reforms recently. Petrol and diesel subsidies are no more after years of gradual cuts and we are finally implementing the goods and services tax after years of contemplating it. I think the long term trajectory from the initiatives has already set the right direction.

My only disappointment is that these reforms were not done sooner due to political concerns. Everybody was so concerned about their political prospect that they forgot or even ignored the country’s future. For months, the government went on autopilot and the subsidy cuts themselves were put on hold for quite some time as the government prepared for the 2013 general election. We lost valuable policy time and now the window is closing.

But what is done is done and perhaps, that is just the cost of maintaining a democracy, however flawed ours is. If we believe in countercyclical policy, we should now switch our focus from fiscal tightening to some kind of relaxation.

In fact, with this framework in mind we should target the deficit within an economic cycle instead of the Gregorian calendar and I think, again, with the reforms done, we should be able to close the gap in the long run.

And we ”• when I use the pronoun we here particularly, I mean the government; after all, we elected the government regardless whether we like those sitting in Putrajaya spending our money ”• do honestly have a legitimate requirement to spend this time around, which runs contrary to keeping the what seems to be an impossible deficit target to meet.

No, it is not about saving 1Malaysia Development Berhad ”• a beast which we will have to address ”• or paying thousands of ringgit for a set of screwdrivers, or even giving more free money to suspicious grantpreneurs and selecting winners in the economy. It is about helping fellow Malaysians.

Pictures of devastation from the recent floods are heartbreaking. As fellow citizens, it is our duty to lighten their burden and the government is our primary agent to do so. Not some political parties, not some NGOs, not some volunteers. It is good to see people helping out but our agent is the government. We pay taxes and we expect the government to provide the basic infrastructure that the country needs to go forward. It is the basic role of a government.

These infrastructures from water to bridges to schools in the east coast need repairs. We need to spend for the repairs and in many cases, for reconstruction altogether.

That spending would probably hit the deficit figures but it is for a good cause. The deficit can wait for another day.

Mohd Hafiz Noor Shams. Some rights reserved Mohd Hafiz Noor Shams. Some rights reserved Mohd Hafiz Noor Shams. Some rights reserved
First published in The Malay Mail on January 17 2015.

Categories
Economics

[2754] A history of fiscal deficit

I am sure you have seen this before but just in case…

20141013MalaysiaDeficitNGDP

And the surplus was not because of Anwar Ibrahim. It was something bigger than him. It was the Roaring 90s.

Just a short remark: the recession of the late 1990s was the worst Malaysia has ever experienced, but it is interesting that in terms of government finance, it was the recession of the early 1980s.

Categories
Economics Politics & government

[2682] Comparing manifesto-related fiscal deficit, sort of

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.

Mohd Hafiz Noor Shams. Some rights reserved Mohd Hafiz Noor Shams. Some rights reserved Mohd Hafiz Noor Shams. Some rights reserved
[1] — [Populist pledges weigh on Malaysia’s wallet, reports WSJ. The Malaysian Insider. April 30 2013]

[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]

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.