Tag: fiscal deficit

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Economics Personal Politics & government

[2572] The bitterness of a financial conservative

I handle my finances conservatively. I spend very little for someone my age and my profile. In fact, I impose a sort of limit on my spending. I am conscious of it and get mildly nervous if my total spending grows too fast even when I can more than afford it.

I probably do buy too much insurance and I do save or invest a large part of my earnings. My credit card service provider probably hates me for having to finance me without getting the chance to charge me interest too often too much.

I can afford to save a lot partly because I do not have too many financial responsibilities.

The other factor behind my saving habit has a lot to do with my upbringing and education.

As a very young school kid, I never really needed to spend too much. Canteen food was clearly subsidized. I rarely asked my parents for expensive items.

The more important thing was that my parents did not give me a generous allowance when I was in primary school. My pocket money was very little. Not that I needed too much anyway but at that age, the limited pocket money effectively curbed any spending impulse I might have then. I was always mindful of my limits. It trained me to be financially prudent.

The same was true as I attended a boarding school in Kuala Kangsar; I rarely had expensive lunches or dinners. Meals were again subsidized and there was rarely a need to spend lavishly in a small rural royal town in Perak. While my allowance did increase, it was definitely less than that of my more well-off peers. I lived spartanly then. This continued during my undergraduate years in America. Formal lessons in economics further solidified my attitude towards personal finance.

During my time living abroad, I did learn to enjoy the finer things in life, but I rarely, if ever, overspent. I rarely overspend still.

So, I can say with certainty that I live by the morality of a financial conservative very strictly.

I think I can say without too much pretension that I am an economist. I understand the various reasons for fiscal deficits. Some of the causes for deficit are justifiable, and some are not. I do understand how the government is not a household in a way that the government can do certain things beyond typical household economics, the point which many defenders of the roles of government in society rush to in deflecting criticism against many facets of government spending. After six years of education in economics, I do not think I need too much schooling in that matter excessively.

Rather, put the economics aside and understand the psychology instead. Understand the worldview of a financially conservative taxpayer.

The state of federal government finance does not impress a person like me. Deep inside, I do feel something along the lines of ”if I can do it, why can’t Putrajaya?” It is a dismissive attitude towards the federal government. It is a damning judgment against a failure to adhere to certain brands of secular morality.

It is a kind of sentiment that is almost always in the background. It is the ever-present demand for financial discipline. Putrajaya violates this conservative morality so blatantly. Each violation accumulates further moral condemnation.

What further justifies the dismissive attitude is the inevitability that the indiscipline — add in the irresponsible economic populism that has happened throughout the year and earlier — will one day, one way or another, result in higher tax on the conservative, and everybody else, sooner or later. Whether I like it or not, I, will have to finance the fiscal indiscipline of Putrajaya.

That fuels my bitterness towards Putrajaya.

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 Malaysian Insider on July 26 2012.

Categories
Economics

[2561] What inflation?

Kapil Sethi has a really odd piece yesterday in The Malaysian Insider yesterday. It started pretty alright by discussing crime but the strangeness began when he tried touch the realm of economics:

At a deeper level though, this desperation points to a changing politico-economic environment that is forcing such radical shifts in behaviour. When there is a perception that well-connected people are getting obscenely rich and are spending their wealth conspicuously and extravagantly while everybody else is feeling the pressure of stagnating incomes, greater indebtedness and inflation, feelings of anger and desperation seem only natural [Crime and the economic divide. Kapil Sethi. The Malaysian Insider. June 19 2012]

In short, he tried to link crime rate with fiscal profligacy.

I do not intend to discuss the strangeness of his article because it messes up my mind. Suffice to say, I disagree with what he wrote about the link. All I want to highlight further is this paragraph of his:

Increasing inflation, higher interest rates and consequent high default on outstanding loans given stagnating incomes could be an outcome of profligate government spending rife with ”leakages” already seen in other economies, notably Greece.

Unfortunately for him, here is how Greek inflation looks like over the past 10 years or so.

I do not see anything special about the inflation rate, save those in 2008 and 2009 which were due to something else entirely (commodity prices boom and the subsequent recession and so-called recovery).

Increasing inflation? If you flip the chart upside down, then yes, maybe for the past two years.

Categories
Economics

[2462] With a fail-safe, no reason for supercommittee compromise

The failure of the supercommittee to agree on the distribution of US budget cut is not much of a news. It has been expected. Leaks of how difficult it was to reach a common ground made it way to news reports .

More importantly, the impact of the failure is not too big because the fail-safe automatic cut is going to happen anyway. Both the unsurprising result and the minimal impact of the failure are signified through the low level of attention given by the media on the issue. Focus on the failure is not nearly as intense as focus on the earlier downgrade of US debt by S&P’s.

In retrospect, the fail-safe mechanism is a brilliant political maneuver. It was a result of uneven bargaining where deficit hawks, perhaps irresponsibly, held the US government at random and squeezed as much juice as possible out of the situation. Default or cut it. It was a Hobson’s choice: default was out of the question. And now here we are with the fail-safe mechanism.

While the fail-safe mechanism now ensures the implementation of the USD1.2 trillion budget cut over the next 10 years, it may have also contributed to the failure of compromise. If the members of the supercommittee — whom belongs to competing political parties and we know they serve their political bias — know the cut is going to happen anyway with its distribution already apportioned, why compromise when a compromise angers your voters base?

In a way, the supercommittee is really a lame duck committee. No incentive to action with every incentive to do nothing.

Categories
Economics

[2445] Deficit hawks prefer deficit/revenue to deficit/GDP

As sovereign insolvency hogs headlines around the world, so heightens the popularity of deficit-reduction agenda. No more only wonks make the noise. Some men in the streets are echoing the slogan of economic conservatism as well, filling the lonely space sitting not quite centered in the Malaysian political spectrum.

One ratio has been brandied around whenever there is a discussion on fiscal deficit: deficit-to-GDP.

In the first reading of the federal budget as well as in the Economic Report published on the same day, the government highlighted the ratio to show that the government is pushing the deficit down earnestly. I myself used the ratio to suggest that the government could have a lower deficit if it was not for the slew of dishonest populism the government is engaging in.

The ratio can be misleading if you are unfamiliar with it. It is a simple ratio, yes, but it is deceivingly so because of its denominator.

Assuming the projection of lower ratio for next year will be achieved, the absolute deficit will not actually fall as dramatically as the ratio suggests. In 2010, 2011 and 2012, the actual and the projected absolute deficit are RM43.3 billion, RM45.5 billion and RM43.0 billion respectively. In terms of deficit/GDP, -5.6%, -5.4% and -4.7%. You can immediately see the relationship between absolute deficit and the ratio is not one of straight line. From 2010 to 2011, the absolute deficit is expected to increase but the ratio is expected to fall. From 2011 to 2012, the absolute deficit is projected to fall modestly. Modest is not an adjective to use to describe the ratio in the same period however.

What reduces the ratio is not so much the reduction in absolute deficit but the increase in GDP. When the increase in GDP overwhelms the increase in deficit, then the ratio will go down.

For this reason, I prefer a more down-to-earth ratio as typically used in business. I prefer the deficit-to-revenue ratio to deficit/GDP. (In fact, if small government is a concern, the absolute deficit figure is a better measure although here, one has to be careful of the context. Absolute figures are important but there are limits.)

In business parlance, it is the net loss margin, if I am not mistaken. This ratio provides a clearer picture of any deficit-reduction effort and the state of government finance than the deficit/GDP ratio, which is meant to be more macro in nature by too much.

One may protest in defense of deficit/GDP, stating that higher GDP translates into greater revenue to the government. That protest will not go far because the positive correlation between GDP and revenue is imperfect. In the case of public finance, GDP is only a proxy to revenue. Why use the proxy when we can use the actual thing the proxy tries to track?

Deficit/GDP has its uses and those uses are mightily useful. I am not going to elaborate that. But if you want to actually reduce debt, then deficit/revenue is the proper metric to use. Deficit/revenue delivers the message of deficit-reduction and its progress—or lack of it—more effectively than the other ratio.

Categories
Economics Politics & government

[2442] Hypocrisy hampers deficit reduction agenda

If one throws a dart randomly at those pieces of paper pinned on the wall, there is a good chance the dart will land on a handout provision. Those papers are the 2012 Budget.

The Budget, as tabled by the Najib administration, is an election budget. Civil servants, teachers, the police force, the armed forces, pensioners and others will get their share regardless of justifiability.

Meanwhile, the subsidy liberalization program that the Najib administration was so gung-ho about earlier has taken a back seat, half-baked and emitting a stench called hypocrisy. Idris Jala, a man who unproductively exaggerated that Malaysia would go bankrupt if the government expenditure continued to rise, now praises the Budget of goodies.

Such is the loyalty of some men to ideas and principles. The wind blows and the mind changes. There is no principle to stick to because only political convenience matters. Never mind the contradiction and hypocrisy. Voters have a short memory span. Give them money and they will go gaga. It is all about winning elections, not honesty and consistency.

The financial position of the federal government could be in a better shape if the administration had the necessary honesty and consistency instead of bending backwards to accommodate the populism monster.

Without the monster, the fiscal deficit for year 2012 — the Najib administration projects to be 4.7% of nominal gross domestic product (or RM33.8 billion in absolute terms) — could be lowered considerably. It could possibly go down as far as 3.7% of nominal GDP if all the subsidies, one-time cash transfers and other election-related handouts are flushed down the drain.

Admittedly, the drastic reduction will be a shock to the system that none might want to experience amid the present global economic uncertainty.

Yet, in times of uncertainty, it is only prudent to save for rainy days even within political needs. This is doubly true given that regardless what has been said and done about the importance of domestic demand, external demand is still wildly important to the domestic economy.

A number of analysts have already voiced out that the government’s revenue figures are too optimistic for a pessimistic world. That is all the more reason for observers to be conservative with the federal government’s finance.

The fiscal deficit can be brought down still lower even with political considerations in mind. Removing the RM3,000 one-off gift to 4,300 individuals, another RM500 one-off transfer to an expected 3.4 million persons and the KAR1SMA program that will cost RM1.2 billion off the Budget while keeping the bloated subsidy regime intact, the deficit for the year 2012 could stand at 4.4% out of nominal GDP instead of the higher projected 4.7%.

One could argue that these programs are welfare enhancing, hence they deserve to be written into the 2012 Budget. In order to forward that argument however, one has to believe in it first. Honesty is required.

Unfortunately, many of those within the government whom now say these are caring measures are exactly those whom accused these same measures of being irresponsibly populist. This suggests one thing. Their only moral compass involves one question: where did the idea come from?

If it is from across the aisle, it is destructively populist. If it comes from their side, the same measures are caring.

That is not a sincere moral system, for the currency is political convenience. The slogan is ”win the election and forget anything else.”

If honesty were of any value, these programs — regardless of whether they are labeled populist or caring — should have given way to a deficit reduction agenda. With honesty and consistency, the federal government would have a smaller deficit, so that there would be less taxation for all of us in the future.

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 Malaysian Insider on October 10 2011.