Tag: fiscal policy

Categories
Economics Politics & government

[2751] When should we cut fuel subsidy?

Ten months into 2014, I have now resigned to the fact that my projection for the annual inflation rate in Malaysia is too high, with the actual rate being relatively benign. The reason I had put it so high — it was in the region of 3.5%-4.0% compared to what it would likely be, which is 3.0%-3.5% — was that I had expected a drastic subsidy cut early on. It did not happen until yesterday. Even yesterday’s cut is not enough to salvage my projection. I have of heard drastic, crazily complicated plans to revamp the subsidy system that would definitely help me be right, but that has either been postponed, or canceled. While I like to be right, I hope the convoluted system will be canceled. I hope the government would just stick with subsidy cut-cash transfer policy.

Politically, subsidy cuts are always a hot potato. It attracts criticisms from a whole lot of people.

Me? While I have criticized certain cuts from time to time, I am generally supportive of it for various reasons. I have been a long-time supporter of transforming subsidies into cash transfer. This time around, I do not have much reason to oppose the cut. Government influence, at least from the GDP perspective, is coming down, suggesting less government spending with the wider economy in mind.

So, I think I would like to engage on two criticisms directed at the recent cut. One questions the cut on the basis that crude oil prices are coming down. Another goes, subsidy cannot be cut until there is a viable public transportation system in place first.

On oil falling prices, I have said it in the past and one person has brought it up on Twitter (where I spend most of my time these days neglecting this blog, my column, my book project … and work… maybe by just a bit), that the best time to eliminate fuel subsidies is when prices are low, like right now. Acting when prices are low is acting from a position of strength and not out of desperation. If the argument that says we should not cut subsidy when prices are falling down is a good one, then when exactly should we cut it?

Is it never?

If the answer is not never, consider the counterfactual. If prices are higher, would that be the best time to cut subsidy then? Under the scenario of the rising prices, the effect of subsidy cuts on consumers and the economy at large would likely be greater than when cutting it when prices are low, because at that time, the situation would have been more desperate and would probably demand steeper cuts. There would likely result more shocks to the consumers that make the pain of higher cost more acute than it should be. As I have written on Twitter in a snappier way, “[you] criticize the cuts because oil prices are coming down. If prices were going up, would you be happy with bigger, more desperate cuts?”

From government finance perspective, I think cutting it earlier makes more sense. It means more saving for the government to finance other stuff earlier. If we are to wait for the government to cut subsidy only when prices are rising some time in the future, then the saving would probably be lower. The saving can finance the cash transfer program, among others.

Besides, a responsible policymaker wants a countercyclical policy. You do stuff that are painful but necessary during the good times, not during when times are bad. Look at the effect of austerity. The criticism of European austerity is exactly because of the poor timing of its austerity program.

On the point that we should wait until the public transportation system is good, I think this is a costly wait-and-see game. It is also partly a chicken-and-egg issue.

I label it as a wait-and-see game because the last MRT line is scheduled to only be completed by 2020. Keep in mind that construction on the two other lines has not started yet. Even then, I am unsure the public transport system would be reliable with comprehensive coverage. Do we want to keep the subsidy regime running until we are completely sure the transportation system is completely up and running in donkey-years’ time? That is a lot of money, never mind who knows what will happen with crude oil prices until then.

I also box this particular criticism against the cut as a chicken-and-egg problem. I would even argue it is a case of Catch-22. We need the money to invest in public transportation, but we do not have the money to do so if we keep up with the subsidy regime. We need to break the loop and not engage in such mind-numbing logic. At the very least, the cut in the subsidy bill and in the deficit ratio could help bring yields on government debt down, allowing the government or the relevant government-linked bodies to borrow at a cheaper rate to fund infrastructure project.

“But,” you say, “we are going to have the GST!” Yes, but I think every saving helps. “But,” you go on, “what about corruption-wastage-leakage in government spending? Sure, I share your concerns there but I think that requires some political changes but that requires some effort. In the meantime, until that happens, it should not prevent us from doing other stuff. It is not a mutually exclusive problem and it is not a sequencing problem either.

Ultimately, I see the argument on public transportation as one that prefers to do nothing.

Categories
Economics

[2681] Government debt cut reduces borrowing cost in the economy

Here is an interesting paragraph which describes how a cut in government debt can lead to lower borrowing cost in the economy:

A decrease in the supply of government debt has forced some money fund managers and cash investors to scramble for alternatives. Higher demand for commercial paper, repurchase agreements and other short-term private debt has knocked down borrowing costs on Wall Street. [US expects to pay down debt in Q2 for first time since 2007. Reuters. April 29 2013]

How about that? A clear crowding out (or rather, crowding in) effect between the public and the private sectors.

Categories
Economics Politics & government

[2679] An Iron Lady to stop populism

Democracy by far is the most respectable way a society can govern itself. That, however, does not mean that democracy has no weaknesses at all. As Winston Churchill is often quoted, “democracy is the worst form of government except all the others that have been tried.”

It is the best that we have after thousands of years of experimentation. Populism is the very essence of democracy. The good thing about that is that it helps ensure the power of the day must always come back to the people if they want to renew their mandate.

Unfortunately, populism is probably the worst feature of democracy as well. That is so because populism can bring about irresponsible policies that can be costly in the future. Everybody loves having a good time but nobody likes to be there for the clean-up.

We saw that in Greece when the government spent everything that it had and more to make its people happy.

The economic populism we saw there is not the only cause of the Greek sovereign debt crisis but it was a major contributor nonetheless. When the debt crisis finally came about and it was time to tighten the belt, the country was up in arms.

And who can forget, in a humiliated and desperate pre-World War II Germany, Adolf Hitler was popular. That populism later brought devastation that no one had seen before.

Greece of recent times and Germany before World War II are extreme examples of populism gone wild. But it is still a cautionary tale for all to bear in mind: there is always cost to populism.

In the late 1970s, Margaret Thatcher was elected as the prime minister of the United Kingdom. She was no friend of populism. She swam against the current ferociously. “The lady’s not for the turning,” as she once said in response to increasing opposition to her policy.

She was adamant in changing the way of doing things to push the UK national economy forward and out of the doldrums. In her mind, there was too much government in the economy and the private sector played too little a role.

The most important thing of all is that she succeeded in revitalising the economy of the UK. She did the job she set out to do even when it cost her job.

Her determination in pursuing her policy shocked her colleagues. Fearing that they might lose the election, they turned around and gave her the boot.

She died earlier this week at the age of 87. The vile comments that followed the news of her death only strengthened the idea that she was not very popular.

At the very least, she was divisive. But whatever one thinks of her, she took her responsibility to heart and she did not flinch. As Malaysians go to the polls, perhaps it is worthwhile to reflect on the resoluteness that Thatcher showed.

This is especially so when both sides of the Malaysian political divide are engaging in populism.

Both are promising to either increase subsidy or cash transfer in hope of winning the general election. To make the matter worse, both sides promise to cut taxes even when their promises if implemented will see government expenditure rising.

The continuing economic populism cannot be good for the health of public finance. Sooner or later when the party is over, somebody will have to pay for that. The path of economic populism is ultimately unsustainable and somebody will need to hit the brakes.

Fortunately, Malaysia is still at the stage where we can hit on the brakes gently. Government finance is still at a respectable level. There is no need for the harsh fiscal austerity in practice in Europe as European economies struggle to grow. But the leeway that Malaysia enjoys cannot be true for too long if economic populism goes on.

The responsible side will be the one which will hit on the brakes gently. The responsible side will be the one that goes out promising a vision that does not depend on promising yet more subsidies and money to voters.

The responsible side will be the one that stands up and reminds all that we cannot go on partying all day, every day.

It is in this respect that Malaysia needs a Thatcher.

One may disagree with the policy Thatcher implemented in the UK in the 1980s but her resoluteness and refusal to succumb to crass populism is something to be admired.

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 Sun on April 11 2013.

Categories
Economics Politics & government

[2675] The taxpayer’s deplorable options

I do consider the payment of income tax as a responsibility I must fulfill. As a member of society, I have some responsibilities toward its maintenance. The fact that I am a citizen makes that responsibility of paying taxes doubly important.

That responsibility arises from my enjoyment of multiple public goods that exist through public funding, never mind that its distribution may be less than ideal since only a minority of Malaysians pay income tax, and never mind that some public goods can be provided for through private means.

The provision of these public goods makes the sum of the income tax that I pay more palatable to me than being robbed on the streets or being swindled by a snake oil salesman. At least, I get something out of the money that I pay out even as there are cases of mismanagement or abuse of public resources by the government of the day.

While I do rationalize the payment of income tax and other types of taxes as such, that does not mean I enjoy paying those taxes. I dislike paying taxes and I especially dislike paying income tax as opposed to consumption tax. Sometimes, I do wonder how far we have progressed since the days of old when the fruits of one’s labor were expropriated by men — in the name of equality, as well as women — of power. Perhaps progress is the fact that tax rates today are lower than they were in times of feudalism. Perhaps, perhaps, perhaps”¦ I tell myself perhaps.

What is certain is that I am sensitive to the income tax rates that I face.

The tax rates themselves are linked back to government expenditure. That makes me sensitive to plans which lead to government expenditure growth.

Apart from my distrust in the government in guaranteeing my civil rights, taxation is one of the other few reasons for my skepticism of the expansion of the role of government in our society. It can hit my pockets, which is not as deep as those in power.

The upcoming general election provides me with an opportunity to assess the options that I have on the table. This election may be the first ever where Malaysians can choose which economic policies they prefer to see implemented.

There have been manifestoes written and shared before of course but the 2013 general election makes it most realistic to imagine a change in federal government, without any political exchange in the style of the failed September 16, 2008 (and by the stars, let there not be any).

Yet, the choices so far have been disappointing.

On one hand there is Barisan Nasional where despite all the sleek public relations exercises suggestive of change, it is still business as usual in too many ways. For one, abuse of public funds goes on as usual.

Just the other day, the deputy prime minister declared that children of workers of Pos Malaysia — a private company after it was divested away by Khazanah Nasional Berhad to DRB Hicom which is ultimately controlled by Syed Mokhtar Al-Bukhary — would be given free netbooks by the Malaysian Communication and Multimedia Commission.

This is the use of public resources to benefit private parties and this is only one example of abuse; Barisan Nasional has no qualms utilizing public funds for its election campaign.

Those kinds of abuse adversely impact government expenditure in one way or another.

The government in its 2013 Budget plans to embark on fiscal consolidation, which is admirable. Yet, plans are plans and it looks all the more incredible as each day passes by. Each day of campaigning is another day the government of the day embarks on economic populism that is funded by public funds in an abusive way to blow the fiscal consolidation plan apart.

On the other hand we have Pakatan Rakyat.

Pakatan Rakyat does offer a vision to address the weaknesses of the incumbent government. Considerable portions of its manifesto try to address monopoly in the private sector that was actively created by the Barisan Nasional government which is something I can support. Pakatan Rakyat’s proposal to increase competition in the automotive industry is also something that I and many have argued for.

Yet, Pakatan Rakyat’s plans to reduce fuel prices, water tariff and others through greater subsidies will demand expansion of government expenditure. That is of significant worry to me. This is especially so when it is clear that the government will require a structural change in doing things in order to lower the fiscal deficit.

Pakatan Rakyat’s plans appear to move the position of public finance to the opposite direction.

Apart from the plan for increased expenditure, the political coalition is averse to expanding the tax base in the form of introducing the goods and services tax to replace the pre-existing sales and services tax. What is all the more remarkable is that Pakatan Rakyat plans to reduce personal income tax.

With increased spending and reduced taxation, the deficit may increase especially if other sources of revenue do not increase fast enough. This raises more questions on the revenue side. Does Pakatan Rakyat plan to increase company taxes and other indirect taxes? Will a Pakatan Rakyat government look to Petronas — which is trying to invest in itself more — for more contribution?

Second Finance Minister Ahmad Husni Hanadzlah claimed that Pakatan Rakyat’s plans would nearly triple the fiscal deficit when compared to 2012 level when compared to nominal GDP and increase government debt level by 10 percentage points to 62 per cent of GDP.

Now, it is election time and his claim should be taken with a pinch of salt. Nevertheless, the direction of change in those figures as suggested by the minister appears reasonable. It does not take a person with wild imagination to think that the fiscal deficit and the debt level under Pakatan Rakyat’s plan will increase.

Pakatan Rakyat itself has not sufficiently clarified how it plans to do all that it promises without increasing the deficit. Its 2013 national manifesto is quite silent on the combined impacts of greater expenditure and its revenue plan on public finance. Pakatan Rakyat supporters have at one time or another claimed the Pakatan Rakyat government will curb corruption and leakage so much that it will allow a scenario of greater spending and unchanged taxation. While I am impressed with Pakatan Rakyat’s commitment to an open tender system for one, I am skeptical that those leakages and corruptions will be easy to tackle and if it is successful, it will release sufficient resources to plug any financial gap.

I ultimately do not believe heightened fiscal deficit and debt level will be sustainable to maintain a good standard of public finance. Economic forces are bigger than either Barisan Nasional or Pakatan Rakyat and I think when both parties are free from populist pressure and faced with the stark reality of public finance, they will tend to do what is responsible.

So if Pakatan Rakyat does get the opportunity to govern Malaysia and run its plans, sooner or later it will likely have to make room for realism with regards to its tax promises or its spending-related promises. Unfortunately, more often than not, raising taxes is far easier than cutting expenditure.

It is within this context that I consider Pakatan Rakyat’s words on taxes to be as incredible as the Barisan Nasional-led federal government plans for fiscal consolidation in 2013.

As a taxpayer, I am staring at my deplorable options.

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 March 15 2013.

Categories
Economics Politics & government

[2672] If nobody could default, why would anybody go bankrupt?

Let us take for granted the assertion that a government cannot default on its debt obligation if all of its debts are denominated in the local currency. For the more macroeconomic inclined, if a country controls both its fiscal and monetary policies, it can never default on its debts.

Taking the axiomatic approach notwithstanding the concerns which I put up earlier this week, there is an important political implication on the political rhetoric employed with respect to discussion regarding government finance.

These days, it is all too common for one side of the political aisle to accuse that the other side’s proposed or current policy will bankrupt the country.

Supporters of Pakatan Rakyat will accuse the cash transfer program BR1M and the likes are irresponsible populist spending. Add those leakage and outright corruption and the country is well on its way to bankruptcy. Given the current size of government debt, they said, bankruptcy can be far off over the horizon.

Against Pakatan Rakyat’s accusation of bankruptcy, supporters of Barisan Nasional can certainly use the no-default assertion. The assertion immediately blunt attack on the size of debt the government maintains at the moment.

What becomes problematic is when the supporters of Barisan Nasional in turn say free education and higher fuel subsidy as proposed by Pakatan Rakyat are unrealistic spending and that it will bankrupt the country in no time.

If you believe in the no-default axiom, then how can Pakatan Rakyat or in fact anybody bankrupt the countries with irresponsible or corrupt policy?

Now, I am not defending the policy of Pakatan Rakyat as proposed in its manifesto. I disagree with a good number of its economic promises. But there has to be consistency in the rhetoric used.

I can understand that it is hard to keep consistent rhetoric throughout since nobody truly works inside a hive colony with the queen controlling everyone’s mind. Each person can be independent to the whole political organization and its official mouthpiece. Each person can try to defend his or her side of the divide on their own. With insufficient coordination, contradictory rhetoric can happen. It does happen.

However, that does not make the no-default and bankruptcy arguments any more consistent with each other.