Tag: Budget 2021

Categories
Conflict & disaster Economics

[2937] Premature fiscal consolidation influences our vaccination strategy adversely

Our vaccination program is taking the big solution approach. Since the Covid-19 pandemic is a big challenge, it might be natural to come up with a big solution. Mega vaccination centers are a critical part of the program. Big space with hundreds if not thousands of personnel vaccinating hundreds if not thousands more individuals. Big, shinny glittering, big. It is as if Mahathir of the 1990s is back.

It has been a slow painfully slow start with some big mess made along the way, but the program is picking up steam. Vaccination pace is still below what is required but we are getting somewhere: on June 10, approximately 155,000 dosages were administered, and close to 10% of the population has received at least one dose of Covid-19 vaccines.

Behind the headline numbers, stories are appearing that people are not showing up for vaccination despite registration. The authorities at first tied the no-show to vaccine hesitancy. Earlier rationale for separating Astra-Zeneca vaccines from the main public vaccination program was based on the understanding that the public distrusted that particular vaccines. After all, AZ had bad press for some time.

After a while, that rationale is starting to become weak, especially given logistical concerns on the recipients’ side. More and more, it sounds like that particular claim was based on a misreading of incomplete data, and hasty conclusion. The kerfuffle between the Selangor state government and the federal government regarding total dosage the former received, for example, does not inspire confidence in the analytical skills of those in power in Putrajaya. Hesitancy is a big problem, but it is becoming clear that it had been used as a catch-all excuse to brush aside other big problems faced by the vaccination program.

To me, the no-show cases and the government’s preference for the big approach raise a question regarding our vaccination philosophy: are our methods primarily designed to be the easiest for the central authority to deliver the vaccines, or for individuals to get vaccinated?

The first part of the question—is the method easiest for central planners?—has the program administrators firstly in mind. If the administrators are the primary focus of the process, then having big centers is the way. This is because the big approach pools resources and rides on economies of scale. Pooling makes the vaccination program cheaper for the side managing it. Also, easier. The big approach necessarily means having few centers. And having fewer centers means the logistics becomes simpler, given all else the same: manage 3,4 or 5 big centers is significantly less complex than dealing 30, 300, or 3,000 spread across wide geography.

The second part of the question—is the method designed to be the easiest for individuals to get vaccinated?—puts potential recipients as the primary focus. It makes it easier for individuals interested in vaccinating themselves get vaccinated. Instead of having to travel from one part of the city to the another, or worse, having to travel from one part of the state to another (which is common enough), a person would be able to get his or her dose from the neighborhood clinics, hospitals, public halls or anything that could function as a vaccination center. This path is more expensive compared to other approach because it is more complex: it requires hundreds or thousands of small vaccination centers all around the country. It will involve resources being spread as widely as possible. But it is easier for potential vaccine recipients.

So, why did we choose the big approach, i.e. the method easiest for the central planners?

There might be multiple reasons behind that. I suspect one of them is related to cost consideration.

This goes back to the November 2020 when Budget 2021 was tabled in the Parliament. In that Budget, the government of the day in all its wisdom decided to embark on fiscal consolidation immediately. That policy was made based on rosy assumptions: the economy was to experience a V-shape recovery as soon as possible. Things would return to normal soonish.

That consolidation plan has gone awry. Recovery, if it could be called as such, is proceeding slower than what the government expected. When the budget was unbelievably passed despite it grave flaws in December 2020, Malaysia was still in recession. In fact as of the first quarter of 2021, the country was still in recession.

Since then, the government has been spending additional resources little by little, but not enough to solve the pandemic problem comprehensively. It has been reactive as the crisis develops, always one or two steps behind, almost ways coming short to the challenge. With available resources limited by the badly designed Budget 2021, those planning for vaccinations had to resort to the big approach: pooling resources, economies of scale, cheaper method. They had to minimize the monetary cost.

That comes at a (different) cost of course: it makes logistically hard to some individuals to get to the vaccination centers. Some is an understatement as we race toward herd immunity. The big approach contributes to the no-show cases: no-show because the big approach needs the people to go to the central planners, instead of the central planners coming to the people. All this raises the risk of Malaysia failing to achieve herd immunity as soon as possible, and letting the economy to muck around longer.

In short, the premature fiscal consolidation planned by this government had influenced our vaccination strategy adversely.

Categories
Conflict & disaster Economics

[2936] Latest government Covid-19 spending plan is ‘dasar cukup makan’

Severely underwhelming.

Those are the words I would use to describe the financial assistance the government launched in conjunction of the latest round of lockdown. The government values the program at RM40 billion, with approximately RM5 billion involving actual government spending. The rest are exemption or postponement-based initiatives, with loan repayment moratorium being the biggest and borne by somebody else.

What we need is not a band-aid program with actual spending being slightly greater than the RM3 billion auditor KMPG has trouble tracing in brewing Serba Dinamik financial scandal. Malaysia needs a new comprehensive program cognizant of the trouble we are facing collectively. I have earlier suggested the government will need to ramp up its spending significantly by raising its deficit ratio from approximately 6% of 2021 GDP currently to 9%-10% or even higher, while making all the consequential legal changes. We need to do whatever it takes to resolve the crisis as soon as possible.

But this government has failed to do that. The latest program proves this government is reactive to events, and always one-step behind. Muhyiddin and his incapable ministers just cannot look beyond the molehill. They keep holding on to plans which foundation has been dismantled by the worsening crisis. Those earlier plans, encapsulated by Budget 2021, were based on rosy assumptions that did not come true. Even with flawed assumptions, they keep going at it. Worse, a huge chunk of spending under the previous plans has yet to be executed.

That mistake of inadequate actual and approved spending in favor of unthinking fiscal consolidation has hobbled Malaysia’s response to the Covid-19 crisis. The government is unnecessarily self-limiting public spending that is needed to raise the health system capacity immediately and hasten the pace of vaccination in the population.

This is a disappointing policy that the Prime Minister should be embarrassed of announcing.

What the latest program really is, is that it is a “at least we tried” policy. Dasar cukup makan.

This spending is not about resolving the crisis. It is the government providing talking points to unthinking political operatives on the ground. It is to show the government is at least is responding to public demand. Moratorium? Yes, half-hearted but at least it is included. Wage subsidy? Yea, it is minimal by at least it is provided. “At least we the government are doing something.”

To come on top of this crisis, at least we did something is not good enough. The leadership of this government is not capable of doing more than “at least we tried.”

“You’re dying, but at least we’re giving you a glass of warm water.”

How comforting.

Hafiz Noor Shams. Some rights reserved

Awani interviewed me on June 2 2021 about my views. Here it is (when I said US and UK with respect to sovereign debt crisis, I meant Europe. I misspoke):

Categories
Conflict & disaster Economics

[2934] Hindsight is 2020, myopia is 2021

We did not know many things about Covid-19 back in 2020. Early on, the authorities and health professionals were urging the public not to panic by highlighting the probabilities of dying from other causes were higher than Covid-19. The intention of avoiding panic was probably good: by end-January 2020, I was looking for face masks to buy but most stores ran out of it. We know better now that the logic was wrong. Covid-19 is serious business.

We made missteps. The Pakatan Harapan government was worried about border closure and its effects on the economy. Nevertheless, travel restrictions were imposed eventually, though not comprehensive.

Then as we were learning about the virus further, party politics got in the way. The unexpected political maneuvering stole from Malaysia several weeks’ worth of lead time to fight the pandemic. At this time, members of Perikatan Nasional and their collaborators appeared unconcerned with the virus and took time to buttress their political position. The new government was lucky because Pakatan Harapan’s last act before their fall was to launch an additional government spending to fight off Covid-19. That bought Muhyiddin Yassin, the Prime Minister nobody elected, a little time as the health crisis worsened quickly.

Eventually, his unelected government got it right: lockdown with financial assistance provided. Lockdown implemention was chaotic, and the accompanied assistance should have been bigger. But the mistakes were forgivable however angering. Year 2020 was a new reality altogether and the hesitance in bringing in the big bazooka was understandable although less than ideal.

Moreover, it was a new government facing a steep learning curve: new ministers on the job had little understanding of fiscal levers, while facing an unprecedented crisis. Like I said, less than ideal but we had to make do.

After several months of mucking around, it seemed Malaysia was succeeding, in large part due to the civil service. The public sector had handled outbreaks before albeit on a smaller scale. That institutional memory served the country well at a time when the executive was scurrying in the dark. Additionally, there were economic response templates from other countries to follow by April-June 2020. Malaysia copied it.

There was damage to many aspects of Malaysian life. Democracy and basic rights were sacrificed. It was a dangerous sacrifice with adverse long term repercussions, but we could argue we skipped the worst. Whether we would pay for our sins is yet to be seen.

In the meantime, we bragged about our success while multiple countries, particularly the US and UK, were bungling their responses.

We bragged so much that overconfidence overcame us. That led us to repeat the same mistake we made in February-March 2020 in the second half of the year. Just like when party politics interfered with crisis management at the start of the pandemic, unreasonable political ambition to take over Sabah state government in the middle of the pandemic brought in the second wave.

This time, the trouble was so not new. There was less excuse to be made. Double-standard regarding quarantine during and after campaigning, and other questionable decisions by the government, made things worse. It was during this period health measures suffered from serious credibility erosion.

But we all need reminding from time to time. Sometimes, we make mistakes because we forget our lessons.

The point is, in retrospect, throughout 2020 we probably would have done things differently. But things should be judged not by how we would have done it differently knowing now things we did not know then. Instead, it is only fair to judge previous decisions based on how they were decided based on the best available information at that time. And we did not have the best information for most of 2020. It was all too new.

We can be angry about 2020. I still am. But that was how the cookie crumbled. Things happened and decisions were made based on the best, or second-best available information.

That excuse can no longer be used for 2021.

If hindsight is 2020, then myopia is 2021. By this year, we know more and we know almost enough information to fight the pandemic effectively. Yet somehow, we refused to use the information.

The disastrous handling of 2021, I think, could be traced back to November 2020, when Budget 2021 was debated in the now suspended Parliament. The budget could have been used to fight the health and economic crises comprehensively.

But we did not use that opportunity.

The government of the day preferred to declare victory prematurely, and engaged in fancy public relations exercise. A sharp V-shape recovery was taken as the base case scenario: base effect was taken in as victory. “This is the biggest budget in history!” declared the government, somehow forgetting the budget of the current year almost always the biggest in history. Rarely does government spending fall. Such was the nature of the government’s meaningless sloganeering to invoke awe in the unenlightened minds.

The budget was big, but it was just not big enough. Budget 2021 rested on rosy assumptions. So rosy that the government intended to resume fiscal consolidation immediately while the economy was still in recession.

So intent the government was on fiscal consolidation that the RM5 billion meant to vaccine-related purchases were not actually included in the Budget. How outrageous could it be?

Constructive criticism came in quickly. The government was told the budget was not big enough. The government was told it should take a more precautionary projection. The government was told to widen the deficit significantly to fight the pandemic off.

Critics were proven right. Budget 2021’s rosy assumptions were dismantled just 4-5 months after it was passed. In November 2020, the government aimed to cut the 2021 deficit ratio to 5.4%. By March 2021, the figure was raised up to 6.0%. It is likely higher now given how things are going. Not only was fiscal consolidation was the wrong policy to pursue at that time, but now since it could not be achieved, the government’s credibility has taken a hit.

The budget should have been rejected: the failure of Budget 2021 is both the fault of the Perikatan Nasional government—including Umno for those still in denial—and Pakatan Harapan. The non-rejection in the House was mind-boggling: we live in a tragic comedy.

Now, as Covid-19 is making its ugliest spread yet, with death toll mounting, health workers exhausted, the Ministry of Finance approved another RM200 million for the public health sector.

What is RM200 million when a vaccine dashboard alone worth RM70 million? What is RM200 million when the total Health Ministry Budget is RM32,000 million a year, and that the public health sector is running out of capacity?

To solve this crisis, we require a much bigger deficit spending: boost the deficit to 9%-10% or even more. Do whatever is necessary to finance the fight. Do it properly instead of through half-baked measures. There is no time for dry powder.

The cost of failing to address this crisis is greater than the cost of higher deficit ratio.

Categories
Economics

[2923] Watch out for the current balance in Budget 2021

The fiscal balance gets a lot of attention from the press on Budget Day. It is usually in deficit (it has been so since the 1990s) and the theme has always been fiscal consolidation. Even when Pakatan Harapan was in power, reassessed the government’s fiscal goal and raised its 2018 fiscal deficit from a projected 2.8% of GDP to 3.7%, the consolidation narrative was intact and bought by credit rating agencies.

This time the fiscal deficit will be much larger. Understandably so given the current economic condition brought by extraordinary circumstances. I would think any mention of fiscal consolidation would be inappropiate.

But the more important figure this time around would likely be a different kind of balance: the current balance.

Definitions

For the uninitiated:

  1. Fiscal balance is the product of all of government revenue subtracted from all of government expenditure. Here, total expenditure is the sum of operating and development expenditures.
  2. Current balance is all of government revenue minus only the operating expenditure.

By definition, operating expenditure involves the day-to-day running of government, like paying wages, interest payment, grants, subsidies and various supplies and services. Development expenditure involves investment into some kind of long-term assets.

There is a logic behind the division between the two expenditures (although it is being increasingly questioned in the past year). As the reasoning goes, the government’s daily operating concerns should be fully funded by the government revenue. This prevents the government from borrowing for non-capacity improving purposes.

Accounting and law, but not economics

But it feels the distinction between the two expenditures is blurry because money is fungible. More than anything else, the distinction exists in concrete terms only because of accounting definitions operationalized by the law. In Malaysia, all borrowings (specifically MGS, GII and Treasuries as I understand it) must be used for the purpose of development expenditure. This is specified by the Loan (Local) Act 1959 and the Government Funding Act 1983. In the 1959 act, it is written so in Part II and in the 1983 act, Article 4. More precisely, any borrowing raised must be deposited into the government’s development fund, which is used for development expenditure, and not operational spending.

If that is wordy, the bottom line is this: the law demands that the current balance must never be in deficit.

Indeed, in the whole modern history of Malaysia, for the most parts, the government has maintained current surplus. The last time Malaysia had a current deficit was in 1987. See the following chart.

The thing with laws like this is, when it comes face to face with economic forces, the economics usually win. If the laws are to be followed down to the letters in this regard, the government would probably be forced to resort to some extraordinary measures.

Current deficit likely for 2020

For year 2020, regular revenue has been falling dramatically, while expenditure has likely gone up. The spending is not developmental in nature too. Things like wage subsidies sound more operational than developmental. As a result, it is likely for the government to face its first current deficit in more than 30 years and it should be big, if nothing is done.

Strict adherence to current balance restriction is one of the reasons why Malaysia is considered as having limited fiscal room to maneuver. Refer back to the chart and observe the small surplus since the late 2000s.

Change the law, loosen the artificial limit

The truth is, the restriction is artificial and it only exists because of the law and given the crisis we are facing, the law is counterproductive to the maintenance of our welfare and the health of the economy. The crisis that we are facing is just out of this world and traditional tools are inadequate to handle the situation well.

Here is a proposal: amend the Local (Loan) Act 1959, Government Funding Act 1983 and other relevant laws to allow for borrowing for operational spending. This will give the government greater flexibility, and more fiscal room to act.

Safeguards could be put in place if the restriction removal is too radical. For instance, we could demand the sum of 5 years’ worth of current balance must be in surplus. Such 5-year instead of yearly schedule could enable government finance to accommodate economic cycles better, and allow for more effective counter-cyclical spending.

Other current balance things to look out for

Finally, here are a set of things we should look out for when it comes to current balance:

  1. Extraordinary revenue measures. I probably mean something like extra dividend. The government has demanded and will be receiving an extra RM10 billion worth of dividend this year. Other entities we should look out for are the central bank and Khazanah. There are other entities with sizable reserves and money doing nothing that potentially could be given out as dividend to the government.
  2. Reclassification of spending. Despite the distinction between operating and development expenditure, the actual classification between the two can be fluffy. So, watch out for some operating expenditure being reclassified as development expenditure for accounting purposes. You know the joke about accountants. No? See the notes.[1]
  3. Off-budget spending done by companies owned by the Ministry of Finance Inc. Pakatan Harapan tried to rein in on this by making it more transparent and slowly bringing it into the book proper. The shift toward accrual accounting should make off-budget spending less controversial and irrelevant. But with this new government in place, progress toward accrual accounting is in doubt and commitment toward not using off-budget spending is likely non-existent.

Hafiz Noor Shams. Some rights reservedHafiz Noor Shams. Some rights reservedHafiz Noor Shams. Some rights reserved

[1] — For the fun of it:

A businessman was interviewing job applications for the position of manager of a large division. He quickly devised a test for choosing the most suitable candidate. He simply asked each applicant this question, “What is two plus two?”

The first interviewee was a journalist. His answer was, “22”.

The second was a social worker. She said, “I don’t know the answer but I’m very glad that we had the opportunity to discuss it.”

The third applicant was an engineer. He pulled out a slide rule and came up with an answer “somewhere between 3.999 and 4.001.”

Next came an attorney. He stated that “in the case of Jenkins vs. the Department of the Treasury, two plus two was proven to be four.”

Finally, the businessman interviewed an accountant. When he asked him what two plus two was, the accountant got up from his chair, went over to the door, closed it, came back and sat down. Leaning across the desk, he said in a low voice, “How much do you want it to be?”

He got the job.

Haha.