fiscal consolidation – the _

[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:

The 2023 fiscal cliff
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.

[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.