Tag: fiscal policy

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Economics Politics & government Society

[2989] Eroding our commons will erode our togetherness

The Malaysian government faces tight fiscal space and the runway to keep going on as we do now is not too long or wide.

The population is still young but it will not be so much longer. This suggests growing needs for healthcare services. In the meantime, education is somewhat underfunded judging by less-than-favorable learning outcomes, compounded or caused by pandemic disruption. Defense is underfunded at a time when the world is becoming a more dangerous place; previous wasteful spending on this front does not help. Climate change requires new kinds of public infrastructure investment. Petroleum revenue is highly like to go down permanently due to rising provincialism, while an aging society means income and consumption tax revenue will struggle to rise in the next 10-20 year period. This has yet to take into account pension liability that the government faces in the same period, which is also underfunded. And, a lot of Malaysians do not have enough savings and in their old age, they will depend on public services more.

The list goes on and on to tell us that under business-as-usual, public spending requirement is rising while there is every reason to suspect that the pace of government revenue growth will not match the former.

The current government understands this and there are efforts to move away from the current business-as-usual scenario. Diesel subsidies has been partly removed (but not in Sabah and Sarawak). There are plans to abolish or at least lower petrol subsidies but that has not happened yet. Recently, the Health Ministry announced it would expand its full-paying patient scheme.[1] This is largely in line with a high-level suggestion made last year that public healthcare should be more targeted to relief fiscal pressures caused by the public health services.

And even more recently, the Prime Minister said education subsidies enjoyed by the rich is to be cut.[2] It is unclear what the actual policy is but that is for us to find out soon when the government tables its 2025 Budget later this month.

But as the government seeks to improve its fiscal conditions, it is crucial to remind Putrajaya that not all fiscal consolidation actions are of equal measures. While fiscal pressures are important and must be addressed urgently, it is not the only things that matter to this country. When it comes to cut or rationalization of public service, it is good to take a step back and reassess what we would lose in return for what we would gain not just in the short Parliament terms, but also in the long-term. After all, most of us save the unfortunate ones, live beyond the 5-year parliament term.

What we would lose from reduced access to public education and health services (and other similar services provided by the government) is the commons. It is the space where we Malaysians theoretically—really, actually for many people—come together regardless of our origins in terms of geography, class, gender, ethnicity, etc. That togetherness allows for the creation of shared lived experience or even shared identity. In an age where technology and quirks of history are leading us to live in our little bubbles, it is our public service that attempts to connect these bubbles into a larger common.

Without these commons, we Malaysians will lose connection to each other, losing whatever left of our shared values and shared identity. Erosion of these commons necessarily lead to the erosion of our togetherness.

I do not think these commons should be eroded by concerns over fiscal pressures, especially when these pressures could be alleviated through other more effective means. Instead of applying the knives to public education and public healthcare systems, other policies could be jettisoned first, like outdated incentives and reliefs provided to private healthcare service providers or private insurance, or outdated subsidies for electric vehicles. And of course, cutting petrol subsidies would go a long way too (although with crude oil prices are low these days, one wonders how long it would go).

And really, Malaysians are able to pay much more taxes. But we refuse to do so.

Our refusal points to another problem: our reluctance to make short-term sacrifices to ensure larger long-term gains and sustainability. It seems that we rather avoid the short-term pain and instead lose something valuable in the future.

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

[1] — Health Minister Dzulkefly Ahmad is standing by the government’s proposal to expand private wings at public hospitals as part of a hybrid model termed “Rakan KKM” (Health Ministry Friends). [Health minister defends private wings at public hospitals plan. Malaysiakini. September 24 2024]

[2] — Menjelang pembentangan Belanjawan 2025 tidak lama lagi, Anwar Ibrahim menghantar ‘isyarat’ yang menunjukkan kerajaan sedang meneliti pengagihan subsidi pendidikan kepada rakyat negara ini. Berucap di Putrajaya hari ini, perdana menteri berkata, kerajaan mahu memastikan subsidi sebegitu disalurkan kepada golongan yang benar-benar layak saja.[Golongan kaya mungkin tak lagi dapat subsidi pendidikan. Malaysiakini. Accessed March 31 2024]

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Economics Politics & government

[2970] Politics of living costs and the inevitable language of austerity

Extraordinarily, the Economy Minister has been holding press conference for every consumer price index release in the past few months. Extraordinary, because in the past, CPI releases were treated with silence by the government, and from time to time, cited in largely unread government press statements. But the new Minister, Rafizi Ramli, is focused on cost of living issues. He sees CPI statistics as a way to regularly talk about it.

He is not alone in focusing on living costs. Information Minister, Fahmi Fadzil in an interview recently said:

“The people don’t really care about the slogan, they care about the cost of living, prices of goods and internet access. Therefore, it is essential for every minister and ministry to act immediately to resolve issues of concern to the people.” [Fahmi: ‘Govt to solve people’s issues through Malaysia Madani concept’. Bernama. New Straits Times. January 25 2023]

A very, very short history of living costs politics

Component parties of Pakatan Harapan (and previously Pakatan Rakyat) have a long history of stressing on living costs politics. When energy prices were high in the late 2000s, DAP, Pas and PKR were pressing on the cost-of-living buttons furiously, and that played well to popular anger at that time.

Furthermore, the focus on living costs is a way to shift attention away from race and religion, towards more welfare-based issues. That shift is something to be welcomed, definitely.

Regression in policy

But as I have written earlier, while living costs deserve attention, the the politics of living costs is counterproductive in many ways. Such politics is the reason why policy progress Malaysia made in the past 10-15 years with respect to welfare policy has been partially reversed. Specifically, I am referring to the shift from subsidies to cash transfers. Cash transfers in many ways superior to subsidies in terms of welfare enhancing. Therefore, blanket subsidies and cash transfers are meant to be competing policies.

Yet, now, we have both and the government for the past 5 years have taken the two as complementary. The confused policy mix is proving to be expansive. And it does not help that the government is scared of new taxes, and prefer hard-to-implement-but-low/unstable-revenue taxes to easier-and-high/stable-revenue ones, which causes a severe fiscal constraint.

Rafizi, who previously was a strong believer in blanket petrol subsidies, appears to have walked back, perhaps after realizing the state of government finance, He, along with Prime Minister-Finance Minister Anwar Ibrahim, are now talking about targeted subsidies instead, which has been discussed since at least 2019, not long after blanket subsidies were reintroduced. But having both targeted subsidies and cash transfers are still a confused policy mix. The ideal would be to move to cash transfers fully.

Politics of living costs almost always means large subsidies

The politics of living costs is counterproductive because, with its logical framework, the easiest way to address it is through subsidies and price controls. Other ways—wage hikes for one, or competition regulations—are much harder to implement and takes longer to be realized. The thing with subsidies is (in some ways cash transfers too, but at least cash transfers is much, much more efficient in enhancing welfare while it can always be clawed back via taxes if the wrong persons received it), it tends to take resources away from other things, like funding healthcare, investing and maintenance infrastructure or building defense capabilities in a region has been taking peace too much for granted.

You cannot solve these structural long-term things, if politics of living costs that is always in the now, is the ultimate priority.

The language of austerity

Since such politics takes resources away from many things, it sets the tone of belt-tightening: pay cuts, no pay, RM1.5 trillion government debt (and liabilities), etc. When there is so little left for anything else, usually, a lot of people would be scared and pull back what they could, except subsidies.

Anwar Ibrahim, at a forum in Jakarta, quipped that Malaysia was no longer the country of the 1990s in response to a request by an Indonesia luminary for more Malaysian scholarship for Indonesian students.

Rafizi, just this week, said:

“It is like an overweight person. You know your ideal weight and you constantly remind yourself that you are getting worse,” he said at a forum titled ‘Resetting the Malaysian economy’ organised by Parliament.

“The solution is simple. You need to eat less. If you want to eat a lot, you need to run more. Doctors, gyms will tell you that. Most struggle despite the diagnosis.

“That’s where we are as a country. With the current fiscal trajectory, things will get worse. It takes a lot of courage, political will and cohesion with all stakeholders (to carry out changes).”

[Fixing economy like fat person trying to lose weight, says Rafizi. Joel Shasitiran. FMT. January 27 2023]

Fat. Diet. Those are words one typically associates with austerity. We do not have austerity, but using this kind of language, it would impress many that there is one.

And the source of this language, and the wider fiscal problem the government faces is the politics of living costs.

This second Pakatan Harapan government appears to be repeating some of the mistakes of the first Pakatan Harapan government: too much focus on government financial burden that it was accused of running austerity policies, despite the fact, clearly, there was no austerity at play.

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Economics History & heritage Politics & government

[2966] A short history of soft-budget constraint in Malaysia, and the challenge the Anwar administration faces

For the past few days, I have been thinking about the 2020-2022 roles reversal in the Malaysian version of soft-budget constraint, but ended up trying to trace the history of SBC in Malaysia.

First off, a short primer on SBC: soft-budget constraint is usually a problem between a government, and its state-owned enterprises. In Malaysian parlance, those enterprises are government-link companies. It is called soft-budget constraint because the budget of those enterprises is hard to be fixed; company revenue does not provide a hard limit on company expenditure. The government ends up financing those companies beyond what the latter’s revenue provides. That financing comes in the form of subsidies, loans, tax breaks and grants, and designed to meet various political, social or even economic objectives.

This problem is most prevalent in command economies, but it also exists elsewhere where the market is more open, like Malaysia.

Now, let us dive into the history of SBC in Malaysia.

From the 1970s until the 1990s: NEP and privatization

Malaysia had several influential state-owned enterprises prior to the 1980s and this made SBC a common problem, especially with the New Economic Policy running at full steam.

Luckily for Malaysia, raw material prices—petroleum, rubber, tin—were high at that time, making budget constraint problem manageable. These companies’ budget constraint was soft, but government revenue was bountiful.

Troubles came in the 1980s, when global recession depressed commodity prices. Budget constraint suddenly became very pressing, when government coffers could no longer support growing expenditure needs. Here, Mahathir Mohamad, addressed it through rapid and widespread privatization. Market discipline was instilled, and these companies found their budget constraints becoming stricter than in the past.

During the 1990s, through rapid modernization and super economic growth, along with privatization, SBC seemed like it had been consigned to history. SBC became a curiosity. The government enjoyed large growing surplus, and there were fewer companies requiring government support, save several instances where Mahathir insisted on import-substitution industrialization (Perwaja?).

When the Asian Financial Crisis hit Malaysia, all the bailouts meant the return of SBC.

SBC of the 2000s

The 2000s is significant in this telling because it was during this decade that off-budget spending took off earnestly. Government revenue did not grow fast enough to meet the country’s rising spending needs, especially so soon after the late-1990s recession. The government overcame its finance gap by devising clever methods to circumvent various accounting rules, and expand its spending capacity enormously. The methods are complex, and I will not go through it here except by sharing a post I wrote several years back, which explains various liabilities the government carried, but previously undisclosed.

Expanding off-budget obligations necessarily means growing SBC problem. Off-budget approach gave the government extra leverage, but it does not mean the government not having to fund them.

Off-budget approach, and SBC, came under intense scrutiny when 1MDB corruption came into the picture, and brought onto the government severe public demand for transparency. That demand, along with other concerns, led to collapse of the Barisan Nasional government, and the rise of Pakatan Harapan administration.

PH attempted to solve the problem by instituting greater transparency (this is part of the RM1 trillion debt and liabilities controversy), putting some off-budget spending back on budget (this partly raised the 2018 fiscal deficit ratio) and adopting accrual accounting, to make sure all financial obligations get recorded properly. But the SBC problem, intertwined with complex off-budget method, has become so big that it needs time to be addressed. And PH fell short of two years into office.

Reversal of roles during Covid-19 pandemic

The fall of PH coincided with the Covid-19 global pandemic. The new government needed to expand its spending fast to save lives and to preserve the economy’s productive capacity. But those in power were reluctant to boost government spending, possibly out of inexperience while facing a steep learning curve. With that reluctance, they looked to state-owned enterprises for solutions.

This caused a reversal of roles between the government and its companies. The government leaned on its GLCs to support its spending needs, instead of the other way round in the normal SBC problem. This made government budget to be softer than it was. GLC’s capacity became the government’s capacity.

Those financial supports from GLCs to the government come in the form of extremely long delayed payments. More specifically, the government throughout 2020, 2021 and 2022 engaged in massive subsidies and these subsidies were financed by the GLCs. The GLCs were supposed to be reimbursed immediately but that did not happen. To put it more plainly, these GLCs ended up financing the government.

For proofs, I would encourage everybody to inspect some of the largest utilities-GLCs out there. Check their growing receivables listed in their balance sheet (receivables refer to amount owned by buyers to suppliers).

There is another way to understand the roles reversal: these companies’ budget constraint becomes stricter than it was during normal times. Soft-budget constraint at the GLC level becomes really hard-budget constraint.

The problem became more complex in the post-Covid recovery, where subsidies ballooned tracking surging commodity prices.

2023 and into the future

Unlike the government, companies have troubles going over their budget constraint without outside support for too long. The cash crunch is coming.

The new Anwar Ibrahim administration will have the misfortune of having to address the roles reversal problem. It will be painful, involving large payments to be made/reimbursed by the government. Anwar Ibrahim the Finance Minister does not have much time: the cash crunch at several GLCs is coming.

That will add pressures for a broad tax hike, that Malaysia needs even before the pandemic.

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Economics Politics & government

[2957] Pakatan Harapan should avoid kitchen sink manifesto

Election is nearing and among policy-minded voters, it is not difficult to spot manifesto discussions. As someone with some implementation experience in government, let me say the last Pakatan Harapan manifesto was difficult. I knew this before I was pulled into the whole business: I reviewed the manifesto and summarized it as the following: the economic plank was “difficult to stomach wholly” but the other parts, particularly the institutional agenda, were what we needed. Given my concerns were institutional in nature, I was willing to give a blind eye to the economic plank, and support the institutional aspect wholly.

Looking back, the economic manifesto rode on popular anger quite effectively. That explained the kitchen sink approach taken by its authors. GST, monopoly, living costs, corporate corruption and other concerns were all meshed into one big document, which did not jive together. The authors knew what they wanted.

Unfortunately, riding the wave, and actually executing the policies were two very different things. Mahathir famously said ‘we’ did not expect to win, and so did not expect to implement those promises. Manifesto bukan kitab suci; manifesto isn’t a holy book. That highlighted the difficulties associated with the economic aspects of the manifesto, especially after GST was abolished just weeks after the 2018 election, and more importantly, before the Finance Minister was sworn in to bring SST back.

The next election, Pakatan Harapan can do better. They need to do better because the same mid-2010s anger is no longer there. There is little to match that economic anger, save the stubborn but relaxing global food prices and rising recession risks.

If I were to write the manifesto all by myself, I would reiterate the institutional aspects and reuse a good chunk for the 2022/2023 general election, and come up with a new one for the economic side. On the economics, I would reject the 2018 kitchen sink approach. I would instead set up overarching national goals. What do I mean by that?

In the kitchen sink approach, almost everything economic-related concerns were siloed off with little concerns to bigger concerns. One way to put it simply is that the proposed solutions were necessarily single-minded and siloed that the same proposed solutions ignored their effects on other things, like government finances and economic growth. At the implementation stage, at times this left those solutions contradicting each other, leaving individuals implementing those siloed solutions fighting each other and accusing the other side as blocking manifesto fulfillment. For instance, when Pakatan Harapan abolished GST without regards to policy sequencing, notwithstanding the previous problem with refunds (truly, the additional government revenue was lowered than BN admitted), how exactly the government would finance other parts of its economic promises? PTPTN? Highways? Petrol subsidies?

As you can see, the kitchen sink approach works from funding supply first, and then effectively takes the funding demand as an afterthought. This caused the troubles Mahathir identified so early. You ended up with insufficient funding supply to meet rising funding demand.

In the overarching national goals, it should work the other way round: start from funding demand-side first, and then work the funding supply-side afterwards.

To do this, we have to ask ourselves, what do we want for Malaysia?

Do we want to maintain our largely free, government revenue-financed healthcare system?

Do we want a welfare system given the damage Covid-19 has done to the financial security of many Malaysians?

Do we want a good education system? What kind?

Do we want better cities? Transport policy?

Do we want stronger defense?

Do we want to climate change infrastructure? Energy policy?

What?

This requires deep discussions among many parties, from lay users to experts. It has to be multidisciplinary, exactly so to avoid the silo problem that the 2018 Pakatan Harapan manifesto suffered (and contemporaneously, the Ministry of Health’s ongoing white paper).

And this way, we can be honest when it comes to taxation: taxes have to rise.

The truth few willing to say loudly because it is unpopular is that the Malaysia government lacks funding to do a whole lot of things due to low taxation. We can raise the deficit ratio, but even so it would not be enough to meet various legitimate demand associated with basic functions of government like health and defense (let us not talk about unorthodox fairy tales about ‘printing money’). For a country aspiring to be a “first-world” with worsening demography (but still young), our tax (and the bigger government) revenue to GDP ratio is low. That fact has caused unnecessary outsourcing of basic functions to the private sector. The same fact is the reason behind a whole lot of off-budget borrowings and spendings, which are nontransparent and significantly raises corruption risk in an environment where underfunded institutions cannot play their check-and-balance role properly.

To tell this truth, you have to tell the funding demand-side story: what do you want?

Of course, not all wants can be entertained lest the same problems besetting the 2018 manifesto would come back. You cannot want a well-run public transport system while wanting blanket petrol subsidies and eye-roll-worthy car duties cut. You cannot want a working revenue-funded health system while supporting tax cut for private insurance and spending at private hospitals. You cannot want a fully-funded education system while supporting tax cut for private education institutions. You cannot want a healthy Malaysian population but keep sugar cheap. You cannot want a good road while wanting a low road tax and cheap petrol.

Manifesto authors have to choose instead of putting everything into the kitchen sink. Here is where leadership is needed: decide on the policy direction instead of a Hail Mary rush.

And also, of course, manifesto has to be popular. It has to have its hooks. But those populist promises can be brought in line with the overarching themes. For example, have public transport cheap, with discount and vouchers and everything, and admit the system will always be in the red, to which the government will have to fully fund it directly (leaving financial performance for public transport system second in priority to physical performance).

Be direct about the funding demand, and through that, we can be honest about funding supply, and taxation.

I should add that the institutional aspect of the 2018 manifesto worked because it had an overarching goal: improving the overall check-and-balance mechanism and all of them are linked to one another in one way or another. It was not a kitchen sink.

To summarize it all: the next manifesto should be driven by overarching goals, instead of a laundry list of grouses. In other words, do not throw everything into the kitchen sink.

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Economics Politics & government

[2948] Government money is best used for actual spending and investing, not replenishing EPF savings

National Union of Bank Employees (Nube), the banking union in Malaysia, wants the government to “return monies withdrawn by B40 and M40 members under the Covid-19 relief package.”[1] I take that as demanding the government to directly replenish EPF contributors’ savings that were depleted by government Covid-19 withdrawal programs. The news report does not mention when the union spokesperson wants the replenishing to happen, but I assume as soon as possible.

For the uninitiated, the Employees Provident Fund (EPF) is a compulsory retirement scheme for private sector workers.

I disagree with the withdrawal EPF schemes, and along with many others, instead have advocated for the government to raise its borrowing and commit to greater spending instead in order to provide greater assistance.[2] But the government was too worried about its fiscal deficit, too fresh to learn all the economic levers it had, and too desperate to find ways to relieve the spending pressures they felt. Among the chaos, they heard Najib Razak’s bad advice and took it.

But it is done now. A mistake has been made. While too many EPF contributors find their account depleted as a result, the overall economic circumstances have changed. During the pandemic, we needed economic programs guaranteeing everybody a certain level of welfare, particularly when a significant part of the economy was shutdown. With the private sector disabled so thoroughly, it was the responsibility of the government to secure everybody’s basic needs. It was a hibernation policy: lockdown and government assistance.

Now that the economy is back operating albeit weakly, priorities have changed. We need to strengthen the economy. Instead of hibernating, we need more spending and investing by the both the public and the private sectors.

This of course assumes we will not make any more mistake on the health front. While there is a real room for optimism going forward, with vaccination rate running high, and that we know more about the virus, after the government’s naïve V-shape recovery blunder, we can never be too careful.

Having the government replenishing EPF savings, especially if immediately or the near future, runs contrary to current priority of economic recovery: pushing for greater spending, investing in capacity building, and simultaneously creating jobs.

Why?

Because putting government revenue (or borrowing or both, since the government unlikely to enjoy any kind of fiscal surplus) into EPF savings would store the money into passive activity for an extended period of time (due to the nature of the scheme, which savings could only be withdrawn at retirement age under normal circumstances; for the macro-inclined, you would remember S=I, but here I would argue S=aI where a<1 since EPF typically invest in equities and debt, and not directly, and if directly definitely in the very minority, into new productive assets like factories and infrastructure). It would go into the financial market, but that is not the most productive of all options available out there. In other words, the act of replenishing will take a lot of steam needed to power the recovery.

And it is worth remembering that economy in 2021 will be smaller than it was in 2019: recovery is not complete. This is an important point because it has long-term repercussion on the economy.

To illustrate the point, it is good to go back to the 1998 during the Asian Financial Crisis. The Malaysian economy only truly recovered from the 1990s crisis by mid-2010s: actual GDP only surpassed the what-if-there-was-no-1990s-crisis GDP around 2015-2016. To put it differently, actual GDP level only surpassed the pre-crisis level around 2014. That is close to 20 years of lost potential.

Actual GDP vs hypothetical pre-AFC growth trend

For 2021, we are still both below pre-crisis level and trend.

For fear of losing more potential, we need to focus on spending and investing. Having the government correcting their EPF mistake by replenishing the accounts will heighten the risk of us losing potential.

The replenishing size, and in turn, potential loss from the replenishing policy, is not small. A report from the Finance Ministry shows the cumulative EPF withdrawal under the 3 programs (i-Lestari, i-Sinar and i-Citra) was RM90.3 billion as of early October 2021. More has been approved but yet to be withdrawn. Replenishing it as soon as possible would take at least RM90.3 billion off the economy in terms of spending and investment, ignoring any multiplier effect.[3] To put the number in perspective, that is nearly 30% of what the government plans to spend in 2022 and in fact, RM15 billion bigger than the government’s development allocation. Even by spreading the replenishment over 2 or 3 years, such policy would take so much money from most parts of the economy, and into the finance industry that will eventually manage those money.

But that does not mean there is no other way of replenishing it. Two ways I can think of are:

  • Tiering the dividend, which those with the least savings getting the highest rate. I have suggested tiering because, but it was primarily made out of realization the wrong people are given the incentive to save, and so, disincentive to spend and invest.
  • Increasing employers’ mandatory contribution. This will increase cost of doing business, but the government, while not doing enough, did a lot for businesses. Perhaps, it is time for businesses to play their role here.

Both however will be a slow replenishing process. Furthermore, increased mandatory contribution, for instance, might reduce take home pay as employers recalibrate their wage structure.

Another way by way of indirect replenishing is to make something like a senior citizen cash transfer bonus, payable by the government upon a person’s retirement, on top of existing cash transfer programs. But done together with dividend tiering, increased contribution and perhaps other ways too, this could reduce the size of the program, while pushing it far enough into the future.

Hafiz Noor Shams. Some rights reserved

[1] — KUALA LUMPUR (Nov 22): The National Union of Bank Employees (NUBE) had on Monday (Nov 22) urged the Employees Provident Fund (EPF) to demand that the government return monies withdrawn by bottom 40% (B40) and middle 40% (M40) segment EPF members to protect their retirement savings at a time when EPF members’ retirement savings have depleted due to Covid-19 pandemic-driven economic challenges. [Shazni Ong. EPF asked by NUBE to demand govt to return monies withdrawn by B40, M40 members during Covid-19. The Edge Markets. November 22 2021.]

[2] — Two experts Malaysiakini spoke to had concerns about allowing such a large number of people to dig into their retirement savings. Instead of tapping into EPF, both opined that the government could have spent more to provide assistance to households amidst the Covid-19 pandemic. Economist Hafiz Noor Shams previously analysed that the government was not spending enough in Budget 2021 to support the economy, by virtue of what he regarded as an overly conservative deficit estimate. [Annabelle Lee. Economists: Why let 8m tap EPF when govt can afford cash assistance?. Malaysiakini. November 27 2020.]

[3] — Laporan LAKSANA ke–76. Page 11. Ministry of Finance, Malaysia. November 17 2020.]