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
Society

[2444] Large numbers, small minds, majority voters

I find it hard to take the masses seriously sometimes. Here is a story why that is so.

I attended a Pakatan Rakyat-organized forum a few weeks ago. The organizers were promoting the coalition’s proposed federal budget. There is nothing wrong with that.

My problem is with the audience.

Since the proposal is a plan for public finance at the national level, the numbers do run to the billions. The nominal size of the economy itself is more than a trillion ringgit and the federal government intends to spend more than 200 billion ringgit in 2012. Various ticket items come with large numbers indeed.

These large numbers awed the audience. I found this a bit shocking. Yet another billion mentioned, there came another chatter. These murmurs mostly came in the fashion of “that’s big.” They were too easily impressed with a lot of things. The way they experienced the awe made me doubted that they understood what impressed them.

For instance, they were surprised that the federal government owes billions but they did not know that that is normal all around the world, and what matters is the ability to service the debt. Even so, the absolute billions impressed them. If the Malaysian government had a debt of only one billion ringgit, they would awe still, never mind that a billion to 200 billion is like 0.005 sen to a ringgit. They could not grasp the triviality of the large numbers.

To them, large numbers are, well, large. It is so large that, it has to be awfully serious.

Granted, the most of the audience did not seem like the professional type. They were not the overly-critical wonkish type. They were those whom loved their politics instead.

They are probably the majority within the realm of electoral politics. And democracy demands they are taken seriously. That is dispiriting.

But at least I learned something new. If you want to pull a fast one, just mention something very, very big.

Categories
Economics

[2443] Guess who?

Nope ladies and gentlemen. It is not Germany. Despite voter backlash and political discontent, Germany went ahead. What is EUR211 billion among friends?

Nay. It is not the Netherlands. The Dutch were vocal but voted for it anyway. What is another EUR44 billion?

No, it is not Finland. For all the demand for collateral, Finnish lawmakers said “yes, let us do it.” Who cares for another EUR14 billion?

Sixteen countries passed the amendment to the European Financial Stability Facility, seeking to expand the facility from EUR440 billion to EUR780 billion.

It has to be Slovakia. Slovakia has to say no. Slovakia has to say, we have arrived.

That notwithstanding, the market is relatively pretty cool about. There was no panic. I half expected a storm. The market is probably expecting Slovakia to pass the EFSF amendment regardless.

Not that it will be enough, if Italy goes under anyway…

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.

Categories
Economics

[2441] No target, no central planning

Milton Friedman once visited Hong Kong in 1963. He met John Cowperthwaite, the financial secretary of Hong Kong, whom was credited for enabling Hong Kong to become Asia’s foremost financial center through his free market policy. Friedman asked him “about the paucity of statistics” in Hong Kong. Cowperthwaite replied, “If I let them compute those statistics, they’ll want to use them for planning.[1]

Statistics has its uses and it does help us understand our society better. It describes phenomena objectively instead of forcing us to rely on conflicting anecdotes that are dependent on point of views. First and foremost, statistics has descriptive power.

But not all individuals believe in only the descriptive power of statistics. Some believe too much in the prescriptive aspect. Statists tend to belong in the latter group. PEMANDU is afflicted with it too, arrogantly trying to manage the economy when the economy itself is organic.

I reject targets placed on something as organic as the economy. While the government does have a role to play, to set a target on the economy mistakes the economy as a business entity or a firm, pretending as if the planner is the CEO, where there is none really.

The dangers of having a set of targets like having specific real GDP growth rate are plenty. One of them is the incentive for the government to spend too much just to meet its target. There is a conflict of interest when the target is set by the very entity that is meant to achieve it (this is also partly the reason why I am skeptical with a lot of KPIs set by the government: incentive to set them low to make themselves good).

This adverse incentive is bad for public finance and ultimately, for taxpayers.

More generally, having those targets encourages central planning.

But this entry is not meant to bash PEMANDU. I think I have criticized PEMANDU so much that I am bored of it already. This entry is meant to criticize Anwar Ibrahim.

Anwar Ibrahim is smart. When he realizes that the Najib administration is targeting possibly an unrealistically high real GDP growth rate given the global economic circumstances, he challenges it and demands accountability from the federal government. He wants a special parliamentary sitting to meet if the federal government fails to meet their target later in the year.[2]

I disagree to the demand for accountability. It is not so much I would like to give the Najib administration a free ride. It is only because I disagree with having a target in the first place. To demand accountability only strengthens the path to the target. That means central planning.

This is a case where accountability is not so hot.

Mohd Hafiz Noor Shams. Some rights reservedMohd Hafiz Noor Shams. Some rights reservedMohd Hafiz Noor Shams. Some rights reserved
[1] — The difference in the economic policies followed by Hong Kong and Britain was a pure accident. The colonial office in Britain happened to send John Cowper-thwaite to Hong Kong to serve as its financial secretary. Cowperthwaite was a Scotsman and very much a disciple of Adam Smith. At the time, while Britain was moving to a socialist and welfare state, Cowperthwaite insisted that Hong Kong practice laissez-faire. He refused to impose any tariffs. He insisted on keeping taxes down.

I first visited Hong Kong in 1955, shortly after the initial inflow of refugees. It was a miserable place for most of its inhabitants. The temporary dwellings that the government had thrown up to house the refugees were one-room cells in a multistory building that was open in the front: one family, one room. The fact that people would accept such miserable living quarters testified to the intensity of their desire to leave Red China.

I met Cowperthwaite in 1963 on my next visit to Hong Kong. I remember asking him about the paucity of statistics. He answered, ”If I let them compute those statistics, they’ll want to use them for planning.’’ How wise! [Milton Friedman. The Hong Kong Experiment. Hoover Digest. July 30 1998]

[2] — KUALA LUMPUR, Oct 10 — Datuk Seri Anwar Ibrahim today demanded Parliament reconvene for a ”special sitting” if Putrajaya fails to meet its ”unreasonable” gross domestic product (GDP) growth forecast.

The opposition leader today poured cold water over Datuk Seri Najib Razak’s Budget 2012 tabled on Friday, claiming the prime minister’s predictions and his administration’s alleged penchant for unbridled spending would likely worsen the country’s deficit.

Anwar also predicted the Najib administration would table a supplementary supply bill by mid-2012, seeking for additional funds just as it did in June this year. [Clara Chooi. Anwar wants special Parliament meet if GDP aim unmet. The Malaysian Insider. October 10 2011]