Categories
Economics

[2764] Will there be a spending spree before the GST?

I think the general consensus is that there will be a spending spree before the GST, which will be implemented on April 1. The idea is that a lot of consumers would expect price hikes of various degrees on or after April Fools’ Day. So, people would rush on to capitalize on current cheaper prices. This is much like how each time the government slashed petrol subsidies and hiked petrol prices previously, private vehicles would line up at the gas stations as consumers try to save the tiniest bits that they could.

I used to agree with that idea despite holding that the effects of GST would not be the same across all goods. A hike sounds likely for new homes but for some others, it does sound like a price reduction. In fact, I am unsure about a lot of stuff.

But in the end, it is expectations that affect current behavior and not actual future prices. The expectations might be wrong, but it will be wrong on the day consumers see the actual price, not before. So until then, expectations would still drive the spending spree. But of course, I am forming an expectation about people’s expectations, which can be problematic.

I am unsure about that spending spree now because I saw a piece of data from a survey at my workplace. I cannot reveal it because it is proprietary data. I would probably get into trouble for this (haha) but the result is quite different from my earlier expectation. I think all I can say is that more respondents expected to spend less instead of more before the GST!

The implications can be big. If you believe the consensus story, growth would be relatively strong in the first quarter and weak for the rest of the year. They spend first and spend less later.

Now, the survey result sounds like a straight up Ricardian equivalence, or at least close to it where consumers save to fund their near future spending (Ricardian is actually more than this but the saving story is similar). So, if the survey is right, there will be no spike in spending this quarter. Maybe even a slump.

Categories
Economics

[2763] Is the new 3.2% deficit target achievable?

People are asking me if the Malaysian government’s new 3.2% deficit ratio target is achievable.  I have read in the news that several politicians are skeptical about the target. I do not remember who said that but I feel the sentiment is shared by many.

But the only way to really answer this objectively is to run a sensitivity analysis.

It is relatively easy to do a sensitivity analysis and I have done one last week under the assumption of no expenditure cut. That one shows how the deficit ratio would react if the government had not changed its budget under a range of NGDP and revenue assumptions. I think it somewhat presents the realistic worst-case scenario. The government said its fiscal deficit would have gone up to 3.9% of GDP in 2015 without any expenditure cut. I think that would come close to my expectation (4.0%-4.1%), which is based on no revenue growth (not unreasonable) and at about 4%-5% NGDP growth. I am not reproducing the table here because I do not want to confuse the readers. If you are interested in that sensitivity analysis, you should revisit the post.

But that sensitivity analysis does not indicate whether the new 3.2% target is realistic. To answer that, it requires a bit more moving parts added into it. One additional dimension is required to be exact.

I am doing that here by showing 3 cases of revenue change under a range of NGDP and expenditure assumptions (note the not-so-small difference from the above model). To cut through the graphics, I think the 3.2% fiscal deficit ratio target is achievable if revenue grows by about 2% (I said about because I am too lazy to run a differential equation).

Before that, some legends for the three charts at the bottom. The yellow-highlighted cells describe the would-be situations if the expenditure was not cut (yes, it is a funny coincidence that the government had planned to increase its expenditure by 3.2% from 2014 in the original budget). The red-highlighted cells show the deficit ratio under the January 20 revised budget expenditure figures (Under revised budget, expenditure would still grow 1.2%. So, please do not call this austerity).

Here is the deficit ratio if 2015 revenue does not change from last year. Achieving 3.2% target seems impossible under this scenario (I wrote impossible because it would require a very strong NGDP growth at a time the GDP deflator appearing weak. If government revenue is flat this year, then my projection for the deficit would be about 3.6%):

No revenue change

Things would look a bit better if the government revenue would grow by 1% this year, but it would miss the deficit target still as 9% NGDP growth is beyond our reach, given current constraints:

Revenue growth 1%

Under 2% revenue growth case, the 3.2% deficit ratio looks achievable:

Revenue increases 2%

So, after reading through this, do you think the 3.2% deficit is achievable?

Ultimately, your answer must rely on revenue and NGDP growth. I think the reasonable NGDP growth assumption is about 4%-5%. As for revenue, I am unsure at the moment. There are just too many moving parts that require further investigation but the original budget had it grown at 4.5%. It will definitely be lower than that this year.

Categories
Liberty Personal Society

[2762] Of paternalistic announcement that comes with an echo

Hearing voices announcing something over the loudspeakers in public spaces makes me uncomfortable. It gives me the feeling that somebody is watching me and worse, the unknown person is giving me an order. The automatic reaction by the libertarian in me is to question and resist, even if the announcement makes sense.

Most announcements in KL Sentral, Kuala Lumpur’s Grand Union Station with its wide atrium, are harmless. Please let the passengers on-board get off the train first. Please watch your belongings. Please watch your step.

Judging by how some people refuse to wait for others to get out of the train before getting in, it feels like I am not the only trying to resist the announcement…

But from time to time it gets a little suspicious. Come join us for the F1 racing this weekend in Sepang! Drink this coffee.

No, I do not want to watch the F1 under the tropical sun. No, I do not like your coffee.

Yes, they are advertorials telling you to buy something that you do not need.

One time in a train car, a “refresher” would spray a scent of a particular brand of quick canned coffee into the enclosed air. There was no way for me to run, except getting out of the train. The advertisement campaign assaulted not only my eardrums but my olfactory organ too.

I learned to identify which train cars were installed with the horrible refresher and refused to ride on it, preferring to wait for better smelling train sets. It was not hard to know which was which. Oh, that is the car with the horrible smell of coffee. Oh, that is the coffee Wonda train car! I will let the train go for a better smelling one.

The PA system does have it uses. Sometimes, when the trains break down, the announcement helps. But at other times, all the gentle reminders — in London, I think it is “Mind the gap” in New York, “Stand clear of the closing door, please” or was it in California with its BART? I do not remember. In Paris, well, the Parisian Metro is unique with its chime ”na-na-na-na” — are definitely a hint of paternalism. It is a kind of soft paternalism that almost everybody ignores but at its heart is that suffocating authoritarian worldview.

The cavernous badly lit KL Sentral exacerbates, as with any cavernous building would, the sensation with that slight echo that follows the initial sound wave.

Growing up Malaysia, I quickly associate loudspeakers and echoes with Islam. The calls to prayer, the azan, are familiar and with so many mosques around, it can be maddeningly incomprehensible and downright annoying. In this country, expressing dissatisfaction against the competition between mosques for the loudest azan prize can bring trouble as the overly sensitive conservatives ignore comprehension of the azan recital in favor of noise. The louder the azans, the sermons, speeches and readings, the louder will the echoes be.

The echoes give the idea that god the supreme being is speaking to you. This is not just me feeling it and writing crap theory. Switch on the TV or the radio when an Islamic program is up in the air and you can hear how the editors use the echo effect whenever a verse from the Koran is read. In a more adventurous unorthodox Islamic program — I think it was Imam Muda where judges look for the best “Islamic idol” (just like the American Idol!) — an echo would accompany the contestants when he or she read a Koranic verse. So, there is something holy about the echoes.

My travels across Southeast Asia have made me realized the role of echoes in depicting something as holy is not limited just to Islam. I stayed for a week in an alley in Mandalay, Myanmar. At the top of the short alley is the Ein Daw Yar Pagoda. The Buddhist chanting I heard every morning and in the evening through its PA system was, forgive me for the neologism, echorized. It sounded like a prerecorded mantra chanting. I could hear the word amitaba through the artificial echo and among the unrecognizable words. And there was also echo in traditional Christian chanting from the mediaeval times as they sang in their tall cathedrals.

Religion, either god himself (herself for the feminist?) or the institution is an authority, I suppose sociologically, rightly or wrongly. The echo is a signifier of holy authority.

Holy and authority. Those are two of my favorite things.

And so I come back to KL Sentral with its banal announcements along with its echoes.

The libertarian is clenching a fist, but with only four fingers closed.

Categories
Economics

[2761] What if there was no expenditure revision?

The Prime Minister announced the government’s plan to slacken its 2015 deficit target from 3.0% of GDP to 3.2%. While it is an easier target, it is still a cut from the expected 3.5% last year. I think we can relax it further but the revision is in line with my sentiment although not fully. There are several measures which I disagree, especially after the PM mentioned the phrase “import substitution” but I will not go into that.

The budget revision involves a number of expenditure cuts and other, I guess, less orthodox measures.

But what if there was no cut to expenditure?

I have made a simple calculation showing how the deficit ratio would react based on changes in the NGDP and government revenue. The original 2015 budget had the NGDP growing at 9% while revenue increasing at 4.5% from 2014, as I have highlighted in yellow below.

20150120Budgetrevision2015Malaysia

I suppose I could add a range of expenditure cuts too, but a 3-dimensional table or chart makes my head spins without the proper software at hand.

Also, I think it is good to use those figures and compare it with historical ones, just for the context:

20141013MalaysiaDeficitNGDP

Categories
Conflict & disaster Economics

[2760] The deficit can wait

I have been supportive of the government’s attempt at closing the deficit. I do celebrate the significant fiscal progress made over the past five or six years.

In retrospect, it was easy to back the cuts because the times were generally good. After a recession in 2009, the Malaysian economy grew quite well almost every quarter and that made tough policies easier to swallow.

But times are changing and what was swallowed easily yesterday will be tough today. Those tough policies will be hard on almost everybody now if executed too religiously.

The situation has changed so fast that I feel almost nobody ”• at least as far as I can see in the financial market ”• still believes the original deficit target of 3.0 per cent to GDP for 2015 is credible anymore. It will be challenging to meet the target and if the government insists on meeting it anyway, something has to give and that something will be overall economic growth.

Growth here is not merely an economic figure appearing in someone’s spreadsheet. It is people’s livelihood which is at stake.

Partly in my effort to be pragmatic and partly from observing from afar the horrible European experience arising from the wrong timing of its austerity program, I have come to believe in having a counter-cyclical policy. We commit to tough reforms making the economy more efficient during the good times and then we give it a slack when things are not so sunny and cheery.

What I am saying here is that the government here in Malaysia should be flexible with its deficit target for the time being.

I sincerely believe we can afford to do so because we have done serious fiscal reforms recently. Petrol and diesel subsidies are no more after years of gradual cuts and we are finally implementing the goods and services tax after years of contemplating it. I think the long term trajectory from the initiatives has already set the right direction.

My only disappointment is that these reforms were not done sooner due to political concerns. Everybody was so concerned about their political prospect that they forgot or even ignored the country’s future. For months, the government went on autopilot and the subsidy cuts themselves were put on hold for quite some time as the government prepared for the 2013 general election. We lost valuable policy time and now the window is closing.

But what is done is done and perhaps, that is just the cost of maintaining a democracy, however flawed ours is. If we believe in countercyclical policy, we should now switch our focus from fiscal tightening to some kind of relaxation.

In fact, with this framework in mind we should target the deficit within an economic cycle instead of the Gregorian calendar and I think, again, with the reforms done, we should be able to close the gap in the long run.

And we ”• when I use the pronoun we here particularly, I mean the government; after all, we elected the government regardless whether we like those sitting in Putrajaya spending our money ”• do honestly have a legitimate requirement to spend this time around, which runs contrary to keeping the what seems to be an impossible deficit target to meet.

No, it is not about saving 1Malaysia Development Berhad ”• a beast which we will have to address ”• or paying thousands of ringgit for a set of screwdrivers, or even giving more free money to suspicious grantpreneurs and selecting winners in the economy. It is about helping fellow Malaysians.

Pictures of devastation from the recent floods are heartbreaking. As fellow citizens, it is our duty to lighten their burden and the government is our primary agent to do so. Not some political parties, not some NGOs, not some volunteers. It is good to see people helping out but our agent is the government. We pay taxes and we expect the government to provide the basic infrastructure that the country needs to go forward. It is the basic role of a government.

These infrastructures from water to bridges to schools in the east coast need repairs. We need to spend for the repairs and in many cases, for reconstruction altogether.

That spending would probably hit the deficit figures but it is for a good cause. The deficit can wait for another day.

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 Malay Mail on January 17 2015.