Categories
Economics Politics & government

[2682] Comparing manifesto-related fiscal deficit, sort of

I am curious at some of the projected fiscal deficit figures which have come out from the internet. A number of them are fanciful.

One that I have read has the deficit under Pakatan Rakyat manifesto rising to close to 12% of nominal GDP while BN would be as low as 4%. The 4% figure is really the number that is stated in the 2012/2013 Economic Report as published by the Treasury for the 2013 budget back in September 2012. This number was published much earlier than 2013 BN manifesto and I doubt the 4% incorporates most if not all of BN manifesto. So, citing the 4% is misleading. In any case, I have written how that 4% in fact is increasingly an incredible figure. I have in fact wrote about this at work as early as October 2012. It is just common sense if you know your stuff and have been monitoring government finance for some time.

First, I have a gripe on some of the numbers. Many projections appear to be based on 2012 nominal GDP figures. Obviously, any ratio based on that number will overstate the deficit ratio since the 2012 GDP figure will very likely be smaller than the 2013 GDP figure.

Second, some take the whole manifesto expenditure and lump it up in just one year when it is clear that many of those spending will be distributed across multiple years. Naturally, you will get a humorously humongous number if you do that.

So, I am annoyed. And to disprove those numbers, I need to produce one of my own.

I hate to disprove Syed Hussein Alatas but I am lazy. I am taking manifesto expenditure figures estimated by The Malaysian Insider and comparing it to Treasury’s 2013 nominal GDP figures. I am not fully convinced of the numbers estimated by TMI but like I said, I am too lazy to produce my own estimates. After all, these are numbers for my blog. If it were for work, I would be more diligent. So, the TMI is the best I have. In my defense, the TMI numbers do not suffer from the two criticisms I have listed down.

TMI has it that BN manifesto in the first year would cost RM12.5 billion while PR’s to cost RM25.6 billion. I do not know the assumptions behind it but I am taking it in good faith.[1]

The Treasury in its Economic Report projects the nominal GDP for Malaysia in 2013 to be slightly more than RM1.00 trillion.[2] The Treasury also projects a fiscal deficit of close to RM40 billion in 2013.[3] So, the base case has the fiscal deficit as 4.1%.

Taking a simple view that all manifesto expenditures are unaccounted for in the 2013 fiscal deficit, that would mean BN manifesto would increase the deficit to 5.4% while PR manifesto would push it to 6.7%.

As you can see, the numbers are less alarming than what political hacks all around have been brandishing. That is not to say those figures are acceptable and I am sure Fitch, S&P and Moody would stand up and yields to spike a bit but it is not the end of the world.

Now, the definition of first year is problematic because the winner of the election will have only about six months to implement their manifesto in 2013. Furthermore, the expenditure for 2013 has been set, notwithstanding possible additional unbudgeted spending that may come later in the year. Furthermore, the six months of 2013 will likely be months of firefighting for both sides.

Because of that, it is probably better to look at the deficit number in 2014 instead.

Now, let us say that the nominal GDP in 2014 would grow at its 2011-2013 growth average (inclusive of the 2013 projected figure), which is about 6.6%. That suggests the nominal GDP in 2014 would be close to RM1.07 trillion.

Let us also assume that the deficit stays the same at RM40 billion however unlikely that will be.

So under a base case scenario before accounting for manifesto spending, the 2014 deficit-to-nominal GDP ratio will be 3.7%.

Accounting for manifesto spending, for BN it might be 4.9%. For PR, it might be 6.1%.

Now, PR manifesto cost might be slightly overestimated. This is especially so because the TMI figures is a gross number. PR will likely institute open tender system more widely and that may reduce overall expenditure by a bit.

As for BN estimate, it is likely slightly overestimated given the base case because I would think some manifesto expenditure would have been included in the budgeted expenditure. Furthermore, some the MRT spending is a kind of contingent liability expenditure: it is “off the balance sheet”. It is just not included in the official deficit calculation.

And the revenue side has not been considered yet. But I am not going to do the revenue projection. After all, the purpose of this entry is to show that it is not the end of the world.

There is just too much uneducated fear mongering and I hate that.

Mohd Hafiz Noor Shams. Some rights reserved Mohd Hafiz Noor Shams. Some rights reserved Mohd Hafiz Noor Shams. Some rights reserved
[1] — [Populist pledges weigh on Malaysia’s wallet, reports WSJ. The Malaysian Insider. April 30 2013]

[2] — [Gross National Income by Demand Aggregates. Economic Report 2012/2013. Malaysian Treasury. Accessed May 1 2013]

[3] — [Federal Government Finance. Economic Report 2012/2013. Malaysian Treasury. Accessed May 1 2013]

Categories
Economics

[2681] Government debt cut reduces borrowing cost in the economy

Here is an interesting paragraph which describes how a cut in government debt can lead to lower borrowing cost in the economy:

A decrease in the supply of government debt has forced some money fund managers and cash investors to scramble for alternatives. Higher demand for commercial paper, repurchase agreements and other short-term private debt has knocked down borrowing costs on Wall Street. [US expects to pay down debt in Q2 for first time since 2007. Reuters. April 29 2013]

How about that? A clear crowding out (or rather, crowding in) effect between the public and the private sectors.

Categories
Politics & government

[2680] Undemocratic Kuala Lumpur

Life in Kuala Lumpur in the past few weeks has been a constant reminder of our flawed democracy.

If you are in the city, look all around you. You will see banners and posters of political parties almost everywhere. Superficially, the colorful show of political flags is a sign of democracy. Now, look closer at those belonging to Barisan Nasional and especially those with Raja Nong Chik Raja Zainal Abidin on it. Be mindful of their messages.

Those messages celebrate the achievements of Raja Nong Chik as a minister. It highlights what he has done over the past few years, with him heading the Ministry of Federal Territories. It appears like the all too admirable democratic judge-my-record, thank-me politics. He even thanked himself in many of his political banners and posters for stuff he did in the city.

Yet underneath this veneer is acid corroding the pillars of our democratic institution.

The campaign narrative told by BN to the voters in the city makes one think that Raja Nong Chik is the mayor of Kuala Lumpur. This is all the more so in Bangsar where he is contesting in the general election. If those messages are to be believed, it would appear that he was both the mayor of Kuala Lumpur and the Member of Parliament for Lembah Pantai, the parliamentary seat which Bangsar is a part of.

If all those achievements highlighted for electioneering purposes are truly his, then he must have directed the very public resources belonging to the city to do what he did. He takes credit for things that are the normal function of City Hall, like the maintenance of drainage around the city, which is funded by taxpayers’ money.

There is a problem with this if one views it through a democratic lens.

The truth is that Raja Nong Chik is an unelected senator appointed as the minister for the Federal Territories. He is not the elected mayor of Kuala Lumpur and he is not the elected representative for Lembah Pantai.

The 2008 general election saw BN win only one out of 11 Parliamentary seats in Kuala Lumpur. While Parliamentary seats are an inadequate proxy to the will of the majority in the city, it is the best proxy we have got since there is no local election. Based on that proxy, the majority in the city conclusively rejected BN candidates and BN itself then in March 2008.

In spite of that, BN continued to control City Hall through the Ministry of Federal Territories as if they had the moral mandate to do so. With that, the party was the one that determined the development agenda of the city. Or perhaps, more importantly, BN controlled the spending priority of City Hall.

Add in the fact that the actual mayor of the city also is unelected, voters of Kuala Lumpur are quite simply unrepresented in the very authority that governs the affairs of their home. The elected representatives are dependent on the goodwill of City Hall and the ministry to execute the normal functions of an elected representative.

It is Putrajaya with its pretentious grandiose buildings that dictate the affairs of Kuala Lumpur. The city of millions is being governed from a desolate town erected in the middle of nowhere.

That is undemocratic. And that, ladies and gentlemen, is exactly the premise that BN’s campaign messages rest upon.

How long more will the Kuala Lumpur electorates continue to be politically unrepresented in the running of the city?

There is no reason for BN to change the status quo because it is the beneficiary of things as it is. If BN continues to be in the minority in the city, it is in their favor to keep the whole undemocratic structure intact. Even if BN somehow miraculously wins a majority of Kuala Lumpur Parliamentary seats and by proxy, the will of the voters of Kuala Lumpur, the moral authority BN might gain through this democratic process is only a redundant bonus.

That begs a question. If Raja Nong Chik and BN do not require a win to do what he did in the next Parliamentary term, why vote him in at all?

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 April 24 2013.

Categories
Economics Politics & government

[2679] An Iron Lady to stop populism

Democracy by far is the most respectable way a society can govern itself. That, however, does not mean that democracy has no weaknesses at all. As Winston Churchill is often quoted, “democracy is the worst form of government except all the others that have been tried.”

It is the best that we have after thousands of years of experimentation. Populism is the very essence of democracy. The good thing about that is that it helps ensure the power of the day must always come back to the people if they want to renew their mandate.

Unfortunately, populism is probably the worst feature of democracy as well. That is so because populism can bring about irresponsible policies that can be costly in the future. Everybody loves having a good time but nobody likes to be there for the clean-up.

We saw that in Greece when the government spent everything that it had and more to make its people happy.

The economic populism we saw there is not the only cause of the Greek sovereign debt crisis but it was a major contributor nonetheless. When the debt crisis finally came about and it was time to tighten the belt, the country was up in arms.

And who can forget, in a humiliated and desperate pre-World War II Germany, Adolf Hitler was popular. That populism later brought devastation that no one had seen before.

Greece of recent times and Germany before World War II are extreme examples of populism gone wild. But it is still a cautionary tale for all to bear in mind: there is always cost to populism.

In the late 1970s, Margaret Thatcher was elected as the prime minister of the United Kingdom. She was no friend of populism. She swam against the current ferociously. “The lady’s not for the turning,” as she once said in response to increasing opposition to her policy.

She was adamant in changing the way of doing things to push the UK national economy forward and out of the doldrums. In her mind, there was too much government in the economy and the private sector played too little a role.

The most important thing of all is that she succeeded in revitalising the economy of the UK. She did the job she set out to do even when it cost her job.

Her determination in pursuing her policy shocked her colleagues. Fearing that they might lose the election, they turned around and gave her the boot.

She died earlier this week at the age of 87. The vile comments that followed the news of her death only strengthened the idea that she was not very popular.

At the very least, she was divisive. But whatever one thinks of her, she took her responsibility to heart and she did not flinch. As Malaysians go to the polls, perhaps it is worthwhile to reflect on the resoluteness that Thatcher showed.

This is especially so when both sides of the Malaysian political divide are engaging in populism.

Both are promising to either increase subsidy or cash transfer in hope of winning the general election. To make the matter worse, both sides promise to cut taxes even when their promises if implemented will see government expenditure rising.

The continuing economic populism cannot be good for the health of public finance. Sooner or later when the party is over, somebody will have to pay for that. The path of economic populism is ultimately unsustainable and somebody will need to hit the brakes.

Fortunately, Malaysia is still at the stage where we can hit on the brakes gently. Government finance is still at a respectable level. There is no need for the harsh fiscal austerity in practice in Europe as European economies struggle to grow. But the leeway that Malaysia enjoys cannot be true for too long if economic populism goes on.

The responsible side will be the one which will hit on the brakes gently. The responsible side will be the one that goes out promising a vision that does not depend on promising yet more subsidies and money to voters.

The responsible side will be the one that stands up and reminds all that we cannot go on partying all day, every day.

It is in this respect that Malaysia needs a Thatcher.

One may disagree with the policy Thatcher implemented in the UK in the 1980s but her resoluteness and refusal to succumb to crass populism is something to be admired.

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 Sun on April 11 2013.

Categories
Economics

[2678] How have those CPI-components behaved?

The CPI for March was released yesterday.

Malaysia’s consumer price index grew by approximately 1.6% from a year ago. It is slightly higher than the inflation rate recorded in February, which was at about 1.5% from a year ago.

You can see which components contributed to the higher inflation, as well as the price behavior of all the CPI-components from November 2012 to March 2013 below.

CPI components Malaysia 2013

From the chart, you can guess which categories suffer from price controls and which ones do not: the ones with constant change are those which prices are controlled. The obvious one is the alcohol & tobacco category.

Here is the alcohol & tobacco category:

Alcohol CPI Malaysia

Alcohol and tobacco are subjected to punishing sin tax almost every year. The step-wise inflation rate reflects the controlled nature of the industry. It is so bad that the industry considers that if the government does not mention them during budget time, it is good news.  This happened in 2012 when the government did not increase the sin tax and hence, the prolonged zero inflation rate throughout 2012.

Nothing, really, shows the controlled nature of the category more than month-on-month rate:

20130418CPIAlcoholmomMalaysia

Each spike in the chart above corresponds to the increase of sin tax.

The transport also appears to be controlled. After all, fuel prices are largely controlled and it is reasonable to expect inflation in this category to be stable. It does seem so on this particular scale:

20130418CPITransportmomMalaysia

But it is just a case of bad scaling. After removing the 2008 outlier caused by government’s move to liberalize part of the subsidy regime, you can see the variation clearer:

20130418CPITransportmomcloserMalaysia

Part of the reason for the volatility in the transport category is that while fuel and public transport fee, which is part of the category, is controlled, the category also includes vehicle prices, which are not controlled. Controlled and uncontrolled items are mixed together under one roof.

Moving on, I have always wondered the reason why have clothing and footwear prices been coming down. And it is not a recent phenomenon. It has been going on for years.

CPI-inflation Clothing Malaysia

The same has been going on with communication category but for communication, fierce domestic competition is pretty much the answer. You can see the competition everywhere. For clothing, it is harder to see so.

I would guess it is the magic of globalization since clothing and footwear are tradable goods, especially with China is to the north. But that sounds too simple.