Categories
Economics

[2602] 2013 Malaysian federal governmet budget is smaller!

The tabling of the federal government budget is still ongoing but the Economic Report for 2013 by the Ministry of Finance is already out. Here is where the projected GDP figures and government finance are available for the first time.

I think the biggest point about this year’s budget is government spending. In most years, the fiscal deficit ratio (fiscal deficit to nominal GDP) dropped because the nominal GDP grew and not because actual deficit was down. This year, government spending is projected to come down.

Operationing expenditure is projected to fall by 0.3% and development expenditure is projected to fall by 4.2%. Overall expenditure is expected to decline by 1.1%.

The drop in operating expenditure is projected to come mostly from a drop in emolument (the civil service, really) and subsidies. For most people, this suggests that there will be a large subsidy cut in 2013. Pensions and gratuities are also projected to come down. This is a signal that something right is happening in the overly fat civil service. But then again, money to the civil service grew massively in 2012 that the cut in 2013 is pale.

Having a declining total government spending is rare. Between 1975 and 2012, there were only four times when total government spending decreased: 1983, 1985, 1987 and 2010.

Being a libertarian, I might be happy with this particular budget. But as I have been warned, I should wait until it happens.

This also means one thing. With the projected drop in government spending, politically, election must be held early in 2013 or even in 2012. It will be hard to achieve the reduction if election is held very late up to the constitutional limit. The later the election, the more electioneering will there be.

Mohd Hafiz Noor Shams. Some rights reserved Mohd Hafiz Noor Shams. Some rights reserved Mohd Hafiz Noor Shams. Some rights reserved
errata — the peril of rushing. I made a number of mistakes in the earlier version of this entry, ranging from grammar to the numbers themselves. First, I had asserted that if the government stuck with the budget, it would have been the first time in ages that total government spending would decrese. While such year is rare, the last time that happened was in 2010. Second, I incorrectly calculated the overall expenditure growth rate.  I apologize for that and I have corrected those mistakes. 

Categories
Economics

[2601] A thought, or two, about federated and unitary states finance, and consolidated public sector finance

I have been doing some preparatory work for a report on the 2013 federal government budget. The budget will be tabled at the Parliament this Friday.

In the course of doing so, I have come to wonder if the comparison of budget deficit (as typically understood) across governments of the world is really fair. Specifically, I do not think it is fair to compare the fiscal balance of a federated state with that of an unitary state, especially if one is concerned with the health of the overall economy and not just the financial health of the government.

This suspicion came after I read the consolidated public sector account for Malaysia.

One reason for the suspicion is this: one way to measure the solvency of the government is to see if the government can finance its operating expenditure and pay all of its borrowings interest purely by its revenue. This is called the primary surplus/deficit or the primary balance.

The reason is that through this, the government can fulfill all financial claims against it without embarking on new investments that require further financing while providing essential services to citizens and others largely unimpeded. To put it in another way, for government finance to be sustainable, it should be able to purely finance its consumption through its revenue only, and not by borrowing further (this comes with the assumption the interest rate is above zero. If the rate is zero and below, well, borrow away).

Looking at the federal government, most of the times there were no problem. According to the latest Bank Negara Malaysia’s Monthly Statistical Bulletin, most quarters registered a surplus as far as the primary balance is concerned. On yearly basis, there have been surpluses since 1981 (the earliest data available in the bulletin) with the exception of 1987 and 1986.

But according to the consolidated account (the Treasury identified it as consolidated public sector account which includes the finances of the federal government, all state governments, various statutory bodies and all local governments), then there is a huge deficit to contend with. In fact, it is estimated that there was a RM35 billion primary deficit for the first half of 2012. In 2011, it was estimated to be RM30 billion.

A little word of warning: the numbers for the federal government revenue from the Treasury significantly differ from the ones produced in the BNM Monthly Statistical Bulletin. So, the comparison is somewhat off.

Even so, if the Treasury numbers are right, then the consolidated public sector account tells a very different story than the one we used to. This may suggest that the wider public sector may have a problem balancing its primary balance.

As far as comparing federated and unitary states is concerned, maybe only the federal and the state government accounts should be combined to allow for a truer comparison. Without the necessary adjustment, a federation may have better financial health than a unitary state only artificially.

Another thing about the consolidated account is that it tells us that in 2011, the public sector suffered from 9.9% deficit to nominal GDP. This is much higher than the federal government’s 4.8% deficit to GDP.

On the 9.9% deficit to GDP, the point of comparing the deficit to nominal GDP is to incorporate the idea that a growing economy allows for more fund raising by the government. More generally, it informs whether there is space in the economy to raise more money through borrowing. The deficit derived from the consolidated account suggests that there is less room compared to what is suggested by the federal government finance.

Categories
Environment Personal

[2600] A lament of a tree lover

I do love trees. There is something comforting about trees, especially when I am surrounded by tall buildings most of the times. In the tropical Kuala Lumpur, it also has a cooling effect. That makes the city every bit more livable, never mind the aesthetic value it offers. Imagine large rain trees with the sound of leaves whistling as soft breeze blows through the landscape. Even imagining so is enough to make me smile a bit.

Great trees remind me of a time when I was relatively carefree, when I would lie down in the shade of a tree during summer, sleeping or reading a book or just eating lunch. The memories I associate with trees calm me down. A place without trees is a barren place and a depressing at that.

I can say that I have emotional connection with trees, especially with those within my familiar environs. And I had favorite trees in the past. These favorite trees of mine were where I would return almost daily when the weather permitted to do what a young me would do. I would lie down on the grass, by the trees and just stared at the clear blue skies. The mind would just be empty, uncluttered by equations, reports, personal issues, and only the heaven knows what else. I would be at peace with myself.

It hurts me whenever I see a tree cut down. Sure, there is deforestation everywhere, everyday but the feeling is accentuated when I see it. There is a feeling within me, almost irrational, that equates such cutting down to torture or killing of animals.

So, it pains me to see trees are being cut down to make way for the construction of the mass rapid transit in Kuala Lumpur. The first trees cleared to my knowledge were those on Federal Hill. I spotted it all the way up from the Parliament tower when I had a short stint there. It is the spot where the tunnel begins. Or will begin.

The latest patches of green succumbing to the monsters that would make up Devastator in the animated series Transformers (not the horrible Michael Bay’s version—he ruined Transformers) are in Damansara. The trees by the road leading to Bangsar from Jalan Semantan are now gone. The trees along the Sprint Highway will be gone soon too. Some have already been cut down.

I know, in terms of carbon accounting, the MRT will probably reduce net carbon emissions even as it cut down those trees (as well as trees for timber from elsewhere). That is good but it still pains me to see these trees being there no more. Between watching a pillar supporting the MRT rail line and a green, lush tree, I prefer the latter.

Also, the dust is nothing to look forward to.

Do not get me wrong. I do love to see a Kuala Lumpur with MRT. I do love intracity trains. Notwithstanding its financial merit and demerit, for better or for worse, a city with a great rail system is nice to live in. I for one do hate driving and the MRT will provide an alternative way for me to move around the city, if I stay in the city by the time the lines are operational. But that does not mean everything about the MRT is a-okay.

There are costs to it and the trees are one of the costs.

Categories
Economics

[2599] Don’t auction it. Abolish it

Let me begin by stating that I support a significant cut in in duties and taxes on cars.

There are at least two reasons for that. One, the cut will allow market forces to work better so that we can have a more efficient environment. A simpler market arrangement will free up resources dedicated to an elaborate system that was initially designed to protect the domestic car industry at the expense of Malaysian consumers. Two, the cut will enhance consumer welfare, which is in some ways a restatement of the first rationale. It improves welfare because with cheaper cars, the same personal resources used to purchase cars can be used for something else.

Along the same vein, I also support the abolition of approved permits.

Theoretically, permits can make the market more efficient but only in the cases of market failure. Permits help redistribute resources better when the market cannot self-organize due to cost being individually unaccounted. When there is no market failure, a permit system causes inefficiency. Indeed in the domestic car market, the permit system adds to the cost of a car, adding inefficiency to the system. I do not see any market failure in the car market and so, in the name of efficiency, approved permits should go the way of the Proton Juara.

I am not the first to say this because the issue is not new. It has always been talked about in the background but it is only recently that it gained very public attention and it is all because of Parti Keadilan Rakyat’s Rafizi Ramli. He has been consistently raising it in the way that it forces the government to reply. The fact that the national election is around the corner, somewhere out there, helps too.

Putting the issue to the middle of the table is good. It is good because it raises the profile of a real and significant issue that affects welfare of Malaysians. Now we have one more policy debate and it is something concrete to talk about, away from the typically unfulfilling issues of race and religion that most times are superficial. That alone gets the thumbs up from me.

Rafizi proposes to make passenger cars in the country more affordable by eliminating or reducing the high duties and taxes imposed on cars. I do support that.

The latest turn in the debate revolves around the approved permits for cars. It is here where I find his position on the matter disagreeable.

He proposes to auction the permits and sell it to the highest bidders. That has caused him to be criticized by those supporting the status quo, others are against it as it is inconsistent. If the permits are auctioned to the highest bidders, then car prices will go up. This will be contrary to the aim of making cars more affordable.

He defends his proposal by stating that the abolition of duties and taxes on cars will ensure that the total price of car will be lower even with auctioned permits. How is that so? He asserts that the permits at the moment fetch prices between RM40,000 and RM60,000 and so, he expects that the same price levels will prevail in an open bidding system as well. This is the assumption that allows him to mount a defense against the criticism. He assumes every cost component as constant except for duties and taxes, which are significantly reduced or eliminated.

In my opinion, the criticism against Rafizi is justified and his defense is no defense. The reason is that his assumption of everything being constant but duties and taxes cannot hold. The reason is that there is no guarantee that the permit price must be in the range he stated.

An auction is a very efficient method at ensuring that the seller gets to sell his goods or services at the highest price possible. And if there is enough demand for permits while supply is limited, then ceiling price can be as high as the sky.

We do not know how high the bid price for permits can go right now. We can only assume and Rafizi assumes that the price range he cites is the benchmark.

Unfortunately, his assumption depends on one question: is the price range cited the result of open bidding among many auction participants, or a negotiated outcome within a small circle?

It is very possible that it is the latter. In the latter case, there is every reason to suspect that the price range cited is too low. Have an open tender instead and microeconomics will work its magic to push that range up to the appropriate level. I do not know how far up it can go. For all I know, the permit price can go up high enough that it may undo any reduction in car price resulting from the abolition of car duties and taxes. The only way to find know is to actually run an auction for the permits. Now, there is context to the auction debate. Those against the effort to cut duties and taxes on cars are worried about government revenue loss. Rafizi counters that that concern can be addressed by auctioning the permits. He is right about how an auction can address the worry, given how the current distribution system of permits is at best inefficient (since the government does not get the full value of the permit), and at worst corrupt.

There are other ways to address the concern about government revenue loss while being consistent with the objective of making cars more affordable. Auctioning the permits is just not one of those consistent solutions.

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 September 21 2012.

Mohd Hafiz Noor Shams. Some rights reserved Mohd Hafiz Noor Shams. Some rights reserved Mohd Hafiz Noor Shams. Some rights reserved
n/b — for economic literates, this was written with quota quantity (or its relative quantity to total cars in Malaysia) unchanged. With significant increase in the number of quota, it’s possible for prices to fall even with auctioned permits under perfect competition and perfect pricing. If the quota remains unchanged and auctioned, no cut in taxes and duties will reduce prices. In fact, prices will remain the same in theory.

Categories
Economics

[2598] Growth yes, but not by all means

The traditional understanding of economic growth has its fair share of criticism.  It has been criticized as being overly materialistic and overly focused on production with disregard for its side effects. Those with esoteric worldviews would accuse such progress as spiritually empty and unfulfilling.

While it is true that such understanding of growth does not take into account our human experience comprehensively—and possibly nothing can—it is very important nonetheless.

Try living in a period when the gross domestic product and its typical variants that measure the mainstream idea of economic growth register a contraction. All the fancy criticism will take a backseat as very real economic pain hits far too many persons.

It is in that sense that the traditional idea of economic growth matters. There is something profoundly substantive about it; when economy does not growth, you will feel it, whatever your reservations about the mainstream understanding of the economy.

Yet, this piece is not a defense of the status quo, even as I do sit in the status quo camp.

Rather I write this to criticize those who pursue growth for growth’s sake. The way a society grows matters even within the current status quo framework. As a result, there is such a thing as mindless growth and mindless growth is one that focuses fully on how fast the GDP grows and not how it grows.

The clearest example happened on the days after the official GDP figures for the second quarter of 2012 were announced in the middle of August.

The Malaysian economy grew by 5.4% from a year ago in real terms. The growth rate beat market projection and forced the gloomiest of private economists to upgrade their economic projection for the whole year.

While external factors continued to exert strong negative influence on growth, the domestic economy grew strongly still. The primary reason why the domestic economy grew was due to extraordinarily strong private consumption.

It is hard to explain fully why consumption in the private economy—primarily spending of households as well as private firms—grew as strongly as it did. Troubles abroad should affect domestic sentiment despite the excitement surrounding various projects related to the Economic Transformation Program embarked by the government. But it did not affect sentiment too badly.

One explanation for the strong private consumption growth was the cash transfer program (Bantuan Rakyat 1Malaysia or BR1M) which was introduced by the federal government. The cash transfer increased household wealth for some periods. The increased wealth effect in turn encouraged households to spend more. In a big way if I might add.

The commentariat has shared its piece of mind on the matter. Some has praised the cash transfer for boosting economic growth in Malaysia. The business section of the Straits Times in Singapore is one of which have sung praises to the cash transfer for the GDP growth that it had brought.

Unfortunately, this kind of growth is not the best of all growth possible. Such cash transfer is always merely temporary and growth arising from such temporary measures is not sustainable.

While cash transfer does have its merits within wider context—for instance, cash transfer is more efficient and less wasteful that subsidy in improving individual welfare from microeconomic point of view—growth arising from cash transfer should be received with a measured nod, and not by throwing in a party. One should acknowledge the growth the cash transfer program brought but one must also understand that without it, growth would have been less fantastic.

The counterfactual is important because it describes the more sustainable growth going forward.

Consumption growth arising from freebies from the government is not nearly as good as consumption arising from returns from productive investment or simply real growth in income won from effort. Growth from the latter is the sustainable growth and it is sustainable growth that will determine the long-run or future state of the economy, but a one-off freebie.

To put it differently, one wants growth from productive enterprise and not from an effort at redistribution.

Redistribution of wealth—whatever its merits income or wealth egalitarian perspective—cannot really be created by merely redistributing wealth. At risk of committing a tautology, one has to create wealth to create wealth in the big, long-run picture.

In contrast, to put it simply, cash transfer is only an act of borrowing from the future to consume today.

This is one aspect which growth for growth’s own sake is wrong. To repeat the message, how the economy grows matters.

Mohd Hafiz Noor Shams. Some rights reserved Mohd Hafiz Noor Shams. Some rights reserved Mohd Hafiz Noor Shams. Some rights reserved
First published in Selangor Times on September 21 2012.