2010 Budget: sound and fury without substance (3)

By S.C.

The Track Record

The Budget for 2010 must be seen against the larger canvass of economic management by the BN Government over the recent past.

It should be recalled that the global Great Recession began in mid 2007 as the sub-prime fiasco in the United States began to unfold. The economic slowdown spread and gained momentum in 2008. As the gathering storm clouds hovered over the horizon, many Governments began to react and take counter recessionary measures.

The Barisan Nasional Government for its part remained in a state of denial. Ministers dismissed with some arrogance the notion that the Malaysian economy would succumb to the global slowdown. They argued rather smugly that Malaysia was immune as it had decoupled from the global economy.

Despite the key economic indicators pointing to a weakening in terms of industrial output, declines in FDI flows, lower exports and indications of capital flight, they continued to forecast robust growth. The markets for their part made their own assessments and lowered the country’s credit ratings.

The Budget for 2009 presented in August 2008 was based on unrealistic and rosy assumptions of growth and buoyant commodity prices, especially of petroleum, and the Government announced a humongous increase in spending both on the recurrent and development budgets. An increase of RM20 billion in spending was unprecedented.

In the months that followed, even as it begun to become crystal clear that the global crisis was likely to be severe, the Finance Minister, the Second Finance Minister and the Governor of Bank Negara indulged in soothing sound bites about the state of the economy even as the indicators pointed to a slowdown; they persisted in sticking to untenable estimates of growth, made light of the weaknesses and refused to use the instruments at their disposal to make policy corrections.

Thus, when almost every country was lowering interest rates, Malaysian policymakers remained in a state of paralysis. Only in late 2008, as it began to become abundantly clear that the economy was indeed weakening, panic measures were taken.

Interest rates were lowered marginally; a Stimulus package of RM7 billion was hurriedly put together; RM5 billion was channelled to up the stock market; there were additional off budget measures taken. At a minimum some RM32 billion were injected.

Despite this massive infusion of resources the economy continued to spiral downwards. It is patently clear that the remedies adopted, namely propping up “friendly“ corporations, massive spending on less than urgently needed infrastructure projects, and handouts to party warlords were not the right mix of measures to stem the haemorrhaging.

The ad hoc packaging of projects with long gestation periods was clearly inappropriate to address the immediate effects of the economic slowdown with consequences for employment and income levels.

It was also starkly clear that without policy reforms there would be a failure in coping with the recessionary effects. These lessons were not learnt. An ill conceived second Stimulus Package was hastily put together.

The truth of the matter is that dubious schemes and narrow politicking in the context of UMNO politics took precedence over prudent policy making. The then Second Finance Minister for his part cut a sorry figure as he went about repeating like a broken record that the Malaysian economy would continue to grow; the Minister responsible for the EPU was neither heard nor seen; the Governor of Bank Negara was hamstrung and failed to move by adjusting interest rates or by allowing a true float of the ringgit.

This is a sorry indictment about the competence of the BN government in piloting the economy through stormy and uncharted waters.

The Second Stimulus Package was rather haphazard with little consultation or input from the various stakeholders. Datuk Seri Najib Razak must take personal responsibility for the package. It was he who put together the package of RM 60 billion, a package of unprecedented size in Malaysian history.

The package of measures he revealed was largely met by a yawn; the markets were unconvinced by the scope of the package. The KL Bursa fell by O.6 percent on the first day of trading. There was considerable scepticism on several counts.

First and foremost there was the question about the size of the package, considered large and unwieldy. Second, there were concerns that the package of measures did not deal with the immediate consequences of the recession on employment and income levels. It ignored the pain inflicted on vulnerable groups.

There was a great imbalance in the package. Loans for businesses accounted for RM25 billion, or 41 per cent of the package. These were to buffer the downside risks to corporate earnings and help industries struggling with debts.

Expectations that the package would include measures to boost consumption, like cash-vouchers or cash bonuses, which would have had an immediate effect on Malaysia’s economy, were missing. A tax waiver would have also provided the most and fastest multiplier effect.

A further RM5 billion injection in 2010 was announced. The then Deputy Prime Minister said however that the RM25 billion in guaranteed funds as well as the RM10 billion investments to be injected by the government investment arm, Khazanah Nasional, were not “silver bullets” but meant to prevent Malaysia from slipping into recession.

If so, why were these funds being disbursed? Why were there no provisions for direct assistance to those being retrenched, or those suffering a sizable drop in earnings by way of elimination of overtime, or those facing a precipitous fall in earnings because of lower commodity prices?

The package of measures was skewed towards corporate interests and favoured support for INVESTMENT activities over support for PRIVATE CONSUMPTION. This was clearly a fatally flawed policy choice.

For a start it was consumption that needed sustaining and support to alleviate the pain associated with the recession. Malaysia deviated in the design of its stimulus package by focussing largely on investment rather than sustaining consumption.

It was also clear that stimulus needed to impact on the short term circumstances: thus direct measures in support of consumption that impact positively and immediately should have taken precedence.

On the other hand, channelling resources towards investment, as the package favoured would mean a trickling down; the proposed investment outlays had a long gestation period; the impact will thus be felt only after a lag. This would negate the goal of delivering immediate assistance to those feeling the impact of the recession.

The failure to front load disbursement of funds was seen as inevitably delaying the flow of resources to counter the adverse forces generated by the recession. Other criticism offered by analysts at that time touched on the lack of a coherent and integrated overall scheme for mounting a program of reforms which were critically needed to move the Malaysian economy out of the doldrums. The DPM-cum-Finance Minister was silent with regard to introducing much needed policy reforms. This ominous silence sent its very own message, namely no reforms are contemplated.

An objective assessment of the proposals left one with the feeling that Najib was taking a large gamble on the premise that large and massive spending would somehow enable the Government to dig itself out of the hole it found itself in. The package was little more than a brazen attempt to hijack public resources and to shovel these into the laps of UMNO warlords and cronies to protect and promote UMNO.

A sharper criticism of the measures announced was that there was no overarching policy framework to accompany the disconnected and disjointed expenditure proposals. The lack of a coherent policy vision indicated that Najib failed to think out of the box and had displayed a singular lack of leadership.

In the months since the launch of the Stimulus package the Prime Minister has announced piece meal and ad hoc reforms. These included the rather limited and token liberalization of 27 sub-service sectors, changing the role of the Foreign Investment Committee, and feel good measures such as the Amanah Saham 1Malaysia.

What has been the impact of the stimulus package? The Budget Speech glosses over the outcomes. Najib said: “The implementation of these packages has prevented the economy from sliding into a deeper recession. As of October 16th, more than 48,000 projects have been completed and almost 40,000 projects are being implemented. The implementation of the packages is on schedule.”

This is indeed an incredulous statement. The nation and people are entitled to a fuller explanation of how these billions were spent; what has been the impact of these expenditures on sustaining growth, how many jobs were saved, what long term benefits have these expenditures led to? It is somewhat insulting that all that can be reported is that some 88,000 “projects”, many of which were clearly boondoggles, were launched and were mysteriously able to prevent a deeper recession.

Clearly, the Government has hardly a clue about the true impact. All it can point to is that funds were disbursed. For the most part these were channelled to either corporate entities, including GLCs, and to contractors who are for the most part the UMNO warlords and cronies. A damning statistic that says it all– is that reporting on private household consumption (private consumption is the largest component of GDP), it grew by a meagre 0.5% in total.

What this rate indicates is that on a per capita basis private consumption FELL since population growth exceeded the growth in consumption. In human welfare terms, the brunt of the slide in the economy was borne by households.

It is thus clear that the billions expended in the name of “stimulus” had little or no benefit for the wage earners, the self employed, the farmers and the fishermen. These are the groups in society who paid the price for the foolish and disjointed policies pursued by the Government.

Had the Stimulus Packages been crafted with an eye to supporting incomes and employment levels, strengthening safety nets and channeling assistance to those most in need and most vulnerable, millions of Malaysians would have been spared the pain inflicted by the recession. What the recession has displayed is that there were a whole range of flawed policies and a singular lack of vision that bring into question the capacity of the BN to govern this nation with a degree of competence.

The Budget offered another opportunity to correct the failures of past policies. Regrettably, the opportunity has been missed. It is appropriate to briefly review the key Budget proposals.

(to be contd)