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The 2010 Budget: sound and fury without substance

By S.C.

Introduction

The maiden Budget unveiled by the Prime Minister was anticipated with great expectations of a new direction to move the Malaysian economy on to a new path of growth and revival through the adoption of policy reforms designed to restore competitiveness. These expectations, sadly, were not met.

The 40-odd-page two-hour long Budget speech delivered by the Prime Minister in Parliament was a great disappointment. It contained little by way of a bold policy agenda or a set of much needed measures to begin to restore the Malaysian economy to health.

The speech was long on rhetorical assertions and a litany of expenditure proposals; it contained little in the way of actual innovative thinking despite the Prime Minister’s resolve to adopt a new model for the economy “based on innovation, creativity and value-added activities”.

There were hardly any credible steps outlined as to how the unsustainable record high fiscal deficit of 7.4 percent recorded in 2009 was to be slashed. The broad assertion that the reduction of the deficit to 5.6 percent was to be largely achieved via proposed expenditure cuts in the year ahead. The main spending cuts are to come from reduced “operating expenditure”, lower food and fuel subsidies, and less money for development spending. Yet the expenditure proposals for 2010 allocate 11 per cent more money for the Government wage bill in 2010 for the nearly one million workers on the payroll which account for almost 10 per cent of the work force and constitute a mainstay of the BN government’s support.

The main spending cuts come from:

  • reduced operating expenditure, seen down by 13.7 per cent in 2010 at RM138.3 billion;

  • lower development spending, seen down 4.5 per cent to RM50.6 billion;

  • Further reductions in food and fuel subsidies which are seen falling 14.7 per cent in 2010 to RM20.9 billion.

These targets appear to be ambitious particularly in the light of the Government’s history of exceeding budgeted allocations of expenditures because of supplementary provisions and under performance in revenue collections.

However, it must be noted that these drastic cut backs appear to represent a stark and dramatic reversal of policies. It must be recalled that barely 6 months ago the Minister rushed through this House a Stimulus Package of RM 60 billion. He now proposes to cutback almost RM 29 billion from the budget for 2010 over the level from the current year.

By any standard, this is a dramatic and remarkable reversal of spending policies. It is truly amazing that the Prime Minister was largely silent to as to why it is necessary to reverse course so soon after the introduction of an unprecedented package.

We may well ask: Is this because the Government’s coffers are empty? Or is this late night conversion to prudent policies an acknowledgement error? Or is it that the markets are sending signals that deficits of the size and magnitude are deemed unacceptable in the context of credit ratings?

Be that as it may, the Prime Minister cannot evade responsibility and is obligated to put all of the cards on the table now that the gamble he took earlier is coming unglued. The erratic pattern of policy changes sends strong signals to markets that this Government is in a state of confusion and has no long term strategy to chart a course for the medium term.

The Budget appears to have been built upon a set of macro-economic assumptions that are questionable. It would appear that the key assumptions are: a) a rapid revival of the global economy in 2010 with positive trade developments; b) that these developments will contribute rapidly to a revival of growth in the Malaysian economy.

These assumptions are flawed on several counts. First and foremost, the early green shoots of a recovery in the global economy are tender shoots that could be stifled and the recession could be prolonged; there is a danger of a second round of decline. The US economy in particular is showing weaknesses as unemployment continues to rise and the Obama administration is under pressure to take steps to mount a further stimulus package.

Thus, it is indeed a high risk strategy for Malaysia to count on a rapid reversal in the slow down, particularly given the fact that historically growth and recovery in Malaysia emerges with a long of 6 to 9 mounts.

The assumptions underpinning the 2010 budget are that Malaysia will experience a V-shaped recovery. The prognosis is however that the recovery path is more likely to be U-shaped.

Thus, it is hardly likely that the projected deficit reduction and growth targets will be met. The early assessments by the rating agencies have drawn a mixed reaction from credit ratings agencies. The budget appears to have been crafted on a basis of a hope and a prayer rather than on a set of realistic assessments that factor in the down side risks.

In overall terms, the 2010 budget can be described as an exercise full of sound and fury, signifying little by way of tangible policy measures and reforms to regain competitiveness. The budget presented on October 23rd marks yet another missed opportunity to embark on a course that would re-establish and restore the integrity of key institutions and their ability to perform.

(to be contd)

5 Replies to “The 2010 Budget: sound and fury without substance”

  1. This is one of the hidden agenda to re-coup some money from the poor…

    JK’s Digest No. 8 of October 2009 (139 of 2009) NAP’s policy on vehicles in Malaysia
    Whether it is good or not for the vehicles of 15 years and above to go for mandatory tests next year prior to renewals of road tax, I would like to mention the following factors:-
    1. The testing agency with monopoly
    How capable and clean is this testing agency? Without competition, the consumers are the victims.
    I remember at the dialogue with the stakeholders in transportation in Kota Kinabalu on 8th August 2008, we were told that the request of another company be allowed for vehicle testing would be considered by the Transport Minister at the hall in Kian Kok Secondary School. But within a couple of weeks in Kuala Lumpur, the sole testing company was given a new 15 years [too long] tenure to be the monopoly. So was the Federal Minister [now obvious] sincere then? We want win-win scenarios.
    2. The costs of testing
    We do not know how much is the testing charge for private vehicles? Is it to be RM55 the prevailing rates for the commercial vehicle – once annually but now twice yearly obviously to make more people poorer. What happen when the first test fails? Would there be additional charges for subsequent tests?
    3. The question of corruption – all levels.
    I think the consumers so far can answer this question. What is the impact on this affecting confidence?
    4. What are the rational for the new NAP’s policies?
    There are a whole range of possibilities such as
    4.1 The purpose of safety may be a good idea when thousands die annually hopelessly on Malaysian roads. How effective on these tests to be relied for safety on the roads if we only know what goes on behind such tests on the day of such events? There are a host of reasons on safety on our roads especially the poor and inadequate roads with meagre directions in Sabah.
    4.2 The old and new vis-a-vis the imported and local made.
    Is it to boost the local sales of relative expensive ones of questionable quality especially in accidents? Imported models in globalisation are expensive due to tax factor while the quality of old and new cars are to be examined [not only the old ones]. Who want to test old cars of up to 30 years versus new cars in term of metal strength especially in crash scenarios? You all know the winners hence survival in bad accidents. Who want to take the challenge to exhibit/demonstrate the damages of test-accidents – old versus new ones? This may lead to vehicle manufacturers to upgrade the quality of the new vehicles and the new parts of such vehicles. What is new may not be necessarily better.
    4.3 Wrong perception on the high income economy
    Are we going so soon to the High Income economy as depicted by the 2010 Budget? Depending on the needs of NAP in the tests [aspects/item of tests] of private vehicles with respect to safety, environment and quality due to aging of the vehicles, it is inevitable that many people due to the low incomes for decades – now still worst – cannot afford to buy poor quality new vehicles at a price level not reflective of the income levels for the past 22 years. It is a fact that many cannot catch up with the price level of the new local made vehicles of questionable quality and prefer to keep their reliable old ones as long as it is road worthy. Over the recent decades costs of evrrything has been on the rise and some rises exceeding high but the incomes over the same period have not seen matching increases generally. So we need to address such disparities.
    4.4 The sole tester in monopoly
    To make the last rounds of financial returns before the monopoly is to be removed soon.
    4.5 What we are now is what had been sown by the NAP making body. The illegal Governments have allowed hundred of billions of Ringgit in Import Licences [AP] and discriminating taxes on imported vehicles to have gone to waste for decades resulting in poor transportation in the nation possibly to boost the local car industry. Now it is likely the majority of the consumers with private vehicles of 15 years and above would have to incur more hardship with the latest proposed tests. Why should a sole tester benefit from such new deals?
    4.6 There are other areas that should encourage safety if personal safety is the sole consideration for the new tests. Maintenance of personal safety for themselves and the families of all users of the roads plus punitive increased insurance premiums for accidents and regular regulatory checks on the roads by Police and JPJ should deter the bad habits of car owners and drivers. May I suggest that anyone with bad accidents should go for a review of the personal credibility like driving tests and health reviews as it is known of the frailty/faulty/flaws of drivers’ tests.
    The question of subsidies, monopoly, corruption, leakages in our economy should be addressed accordingly. We should learn how other nation maintain these tests on vehicles.
    Meanwhile, I would urge all concerned NGOs and other groups to come up with a detailed memorandum to deal with our transportation issues especially how to be safe on our roads with minimum costs as this is part and parcel of the maintenance of high income economy otherwise the consequences are still negative.

    Joshua Kong, Prime Minister of IGGG Malaysia.

    pw: flocked 30

  3. I have been trying to figure out what is a new economic model based on “innovation, creativity and value-added activities”. How can a model based on something as illusive as innovation and creativity ? It is really no different from saying that the new economic model is based on hot-air.

    I thought that an economic model based on the dignity of man as proposed by DSAI made more sense. Only with such a basis and foundation that policy imperatives and direction become clear. Innovation and creativity can only be a result of freeing the spirit of the individuals.

  4. The author made a grim reference to green shoots. Actually the scenario is grimmer. Green shoots were said to have been observed some 6 months ago. And so we really ought to see stems and green leaves today. No. Green shoots are still being talked about. That is worrying. Are we trapped in a snail-paced economic recovery? If you asked me, the signs are that we are indeed travelling in a slow coach. Minute paces made in the way of recovery could easily be swiped away. Petrol prices are not low and still not stable. The dizzying investment spins made by those ingenious american bankers and investment people (fraudsters really) had a corresponding dizzying impact the world over. Of course they are still engaged in dizzy spins at the moment but about their own heels – an act which is unlikely to impact upon anyone adversely. TG. The point is their activities would from now on be checked. The major force that whipped up the economy of the world would be less strong in future. In the event, even if recovery in the US is indeed on the way, it will be slow-moving. And without some spinning acts thrown in (I personally am against spins), it will certainly take time for any benefit emanating from the US recovery to drift across the ocean and hit our shores. And China is too preoccupied with pumping up domestic demand to fill the vacuum created by sluggish world economy. Again, we cant expect any real benefits to filter down from the middle kingdom. Not so soon anyway. Is government spending the way to go? Yes provided the economic problem is not deep seated and broad based (like what we have today) in which case government spending could just do the trick – the magic of propping up consumer confidence. If you have a problem of the size we see today mending confidence would be both an act of desperation and an act in futility. Against this scenario, how does najib’s budget stand up? Poorly. Very poorly indeed. He has nothing concrete in the budget to address our fast eroding competitiveness. The reasons for the erosion are well known – nep, nap, corruption, crimes and safety issues. Maintaining competitiveness is a crucial move which will arm us with the means to ensure sustainable growth.

    I rate najib’s budget “D-” bordering on “E”.

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