Govt should cut expenditure

IN just over two weeks, the Budget will again be presented to the people and like always, Malaysians will be wondering what goodies the Finance Minister will have in his briefcase for them.

The wish list of the people is obvious, as always. Human nature will dictate that people want more and give less and reality is that most wishes will not be met.

Being billed as an election budget, however, Budget 2012 should contain something for just about everyone, at least for those who might be a little more realistic over their expectations.

Realism, however, dictates that the giving will be hamstrung by the state of finances.

Dishing out more tax cuts, waivers or rebates could mean less tax collection in the future and with the Federal deficit expected to hit 5.4% this year and at around the 5% range for Budget 2012, the realism of public finance is that more money will need to come in before money is lavished elsewhere.

Another worrying trend is that over the past three years, tax revenue to the Government has stagnated at around RM159bil. Transposed against the disturbing reality that the Government is increasingly dependent on tax revenue from the oil and gas sector, which in itself is volatile to the gyrations in international oil prices, that would imply more uncertainty should demand for crude oil ease due to an expected global economic slowdown.

It then comes as no surprise the muttering of a Goods and Services Tax (GST) is getting more audible as a means to push revenues on the upward trajectory. Maybe the time has come for Malaysia to join the majority of the world in introducing a GST but convincing the masses is going to be tough and long, looking at the uproar generated from the prepaid service tax issue.

But then the fiscal deficit is based on two parts of the ledger. The expenditure side of the Government, however, has shown no signs of abating since the turn of this millennium except for 2010, when overall expenditure dipped a meagre 0.5% compared with the RM206bil spent by the Government in 2009.

The fact is that the overall deficit situation needs to be controlled. Federal Government debt as a percentage of GDP was about 35% the last year a fiscal surplus was recorded in 1998 and by 2010, it was 53% of GDP.

Adding on a deficit rate of 5% in the medium term or any significant length of time when government revenue is stagnant will just increase its indebtedness.

And we have all seen what too high levels of government debt translates to in today's environment. It's either governments make the changes themselves or the markets will force their hands.

For a start, my wish list, apart from what most middle-income people will like, is for the Government to make a commitment to cut expenditure.

In fact the Government should set a target of slashing its burgeoning expenses by 10% for 2012 and mandate each ministry to do so.

The trimming of expenses can be achieved in a number of ways but the preferred method will be to do things more efficiently to extract savings. Open tenders and more stringent cost controls in procurement are examples where expenses can be cut without really affecting the impact on the economy.

And there should be more targeted spending. Instead of building more hard infrastructure people can do without, spend on what is lacking, which is soft infrastructure. The road to a high income economy is not paved with gravel, cement or steel but rather brain power, creativity and innovation.

Whether effective spending cuts can be made is debatable when the private sector, on whom hopes of driving growth has been pinned on, has not responded.

Malaysian companies and entreprenuers have only invested RM15.9bil in the manufacturing sector in the first seven months of this year.

Investments in services was RM11bil, and they indicate a lot needs to happen in the remaining time of 2011 for the official domestic investment target of RM94bil to be hit.

Private sector spending was counted on to drive the economy and indiscriminate slashing of the budget might be too tall a task at the moment but a commitment towards it should be made.

The best thing is for the Government to control its own future with regard to public finance.

A more disciplined spending regime and a future GST would be more palatable to the public than having people question why they are taxed more when spending continues to spiral upwards.

● Deputy news editor Jagdev Singh Sidhu wonders if the widening of the tax band will finally be done this time around.

- The Star