Here we go again with another austerity drive

We think of being frugal and prudent only when we are in trouble.

COMMENT

by T K Chua

It is that season again for the Treasury to announce an austerity drive. Yes, the prices of oil and other commodities have tumbled, the nation is inundated by floods, and we have incurred and accumulated lots of debts over the years.

In my lifetime, I have seen many of these austerity drives – budget cuts, reduction of wastage, reduction of imports, a shift of focus to the domestic economy and a call to invest less overseas.

It is just so typical of us. We think of frugality and prudence only when we are in trouble. In times of plenty, we spend lavishly and without thinking.

Have we ever thought that prudence and “value for money” management are enduring principles of finance? Why is it that we only think of prudence and austerity when we are in trouble? Don’t you think it is too late?

We know there will be ups and downs in any economy. Economic cycles and uncertainties are part and parcel of life. Why didn’t we save up when we had plenty and spend more to help us out when we are in difficulty? No, this is not to be; we spend even more when we have plenty, and when we are down, we try to spend less.

This kind of strategy is pro-cyclical, not anti-cyclical. In times of plenty, we make the economy even more buoyant. In times of difficulty, we make the situation worse.

Just look at the oil windfall we have squandered. If only we had invested wisely and built up our sovereign fund like Norway (almost a trillion US dollars now), I am sure at this difficult time, we would be able to ride out of the storm easily and smoothly.

Now Putrajaya wants to boost domestic consumption because our export earnings have fallen from the roof. The magic is to keep the growth figure up, regardless of the pitfalls of consumption driven growth. If consumption driven growth is easy, I think most countries would have consumed their way to prosperity.

But we know that if we consume more, we will only save and invest less. If we invest less, our capacity to produce will be lower in the future. BR1M, if we are not careful, is one example of consumption driven growth that will lead us to oblivion. Mahathir is right.

Household debt

Worse is the increase in household debt. It is an indication of dissaving. Not only are we not saving enough from our present income, we are also spending our future income.

Then we have Putrajaya wanting to focus more on domestic investment and less on overseas investment. Now, investment is about returns. Over the years, we have set up so many statutory bodies, GLCs and private companies to invest overseas. But what have we got in return? Have they repatriated the money earned abroad? Sometimes, I wonder whether these are investments abroad or capital flights? Now that we are no longer so rich, we are asked to invest domestically. So here is my take: we will resume our “investment” abroad – or is it capital flight? – when we are rich again. For how long do we want this baloney to go on?

I think we are just too “adventurous” and reckless in our financial management. We spend lavishly in times of plenty thinking that the good times are going to last forever. We borrow excessively based on buoyant valuation and unrealistic market sentiment, again based on the thinking that the good times will go on indefinitely. We invest based on the amount of money we have in our pocket, not on risk-return trade off. We throw caution to the wind.

Let’s take the federal government budget as an example. For more than one and the half decades after 1997, the country’s budgets have been in continuous deficit. Are we saying that for more than 15 years, despite the prices of oil and other commodities breaking records, the country has had no occasion to experience a budget surplus even once? This is the extent of our recklessness. Why then should I appreciate what the Treasury is trying to do now? Austerity drive, really?

T K Chua is an FMT reader.