Is austerity enough?

 

The Malaysian government is on a mission to cut spending and end largesse to help cover the RM77.7 billion estimated subsidies and welfare bill for this year.

Ministers target a 5% cut in operational expenditure for what remains of the year and a pause in mega-projects that have not yet started. This sounds like a deep cut indeed but will it make a difference?

Budget 2022 allocated RM233.5 billion for operational expenditure. A 5% cut for the rest of the year, assuming spending is equally spread, will save about RM5.8 billion. This is about 1.75% of the total RM332.1 billion for Budget 2022 or 7.5% of the estimated subsidies bill for 2022.

Many spending plans cannot be cut immediately so a better estimate would be around RM4.7 billion, 1.5% of the 2022 budget or 6.3% of the estimated subsidies bill.

For mega-projects, minister for economic affairs Mustapa Mohamed announced that 30 projects worth RM100 million have been shelved. They are worth only 0.03% of Budget 2022.

As a general rule, cutting operational expenditure and keeping government small is always welcome if it is associated with more efficient government spending and reforms to cut leakages and wastage. However, if it is just to cut the overall budget or to transfer savings into subsidies then what has been proposed looks too small and too poorly-targeted to make a difference overall.

Cutting too deeply, especially on development projects, can disrupt existing spending plans and projects which is damaging and costly, especially if some projects have already started or where time and money has already been invested.

Cutting ministers’ allowances and civil servants’ travelling costs will have no effect at all in economic terms. Other options to cut leakages and wastage may be better.

The government can also look for extra revenue, by increasing the dividend from Petronas for example. Petronas already made profit after tax of RM23.7 billion in the first quarter and is estimated to make RM75 billion to RM80 billion profit for the full year, according to Mustapa.

But there are also considerable losses due to poor economic management. The foreign worker crisis for example has cost more than RM10 billion in plantations alone. It is affecting multiple high value-adding sectors including construction, chip-making, manufacturing and tourism. Automotive supply-chain companies are running at only 60% to 70% capacity and have lost RM2 billion over that last two years, according to industry sources. This is holding back growth and revenue and should be fixed urgently.

Overall, operational expenditure cuts are not necessary now but spending could be lower in Budget 2023 if it is associated with effective reforms in spending, cutting waste and leakages and improving taxation to raise revenue. Evidence from around the world shows that tax reform coupled with lower taxes can spur economic recovery and actually improve government revenue.

Three major reforms are necessary. First, full reform of government spending, taxation and a reduction in market intervention to free up opportunities and create a more vibrant economy. There should be more liberalisation, less government interference and a full-fix of the labour market, especially for foreign workers.

Second, tiered prices in petrol so that only the small volume sales made mostly by low-income groups get the full subsidies. This will reduce the subsidies bill.

Third, a move away from subsidies and price controls for social protection toward a Universal Basic Income model administered through a tax credit or negative income tax scheme. This targets cash help more effectively to those who actually need it.

These are all part of what economists call “supply-side reform” and offer a revised 21st century vision for the Malaysian economy which has the potential to revitalise the economy. They should be a priority for the next budget and the upcoming election. - FMT

 

Cutting too deeply into development projects can disrupt existing spending plans and projects, which is damaging and costly.

 

 

 

The views expressed are those of the writer and do not necessarily reflect those of MMKtT.