Many would see a parallel with Malaysia’s current situation, as a rising cost of living squeezes real incomes while the government pursues an agenda of deficit reduction and fiscal consolidation. That agenda has seen subsidy cuts across many essential items (beginning with petrol and electricity) identified by the new Fiscal Policy Committee (FPC), which was formed last year to coordinate and plot the overall direction of Malaysia’s fiscal health.
The situation that the FPC had to deal with was more acute than has been generally recognised. While government revenue and spending were both somewhat above budget projections, leading to the perception of a fiscally irresponsible government, nominal GDP growth had been in sharp decline since the end of 2012, and only began to recover in the second half of 2013. Hence, even if the government hit its 2013 deficit target in absolute terms, the debt-to-GDP ratio would have exceeded the administration’s line in the sand of 55 per cent by the end of the year.
That realisation caused some hard and hasty decisions to be made, the biggest of which was the 20 sen per litre (US$0.06) reduction in petrol subsidies, but also extended to a review of electricity tariff rates, toll road rates and other lesser subsidies. In addition, it was confirmed during the tabling of the 2014 government budget that the goods and services tax system would be introduced in 2015 at a higher-than-expected rate, replacing the antiquated sales and services tax.
From an economic and fiscal perspective these are all defensible moves, and there’s no question that implementing them would immensely improve the government’s financial position and the competitiveness of the economy. In fact, preliminary numbers indicate the government achieved a surplus in the last quarter of 2013, preserving the 55 per cent debt limit. The issuance of government debt securities in 2013 is also coming in below initial projections. While there is still a long way ahead in closing the budget gap, positive steps towards that goal have been taken.
However, from a political economy perspective, the impact of multiple price revisions within a very short timeframe has eroded support for the government. The perception is that price inflation will impact the lower-income groups the most, as essentials make up a bigger portion of their expenditure. The increase in cash assistance programs that the government began in 2011 only partly offsets the increase in household costs and taxation. Moreover, the implementation of the petrol subsidy cut was somewhat botched, leading to the impression that the government hadn’t thought it through. The result has been a restless populace and consumer inflation that is likely to exceed 3.0 per cent in the very near future, compared with just 1.2 per cent at the end of 2012.
So where now from here?
From a policy angle, there’s little to complain about. The government is keeping to its commitment towards fiscal consolidation, building fiscal space to deal with potential future crises and generally putting government finances on a more solid footing. Household incomes are rising fast enough to deal with the acceleration in price increases — for the moment. The economy is benefitting from higher private and public investment, and should be given a further boost from the improvement in the external economic environment.
However, there is a growing trust deficit with the administration and a gap in communicating government policies to the people. The necessity for hard decisions has not been explained fully or clearly, especially as the Malaysian populace has become increasingly plugged into non-traditional communications channels. Whatever good intentions and sound policy the administration may have are lost in this disconnect.
Again, there are parallels with history. Marie Antoinette never actually said the words that were attributed to her; some historians believe they were uttered by another French queen generations before her time. She may have been profligate with public funds, but much of that money also went towards charitable works, and by all accounts she was truly sensitive to the needs of the people. The vilification of Marie Antoinette occurred because she was an easy target as a foreign princess and through her status as queen, not because of her true character or actions; it was as a symbol that she was brought to the guillotine.
That’s a tragedy, and a mistake, that shouldn’t be repeated.
Nurhisham Hussein is an economist based in Malaysia. He writes a blog on the Malaysian economy at Economics Malaysia.
The disconnect is not that the populace now have alternative information sources. It is because the government has largely ignored what is going on in these sources. In short, the government feels it can run roughshod over the people and just manage their perceptions, using similarly-disconnected PR (Public Relations) Agencies completely out-of-pulse with the Populace.
Some of the problems faced are the structures put together with a government which does not care. For example, the automatic toll increase to concessionaires means they will get paid increased rates whether or not the government allows public toll increases. Therefore any toll increase is deemed to be an increase by the government because it is the government which announces the increases. Actually the public is already paying the increases because the government has to make good what it fails to let the public pay. If tolls are increased, roadusers pay. If tolls are not increased, the government, meaning the public, pays. It is only because the government has no cash to keep paying this difference that it has to collect more toll.
Who in the world says that you can invest in a road, and collect compound interest at fixed rate over long periods? Yet every concessionaire has such a contract. You want to know what is worse? a) If the concessionaire decides that it is not profitable, the government has guaranteed to repurchase the concession at the cost the concessionaire paid, even though the concessionaire was not subject to financial controls like responsible procurement, that the government is subject to. b) If traffic increases, as it will in any case, instead of being required to upgrade capacity to meet increased traffic, the concessionaires, for additional investments, are given term extensions, so that they make from the increased rate, the increased traffic and also the extended term. Bad policy right from the start, and definitely not what business risk-taking is about.
BTW do you not know that after Anwar was arrested, Mahathir showed UMNO delegates on a board, a list of 160 toll concessions not yet approved by Anwar, all on the same terms of no risk for concessionaire, and blind paying by the government on behalf of the public?
But you haven’t seen anything yet about our very bad privatisation policy which continues today. Take the MRT. Enough experts have said that we are paying much much more than other countries are paying or have paid for infrastructure of the same capacity and length, even compared with those with higher underground/surface ratio. You say we are still under the 55 per cent debt to GDP ratio. Since Monorail, STAR and Putra, developed at excessive cost were all sold back to the government, it is not hard to see that history will be repeated, just you wait when MRT comes to the Treasury to hand over the line, and ask for payment “at cost.”
Such costs would include the “budget” that the public “approved” for example for RM35b more because you asked for another station. Who are the public to approve such budgets? But when MRT comes with a hand out asking for payments, this is what the government has to pay and let us look at the debt to GDP ratio then. Better we compute this ratio contingently for all privatisation projects.
So please don’t say the public are exposed to not-necessarily-reliable sources; the government has failed to give responsible answers. And frankly, runaway inflation is already upon us, and there is nothing the FPC can do about it.
Kaypohchee
When you give a monkey a rose, what do you expect the animal to do? This is true of Malaysia -it has became an illiberal democracy after every democratic safeguard has been dismantled. Bad governance and corruption trumps with a top bottom approach. We all saw this coming-the bad policies for the past 40 years are now showing their head.