Global Trends by Marin Khor
Monday 8 October 2018
Economic issues take centre stage
In the next few weeks the government will roll out the Mid Term Review of the 11th Malaysia Plan followed by the Budget, which will be especially challenging in view of the worsening global economic prospects.
Several events this month will put the spotlight on economic issues in Malaysia and globally.
On 18 October the Prime Minister will present to Parliament the Mid-Term Review of the 11th Malaysia Plan (11MP).
After last week’s Cabinet meeting discussed it, the Economic Affairs Ministry put the finishing touches and finalised the Review document.
Economics Affairs Minister Datuk Seri Azmin Ali had earlier promised that the report would set a new direction for the economy. He added it would focus on increasing incomes of the bottom 40% of households.
Naturally Malaysians are eagerly waiting to see if the Review promotes new ideas and what development programmes will be funded. Also, if there will be shifts in priorities for growth, income distribution and balance within and between sectors, states and socio-economic income groups.
The Malaysia Plans are for five years, so the midterm review gives the framework and budget plan for two to three years. But it is the policy direction, that go beyond a couple of years, that will be significant, especially since this is the first Pakatan Harapan exercise in development planning.
On 2 November Finance Minister Lim Guan Eng will present his maiden budget. The time frame is shorter than the 11MP Mid-Term Review, but it will have more immediate effect. First, on specific tax-related changes, and second on the level and type of expenditure.
Most Malaysians will be more interested in the tax aspects as this directly affects their income and daily lives, while economists will pay more attention to the size of expenditure and the budget deficit.
Here, the Minister and the government will have to do a difficult balancing or juggling act. On one hand, the federal government debt has been discovered to be significantly higher than previously reported: the figure of RM1 trillion is now widely used.
Even if by different definitions it is lower by a couple of hundreds of billions, the government debt is still much higher than what it should be.
To bring it down, projects have to be cancelled or postponed, wasteful expenditure must be trimmed, and even useful expenditure may be capped at slow or zero growth. Ministries and agencies are all affected, and they are probably still bargaining with the Finance Ministry on their budget allocations.
From a finance point of view, the aim is to control debt and prevent the budget deficit from increasing from the present 2.8% of GDP. The latter would be no mean feat, since revenue will fall due to replacing the good and services tax (GST) with the sales and service tax (SST), while unpalatable expenses have to be met for 1MDB debt servicing and plugging loopholes or missing money including refunds for GST payments and overpayment of income tax. On the plus side is the rising revenue due to oil price increase (now US$75-US$80 a barrel).
Overall, we can expect government expenses to be squeezed to make way for the abuse, misuse and overuse of funds of the previous government. Warnings have already been given by the Prime Minister and Finance Minister that the public has to make sacrifices.
But here’s another dilemma. If there is a tight budget, with less government spending, this will dampen the economy’s “effective demand” when economic growth is already slowing.
Usually when the economy is slowing down, government increases its expenditure to give it a boost. But with the government aiming to control both debt and the budget deficit, there’s not enough money to boost the economy.
The public may understand the need for a “tight budget”, but if this crosses into an “austerity budget” it will become unpopular when implemented. Thus, the need for balance and juggling.
One rule of thumb is that since there is need for sacrifice, let it be the upper and upper-middle classes that are called on to take the brunt, whether it be in extra taxes or government spending cuts.
The bottom 40 per cent should be protected, or their interests could even be enhanced. This has been promised in the preparation of the 11MP Mid-Term Review, and the one-year budget is after all 40% of the period of the rest of the 11th Malaysia Plan.
A new catch word, “inclusivity” is now frequently used. That should mean that the interests of the poorer Malaysians are included and indeed prioritised in the budget and the new Plan.
One further complication is that there is now growing agreement that the global economy is in pre-crisis trouble. The International Monetary Fund which last week warned that “large challenges loom for the global economy to prevent a second Great Depression” in its annual economic outlook.
IMF head Christine Lagarde warned that the rapid build-up of debt made developing countries’ governments and companies more vulnerable to higher interest rates, which could trigger a flight of funds and destabilise their economies, and this should serve as a wake-up call.
Some top economists are now in Kuala Lumpur for Khazanah Nasional’s Megatrends Forum 2018, with Nobel laureate Joseph Stiglitz giving the keynote speech.
Another speaker, former Chief Economist of the United Nations agency UNCTAD, Yilmaz Akyuz, gave talks in Putrajaya and KL last week in which he predicted that four events combined can lead to a serious crisis in developing countries.
These are a debt default in Argentina or Turkey, the Trump trade war, a hike in interest rates, and a strong dollar. The last three are already taking place.
He called on developing countries to start examining policies to respond to the worsening situation, while noting that the same policy measures may now have less positive effects than in previous crises.
We look forward to important exchanges of views during the Megatrends Forum. And we eagerly await the presentation of the Mid Term Review as well as the Budget.