The Budget and Its Shadow

Talk by Teh Chi Chang (REFSA, Research for social advancement based in KL). Background from financial industry.
Book: “Budget: How the Government is spending our money” pub last year.

1st year tt Pakatan has come out w Shadow Budget,previously only DAP

Income: bottom 40% avg rm1500/mo
Majority 80% rm2500/mo
>1/3 of household heads employed in informal sector
70% SPM qualification or lower
Inequality among highest in Asia

Debt:
2010 end rm577bn total household debt = 77% gdp
140% personal dispo income (us 123, sg 105, thai 53%)

Competitiveness:
Only country in Asean w net FDI outflows

Rising cost of living.initiatives 2 help
Kar1sma aid program
Kedai 1 Rakyat Msia
Menu 1 Rakyat Msia

Graduates – high unemployment, low skills

Response by gov:
Expand subsidies & handouts
Mega-projects to stimukate demand
-corridors, MRT, Warisan Merdeka
Talent Cortp, ETP, EPP, NKRA…

Subsidies massive
Now 18% gov revenue
2000 rm2.6bn to 2011 rm33bn
Above does NOT include subsidies to industry eg power producers, petrol
Have expanded to include Kedai 1Msia thrift stores& Menu 1Rakyat Msia meals

BN view: hardwaredrives growth
Public-private partenerships
Rural minor infrastructue
Corridors
Langkawi
KL financial district
Even in education, focus is on constructing schools
– for Class F (bumi) constructors only
– fails to address literacy, numeracy, work skills

Coddling businesses
Fill gaps in pte sector directly, even where financial industry has not seen fit to fund
Eg venture capital for creative industry
Islamic finance
Bumi entrepreneurs
SMEs *and* “second chance” funding for failed SMEs
Bank bailouts!!!

Civil servant 10% of workforce, 1.2M civ serv to 1.7M taxpayers
GLCs are 50% of economy
Natl debt rm430bn = 14800/every Msian
Has doubled since 2004.

HOWEVER, revenue has exceeded budget since 1998 except during 2008/9 econ crisis
So why is gov in debt? Spending has also exceeded budget consistently.
Budget deficit has been conspicuously worse last 3y.

Pakatan Rakyat basic framework:
Raise revenue bycurbing tax evasion
Spend money more effectively
Riase incomes by focus on soft infrastructure, not construction

GST not necessary yet -regressive tax bc currently only small % Msians pay income tax

Tax evasion:
APs: +1.8bn if auctioned, no extra cost to citizens.
Illegal trade: e.g. cigarettes 2bn. Gambling industry: illegal nearly same size aslegal

PR 220bn total spend same size as gov budget, but outcomes +20% by eliminating waste
Subsidies targeted to poorest 1/3(2M) households.
Current subisides: mainly petrol, rich benefit more
Kedai 1Rakyat – takes business from neighbourhood shops

Budget 2012 recd surprising amt criticism fr industry, 3rd parties eg Malaysia Rating Corp (MARC)

PR: reduce cost of living & business
Lopsided concessions & monopolies eg IPPs, tolls, lead to high costs.
PR proposes Unfair Public Contracts Act: create commission to review such contracts & can acquire/ expropriate.
Extend Competitions Act to all sectors – currently telcos, Astro, energy exempt.

Wages:
2 foreigners(documented and estimated undocumented) to 5 Msian workers. Mostly unskilled
Disincentive for pte sector to invest in raising worker productivity
Even Msians low education

PR proposals
Minimum wage rm1100
Reduce unskilled foreigners
Emphasise technical/vocational skills, make it a respected career path
Incentivise businesses

Facilitating entrepreneurship
Open procurement: rewards know-how, not know-who; reduce gov costs; reduce fees to middlemen
Current rank 113/183 countries in ease of starting business
Less red tape for rakyat eg filing taxes, renewing licenses.
Keep GLCs in key areas only. Too many GLCs not only reduce competitiveness, also cause conflcits of interest.(regulator vs business)

Gov “generosity” mainly benefits elite
7/10 poverty eradication progrmas failed due to overspending & not selective of recipients
PR: shrink PM’s Dept & reallocate $ to ministries & states

Resource use
Cap Petronas dividends
Better water management (savings, pricing) to avoid buidlding new dams
Improve transport infrastructure

Comparison:
BN budget overoptimistic on gov revenue & GDP, so even though both have similar deficits in $ and % of revenue, BN likely to run over.

Big picture: BN budget hands out plenty of fish for all, from the truly needy to Class F contractors.Shadow Budget plans to create a nation of skilful fishermen.
–end talk–

Francis Hutchinson (political economist) follow-up talk
Existential questions

Q1: does Msia need a new growth model?
GDP growth slowed after Asia econ crisis
Good overall enviro for business BUT a lot of other issues

Q2: new social model?
Poverty dropped tremendously over last 4 decades but Gini coefficient barely decreased
Worse than Phils, Indo, Iran, India, USA
Inequality leads to social problems

Q3: state-society model?
Accountability to ppl
Does Msia tax enough & aretaxes being used in productive way?
Most revenue from oil&gas revenue
How govts earn income v important for state-people r’ship: if revenue is from people, gov is highly motivated to make ppl prosperous, ppl are motivated to be engaged in gov.
(Our counterexample: imagine if Petronas Twin Towers, KLIA etcwere paid w income taxes.
Countries w large oil revenue assoc w weak democracy & rule of law

Q4: is Msia managing oil wealth responsibly?
In light of reserves soon to run out & growing population, should set aside some for future
Intergenerational equity

Gaps in 2012 budget: for industry
No help for manufacturing -needed for job creation esp middle class. High-skill sectors create relatively few jobs.
R&D: v littleexpenditure. Tied up in few niche institutes. Not enough in unis. Dispersed across pte sector
Sci & tech grads too few.
Infrastructure for innovation eg technical libraries, market info, labs & testing facilities.
Communication: not enough resources. SMECorp, SIRIM, NPC. Mostly concnetrated in KL

Social:
Best features probably expenditures for 2ndary education & abolishing school fees.
Civil svc: new salary structure, explicit promotion criteria. Increasescapacity, but what abt…
Size- vast expansions under Mahathir. Overlaps bet fed, state, corridor admins.
scope- gov intervention in too many sectors
accountability- e.g. water: until 2007, r’ship bet state gov & water provider direct. Now fed gov intervening, too many actors dilutes accountability.

Per capita fed gov spending is hugely disproportional for KL FT compared to states.

PR’s shadow budget: largely agrees w Chi Chang. Questions:
What sectors does PR gov want to invest in?
How to tackle inequality?
Are you happy w current tributary structure? – progressive taxes? Corporate vs income?
What relationship does PR see bet state & citizens?
–end talk–

Q&A session:

Q: Significant # of deserving poor/elderly/disabled etc not receiving assistance. But we don’t want to be stuck in welfare state, use some development programs eg Sg’s Workfare. Don’t go for cash transfer entirely.
TCC: there is not a proper database of needy in Msia. AG’s report highlighted aid misdirected to non-poor families. PR promises to consult w stakeholders on this.

Q(Barry Wain): 1. Pte investment supposedly surged last few years but I’m extremely sceptical, would like to ask you about this?
2.Govt providing cheap meals, who is being squeezed?
TCC:
1. Surge was starting from a low base. Gov figures are from MITI. Even with that surge, net FDI still negative.
2. 1Msia meals will most likely affect small traders. Eg coffeeshops, kedai runcit. Super/hypermarkets prob less affected bc catering to more wealthy.

Q/comment: 1. disagrees tt net investment outflow shows Msia not competitive. Could be showing tt Msian co’s competitive enough to invest abroad.
2. It’s a good thing tt Msia gov giving SMEs more chances.
TCC: 1. You may be right but issue is not whether Msian cos are strong or not. Question is why they are sending $ overseas? Eg passenger car mkt largest in ASEAN but automakers all moving to Thailand.
2. Issue w providing aid to failed SMEs is tt you end up socialising losses. How is aid structured? Ideally gov shd get investment back if it becomes profitable again. Also, gov shd b more conservative in stewarding taxpayers money. Not justifiable to invest in too-new/innovative product. Better to provide technical infrastructure tt can help whole industry.
FH: GLCs 50% econ, local SMEs only hv half the field to play in. To be viable they need to start exporting immediately.
2. In this part of the world, MNCs are much more profitable, SMEs do not want to b seen 2 have failed. Compare to eg Silicon Valley where failure is pt of career. If your co failed, means probably won’t work so shd not bail out SMEs twice.

Q: 1. Global labour market about 1/2bn people who are cheaper than Msia, how to deal with it? How much requires a political shift vs fiscal shift? 2. Institutions in Msia hv become diluted in last decade, how much do you think this plays in lack of competitivness?
TCC: 2. Foreign companies don’t trust judiciary, want disputed to be arbitrated in Sg. Other – police.
1. Productivity in Msia is low. Eg delivery of goods inefficient and tardy- drivers don’t have GPS. Bosses don’t care bc salary & fuel cheap.
Wain: many institutions simply don’t work, terrible situation when companies don’t trust courts.
Elephant in room: bumiputra policy. How much of a drag on economy is NEP(and its abuse)?
FH:
I look at electronics sector in my research. Ppl v worried about your #1 point in 2000-04. Co’s recruited to relocate from Penang to China. Worry has receded somewhat for managers wages, remains somewhat at lower skilled workers level. China problems: IP protection, labour unrest. Co’s don’t want to put all eggs in 1 basket. Msia also has few decades of developed capabilites. Manufacturers don’t want to pull out of established commitments. New front: Indonesia.
TCC:
As a result of misdirection, various inefficiencies in bumi policy perpetuated. E.g. APs distributed for free to bumi “entrepreneurs” (only 100-odd people) who did not import cars but simply sold them to the real car importers. Reason why auto industry reluctant invest in Msia.
NEM was to roll back some protections but right wing groups eg Perkasa protested, NEM has now been quietly shelved.
Prime tracts of land alienated to certain GLCs. Eg MRT project still doesn have cost estimate but has been given away.
FH:
Pg and Johor are centres for electronic industry but gov support is not oriented to manufacturing. Is given more to food&bev – disjunction.
Linguistic- older ppl in industry is a lot Chinese, not fluent in BM, English but most programs are in these languages.
Gov training programs give human capital but not social capital – focusing on certain ethnic groups only creates a barrier to growing those industries.

Q: subsidies per household quite substantial compared to income. By cutting down, why can’t Pakatan balance their budget? 2. AG’s report shows massive overspend, more room to cut.
TCC: can’t cut subsidies immediately. Will be retained for 1 year while working out how to proceed.

Q: what do you think of brain drain, Najib’s incentive of flat 15% tax for returnees? What else can be done? 2. What do you think of Iskandar?
TCC:
1. Don’t agree bc incentive for Malaysians to go abroad 1st to get low tax. Also, taxes not only thing driving Msians abroad. 6 years ago, similar initiative got substantial # back but only 1 left now. Other things: edu system, employment for talented.
2. Iskandar conceived in 2008, 3y later still planning? A lot of construction but hardly any institutions hv come in.
FH:
3-4 y ago Prof. Rajarasiah tried, horror stories on trying to get work permits & tax breaks (he’s the sole survivor of tt program).
Iskandar good if you are large co. & just need land, can integrate w Sg. If u r small & need investment, universities, other tech resources, no.

Q: are the overseas Msians tt gov is trying to get back from a certain demographic?
TCC: Talent corp not targeting any race. Across the board, successful Msians overseas incl bumis doing well & recognised in their work, don’t want to come back. If return to Msia, face stigma that “you’re here just bc you’re bumi”.

Q: one-line summary of 2 budgets?
FH: BN budget like American dessert, too sweet. PR budget like Japanese dessert, doesn’t hit your palate but you enjoy later.

Q(Ooi Kee Beng): when you study PR budget do you get a sense that it’s well integrated or just trying to grandstand?

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