2010 Budget: sound and fury without substance (2)

By S.C.

The Macro-Economic Scene

The key economic indicators and assumptions used in the budget formulation are:

  • Malaysia economy to grow 2-3 percent in 2010 after a contraction of 3 to 4 percent in the current year.

  • Per capita income to increase by 2.5 percent to RM24, 661. This rate of growth is inconsistent with a GDP growth rate of 2 to 3 percent as population growth is in the region of 2.5 percent; this would yield a per capita growth of close to zero

  • Budget 2010 allocations total RM191.5 billion, of which RM138.3 billion is for operating expenditure and RM53.2 billion for development expenditure.

  • Federal government revenue in 2010 to decline by 8.4 percent to RM148.8 billion despite the tax changes proposed.

  • Budget deficit at 5.6 percent of GDP compared with 7.4 percent in 2009.

  • Exports will revive to 3.5 percent growth after having fallen by over 23 percent in the first half of 2009; this assumption is dependent on developments globally;

  • Private consumption will grow by 2.9 percent as against 0.5 percent in the current year

  • Inflation will remain low

  • Unemployment will not exceed 4 percent

  • Private investment will grow by 3.4 percent in 2010

  • FDI flows in 2009 are in the region of RM3.6 billion, recording a dramatic fall from RM19.7 billion from the previous year.

It is appropriate to comment broadly on these statistics. The performance for the year 2009 as reported is based on actual outcomes for the first half of the year. There appear to be rather optimistic assumptions of performance for the second half of 2009. Thus, the overall outcome for the year as a whole is based on partial information and therefore subject to a degree of uncertainty.

  • Other independent forecasts project a lower rate of GDP growth both in the second half of 2009 and in the early part of 2010. The Asian Development Bank in a recent assessment of growth prospects for the region highlighted the fact that Malaysia would be one of the economies that would have a slower recovery than its neighbours given the structural impediments. The IMF too hedged its bets by alluding to the problem of the size of the fiscal deficit.

  • The budget deficit may indeed be larger if account is taken of the lower revenues and the higher expenditures when supplementary allocations are taken into account. The deficit as reported may understate the actual magnitude if full account is taken of the off budget expenditures.

  • The estimated FDI flows (based on approvals) may not materialize given the political uncertainties and weak policy responses. If account is taken of the capital outflows from Malaysia as reported by UNCTAD in a recent report, then net FDI flows are negative in the case of Malaysia. Malaysia would be one of the few middle income economies that are recording outflows of FDI. This is an indication of lack of confidence in the policy regime and the ability of the Government to manage the economy in a sound manner.

  • For more than a decade the BN government has followed a policy of running large deficits. These deficits have been financed by large scale borrowings, domestic for the most part. The current domestic debt of the Government is approximately 52 percent of GDP. This in itself is an understatement for sure, if account is taken of the unknown and hidden contingent liabilities of the Government ala the guarantees amounting to some RM 11 billion in the case of the PKFZ. The question is how many more PKFZ scandals are hidden away since the Government accounts are cast in a manner meant to conceal rather than to inform the public.

  • The dependence on revenues from oil and gas resources in the form of dividends, taxes, royalties and export duty are critical to the Government. These have risen from RM19 billion in 2004 to RM67.8 billion in 2009 or 43.5% of government revenue. The narrow tax base that exists is patently inappropriate. In addition, in 2005 Petronas saved 42.5% of its profits, these now amount to only 21.1%.

  • The labor market is highly distorted by the heavy dependence on cheap migrant workers. The low productivity levels in Malaysia are contributing to the loss of competitiveness and impact on the ability of Malaysian industries to innovate, adapt practices that lead to greater investment. The high levels of migrant workers also have further adverse impacts such as large amounts of remittances, social consequences such as crime and other disruptions.

What is stark is that the budget does not even allude to these pressing issues that are affecting the investment climate and the prospects for growth, let alone offer policy options. The unwillingness to acknowledge these issues makes a mockery of the call for innovation, creativity and value-added activities that the Prime Minister made. The so-called “new economic model” and strategy for high income growth that are promised are therefore rhetorical in nature and remain illusionary given the absence of a coherent and integrated set of policies. The sound and fury built into the budget statement are hollow and will remain so until the BN Government begins to acknowledge what ails Malaysia. It is time that there is a change from the ostrich-like approach that characterizes economic policy making to a more open and environment.

The 2010 budget largely continues with the economic policies of the Mahathir era which can be summarized in the following terms: “ Spend and spend on so called development which is nothing but directed at enriching the UMNOputras and warlords by awarding contracts without the benefit of competitive bidding; privatize public assets into the hands of cronies thus enriching a few chosen individuals; drop a few sops to the public at large via subsidies while the larger share of resources are siphoned off and permitting corruption and rent-seeking on an unprecedented scale.”

The changes announced in the budget are cosmetic for the most part and do not deviate much from the path of previous policies.

(to be contd)

  1. #1 by Taxidriver on Sunday, 1 November 2009 - 6:03 am

    What can this Najib fella do? He is what he is today because of his father. Other than being well-known as a pleasure seeker, he has never been known to be capable in any other things. The longer he stays as PM, the more damage he will do to the nation.

    Mr. PM, please resign to make way for someone qualified to lead. Like Matir you may keep all the money that you have stolen. travel around the world, enjoy yourself. Only remember not to go to Mongolia.

  2. #2 by johnnypok on Sunday, 1 November 2009 - 7:02 am

    A very dangerous situation indeed when a country is run by a “playboy”.

  3. #3 by k1980 on Sunday, 1 November 2009 - 8:22 am

    All those who reject PPSMI should read this article:


  4. #4 by Jeffrey on Sunday, 1 November 2009 - 9:13 am

    ///A very dangerous situation indeed when a country is run by a “playboy”///

    A leader being “playboy” (real or perceived) does not – and ought not – by itself create dangerous situation.

    It is hard to find a co-relationship between playboy tendencies and good or dangerous leadership though its conceded that the normal objections to the first are that their liaisons, if exposed, invite ridicule and disrespect and sometime the other argument they are subject to black mail….

    Examples of playboys perceived good/popular leaders: Canadian PM Pierre Elliott Trudeau, US President JF Kennedy & brother Ted Kennedy, even Clinton was perceived good president if not for Monica Lewinsky escapade. War hero Dwight D Eisenhower ranks highly among former U.S. presidents in terms of approval rating though he flaunted his mistress Kay Summersby ; French PM Francois Mitterand’s mistress and their daughter had been living at state expense in an annex to the Elysee Palace…

    Great leaders like Mao Tse Tung had voracious appetite for young women and the opposite Mahatma Gandhi slept with teenage girls ostensibly to “experiment” with discipline of celibacy etc.

    Dr Mahathir had none of the playboy image. Are we happy with the way he ran the country? Adolf Hitler also had no playboy image (except one niece Geli Gubal he doted & girl friend Eva Braun)

    Many leaders are Alpha males having dominant and aggressive characteristics. There is strong link between dominant/aggressive tendencies with testosterone, which is linked, to the drive for sex and opposite sex, who are also drawn/attracted to such males creating the inevitable situation.

    As we struggle to move ourselves from third world what we need in leaders is, besides capability and strong personality and vision, sincerity and probity in dealing fair and not being dishonest and cruel. We’re asking a lot if in addition to these we also expect him to have squeaky clean personal life.

    Just an observation. Sorry for the deviation from main topic.

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