By S.C.
Key Budget Allocations
The budget allocations listed in the budget speech are indeed astonishing and represent a long litany of projects and allocations, the direct beneficiaries of which appear to be special interests and well connected individuals.
This should be no surprise as the budget has become the chosen means to distribute corporate welfare with a few sops for the public at large. One may well ask why billions more are being channelled to infrastructure at a point in time when the economy is in greater need to strengthen institutions, develop human capital and to widen the safety net programmes to protect the weak and the vulnerable elements of our population.
For instance, why is it necessary to have TNB invest RM5 billion to expand electricity generation and distribution given that overcapacity exists? Why is it that RM3.5 billion is allocated for infrastructure and basic amenities and training programmes and socio-economic projects to support implementation of private sector projects? Is not the private sector capable of undertaking these types of projects that benefit the sector? The Prime Minister announced that the Government will provide subsidies, incentives and assistance amounting to some RM2 billion to farmers and fishermen to safeguard their interests.
It is legitimate to ask why it is necessary to increase subsidies at a point in time when efforts are being made to scale back subsidies which amount to a very large component of Government expenditure (RM24 billion in total subsidies) of Government operating expenditure. How can this inconsistency be explained?
Although the Prime Minister took great pains to list at length the expenditure proposals and allocations — perhaps to project a “feel good” factor— he was somewhat cryptic in announcing the cuts in spending in the coming year. He announced that spending cuts would come from:
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reduced operating expenditure, seen down by 13.7 per cent in 2010 at RM138.3 billion;
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lower development spending, seen down 4.5 per cent to RM50.6 billion;
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Further reductions in food and fuel subsidies which are projected to fall by 14.7 per cent in 2010 to RM20.9 billion.
No further details were provided as to the areas of expenditure cuts. The Prime Minister should table a paper providing full details concerning the proposed cuts. Transparency and accountability must exist if the credibility of the Government is to be enhanced.
The Prime Minister’s commitment to eliminate hardcore poverty by the end of the next fiscal year must be welcomed. However, it is somewhat incredible that it has taken over 50 years of BN rule and the spending of billions of ringgit to reach that stage! It is indeed a sad commentary that mega projects have been a higher priority than the elimination of hardcore poverty.
The recently released Auditor General’s Report has yet again castigated the Government for the lax procurement procedures that permit abuse and mismanagement of public funds. It is clear that the adoption of a system of competitive bidding in Government purchases would result in savings of billions of ringgit and reduce the extent of corruption.
Adopting such practices continues to be resisted vigorously by the BN Government. It is indeed scandalous that a basic measure of this nature does not truly feature in the Government’s agenda in order to achieve savings, cut waste and improve public administration. It is legitimate to ask as to why basic reforms of this nature are resisted. Is it because of the need to ensure that the few and favoured are protected at the cost of millions ordinary taxpayers?
Revenue Measures
The ballooning budget deficit can be rightly attributed to the explosion in spending. However, it is important that we take account of what has happened on the revenue side.
Over the years, the Government’s tax policies have become skewed. The nation has become more and more dependent on income from oil and gas revenues. These revenues are derived from the exploitation of wasting assets. Their misuse is depriving future generation of Malaysians of their patrimony.
Available data indicate that the contribution to total Federal revenues from this source exceeds 40 percent. As a consequence the tax base has become narrower. The narrowing of the tax base has also seen a shift in the tax burden.
Although no details are available, consumption taxes that fall on the shoulders of ordinary consumers have gradually increased while more and more concessions and rebates are extended to corporate entities. These distributions of the largess are justified by the Government on the grounds that the private sector needs to be encouraged and provided with incentives to invest and create employment. However, this assertion has never been tested by way of a rigorous study of the impact of tax policies on growth.
Evidence from other countries supports the view that tax incentives to businesses play a minor role in drawing FDI and in encouraging domestic private investment. Global studies of what drives FDI indicate that taxes play a small role in investment decisions. It is good governance, the existence of the rule of law and the absence of corruption and over regulation that have a vitally important role in private sector development.
The Prime Mister made much of the need to develop and put in place a new economic model but gave no details of what would be incorporated in such a model. Lest it become yet again another slogan, the Prime Minister should begin the process by instituting a full and rigorous study of the tax system. A new system of taxation that reduces the dependence on oil and gas revenues, that provides a more balanced burden sharing and does away with “corporate welfare” for the chosen few is urgently needed. These measures are imperative in order to set the stage for a new economic model.
Turning to the new revenue measures announced by the Prime Minister, it is clear that little or no thought has been given to the impact of these taxes on the overall macro-economic picture. With the projected cuts in public spending, the economy will face a contraction – in effect the stimulus will be withdrawn. Economic revival in 2010 will thus critically depend to a larger extent on the revival of private consumption. Yet, the imposition of the tax on credit cards and the re-introduction of the real estate tax will impact adversely on households and directly and indirectly curb household expenditures. This is clearly a contradiction between policy goals and government actions.
The other tax changes impacting on individuals e.g. the reduction in the income tax rate from 27 to 26 percent and the level of exemptions announced in the budget are for the most cosmetic and offer marginal relief to hard pressed workers. In any event these changes will benefit the narrow band of high income individuals and have no impact on the bulk of wage earners and small traders.
Studies indicate that the income disparities between the rich and the poor have widened in Malaysia. Indeed, Malaysia has one of the worst income distribution patterns in the region. The budget sadly contained no measures to address this issue. Cynically, not even a mention was made of this grave issue.