By S.C.
Introduction
The maiden Budget unveiled by the Prime Minister was anticipated with great expectations of a new direction to move the Malaysian economy on to a new path of growth and revival through the adoption of policy reforms designed to restore competitiveness. These expectations, sadly, were not met.
The 40-odd-page two-hour long Budget speech delivered by the Prime Minister in Parliament was a great disappointment. It contained little by way of a bold policy agenda or a set of much needed measures to begin to restore the Malaysian economy to health.
The speech was long on rhetorical assertions and a litany of expenditure proposals; it contained little in the way of actual innovative thinking despite the Prime Minister’s resolve to adopt a new model for the economy “based on innovation, creativity and value-added activities”.
There were hardly any credible steps outlined as to how the unsustainable record high fiscal deficit of 7.4 percent recorded in 2009 was to be slashed. The broad assertion that the reduction of the deficit to 5.6 percent was to be largely achieved via proposed expenditure cuts in the year ahead. The main spending cuts are to come from reduced “operating expenditure”, lower food and fuel subsidies, and less money for development spending. Yet the expenditure proposals for 2010 allocate 11 per cent more money for the Government wage bill in 2010 for the nearly one million workers on the payroll which account for almost 10 per cent of the work force and constitute a mainstay of the BN government’s support.
The main spending cuts 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 seen falling 14.7 per cent in 2010 to RM20.9 billion.
These targets appear to be ambitious particularly in the light of the Government’s history of exceeding budgeted allocations of expenditures because of supplementary provisions and under performance in revenue collections.
However, it must be noted that these drastic cut backs appear to represent a stark and dramatic reversal of policies. It must be recalled that barely 6 months ago the Minister rushed through this House a Stimulus Package of RM 60 billion. He now proposes to cutback almost RM 29 billion from the budget for 2010 over the level from the current year.
By any standard, this is a dramatic and remarkable reversal of spending policies. It is truly amazing that the Prime Minister was largely silent to as to why it is necessary to reverse course so soon after the introduction of an unprecedented package.
We may well ask: Is this because the Government’s coffers are empty? Or is this late night conversion to prudent policies an acknowledgement error? Or is it that the markets are sending signals that deficits of the size and magnitude are deemed unacceptable in the context of credit ratings?
Be that as it may, the Prime Minister cannot evade responsibility and is obligated to put all of the cards on the table now that the gamble he took earlier is coming unglued. The erratic pattern of policy changes sends strong signals to markets that this Government is in a state of confusion and has no long term strategy to chart a course for the medium term.
The Budget appears to have been built upon a set of macro-economic assumptions that are questionable. It would appear that the key assumptions are: a) a rapid revival of the global economy in 2010 with positive trade developments; b) that these developments will contribute rapidly to a revival of growth in the Malaysian economy.
These assumptions are flawed on several counts. First and foremost, the early green shoots of a recovery in the global economy are tender shoots that could be stifled and the recession could be prolonged; there is a danger of a second round of decline. The US economy in particular is showing weaknesses as unemployment continues to rise and the Obama administration is under pressure to take steps to mount a further stimulus package.
Thus, it is indeed a high risk strategy for Malaysia to count on a rapid reversal in the slow down, particularly given the fact that historically growth and recovery in Malaysia emerges with a long of 6 to 9 mounts.
The assumptions underpinning the 2010 budget are that Malaysia will experience a V-shaped recovery. The prognosis is however that the recovery path is more likely to be U-shaped.
Thus, it is hardly likely that the projected deficit reduction and growth targets will be met. The early assessments by the rating agencies have drawn a mixed reaction from credit ratings agencies. The budget appears to have been crafted on a basis of a hope and a prayer rather than on a set of realistic assessments that factor in the down side risks.
In overall terms, the 2010 budget can be described as an exercise full of sound and fury, signifying little by way of tangible policy measures and reforms to regain competitiveness. The budget presented on October 23rd marks yet another missed opportunity to embark on a course that would re-establish and restore the integrity of key institutions and their ability to perform.
(to be contd)