The Five Thrusts of the 10th Malaysia Plan

The Prime Minister stressed that the 10th Malaysia Plan is oriented around five key strategic thrusts, namely:

* Stimulating Economic Growth – implementing a policy framework that will galvanize the private sector and promote trade and investment;

* Moving towards Inclusive Socio-Economic Development – focusing government support on those most in need and reforming affirmative action policies;

* Developing and Retaining a First-World Talent Base – improving schools, providing skills training to those in the workforce and implementing important labour market reforms;

* Building an Environment that Enhances Quality of Life – investing in housing, transport, healthcare, utilities, crime prevention and the environment to support economic activity and improved living standards; and

* Transforming Government to Transform Malaysia – building on the success of the Government Transformation Program to continue to improve government performance and transparency to best serve the people

The question that arises is: How different are these in comparison with the corresponding thrusts that were outlined in the 9th Five Year Plan?

In the so-called National Mission the five thrusts were:

* To raise the value added of the national economy;
* To raise the country’s capacity for knowledge, creativity and innovation and nurture “first class mentality”;
* To address persistent socio-economic inequalities constructively and productively;
* To improve the standard and sustainability of the quality of life; and
* To strengthen the institutional and implementation capacity of the country.

There is a remarkable similarity in the two sets of general propositions. Thus, to claim that the 10th Plan incorporates a true New Economic Model is stretching the truth. The reality is that the 10th Five Year Plan is old wine in new bottles. The approach taken raises deep and troubling questions about the competence of the Government in being able to formulate and implement policies that genuinely are in the national interest.

The Plan proposes total outlays of RM 230 billion. It incorporates a return to the era of mega projects to be financed by massive borrowings that were a hallmark of the Mahathir era. The characteristics of the earlier Plans represented by privatization, channeling of funds to crony corporations, emphasis on the Bumiputra equity ownership targets, and massive State interventions while paying lip service to the pivotal role of the private sector are once again at centre stage. The notion of a New Economic Model incorporating critical reforms that was floated as recently as March of this year was indeed stillborn. It has been aborted by the forces of reaction which place narrow interests ahead of national needs.

The macro economic framework used in framing the Plan is built upon rosy assumptions. Growth is projected at an average annual rate of 6 percent against a rate of 4.2 percent achieved during the 9th Plan. Private Consumption is projected to grow at 7.7 percent against an achieved rate of 6.5 percent; Public Investment is expected to grow at a slower pace of 5.0 percent against 6.2 percent; Private Investment which registered a rate of 2.0 percent is to rebound by a hefty 12.8 percent per annum. Increased in flows of FDI are assumed to grow although no amounts are indicated. The Plan further assumes that inflation will remain modest thus providing price stability.

Based on the past track record for projections, these projections are rosy and over optimistic. The down side risks of a global slowdown brought about by inevitable corrective measures to tame US and EU budget and external deficits which could prolong the current financial crisis do not appear to have been factored in despite obvious linkages to the Malaysian economy. Additionally, the loss of competitiveness and the growing attraction of China and India as destinations for massive capital flow diversions are largely ignored in the Plan framework.

The Plan framework asserts that domestic price stability will be maintained. The case made is far from compelling. The Plan framework is wholly silent on the inflationary impact of the planned outlays of RM 230 billion under the 10th Plan. Expenditures on this scale will undoubtedly contribute significantly to inflation in the domestic economy. Yet no account appears to have been taken. Prudence and caution appear to have been jettisoned as the Government goes on a spending binge. Irresponsible policies if pursued will be catastrophic.

How does the Government propose to finance this spending spree? Table 8 offers some indications.

Optimist assumptions are made about Revenue growth at 6.1%. – only likely if GDP growth of 6.0 percent is achieved. Revenue is projected to grow from RM 158 billion in 2008 to RM216 billion in 2015. Similar optimistic assumptions are made with regard to Operating Expenditure, projected to grow at a lower rate of 6.5% in the next five years compared to the increase of 8.6 % during the 9th Plan. Given the larger borrowings and higher interest rates, debt service will increase sharply by 9.4 % as against the already high rate of 8.6 % during the 9th Plan period. This is unlikely to be countered by cuts in other operating expenditures.

Taking these highly optimistic projections together, the Plan forecasts that the Overall Public Sector Deficit as reported in Table 9 will move from a deficit of RM29.9 bill in 2009 to a surplus of RM.12.7 billion over the next five years. This is a turnaround of almost RM 43 billion. It would appear that optimism has no bounds. Or are these the outlines of the iceberg of intentions to raise taxes in a sizable manner?

The Federal Government, which ran a cumulative deficit of RM 97.8 billion during the period of the 8th Plan, (initially projected at RM 29.9 billion) will see a deficit of RM 163.1 billion in the 9th Plan. As only partial figures are provided for the period of the new 10th Plan, it is difficult to estimate the cumulative deficit in the next 5 year period. On a crude basis, an extrapolation of the deficit would indicate a figure of approximately RM 180 billion, a figure almost double that recorded during the 9th Plan.

Taken together, Total Debt increases from RM 362.4 billion at the end of 2009 to RM 593.9 billion by 2015 ( an increase by 64 percent) with the Domestic component increasing from RM 348 billion to RM 562 billion by 2015 and the foreign component increasing from RM 14 bill to RM 32.

It is patently clear that the Government’s commitment to reducing the deficit rings somewhat hollow. In absolute ringgit terms the deficit will grow and will lead to borrowing on a large scale thus adding to the mountain of debt. Deficit financing is no longer a means for pump priming to counter cyclical downturns; it is now a permanent feature of Malaysian fiscal policy. Datuk Idris Jala was right on the mark when he made the point that Malaysia was headed towards bankruptcy.

These forecasts and projections are indicative of the adoption of highly irresponsible and high risk fiscal policies and an abandonment of fiscal prudence. While past prudence has been rewarded by the markets with good ratings, this turning away and the pursuit of a devil may care reckless policy will not go unnoticed by markets and rating agencies. In a globalized world, countries, more so open and vulnerable economies such as Malaysia, cannot afford the luxury of going against conventional norms. If they so chose, markets take corrective steps and mete out devastating punishment. This was one of the critical lessons from the current financial crisis which is taking a devastating toll on some of the member states of the European Union e.g. Greece, Spain, Portugal etc. It would appear that the BN Government has either not drawn lessons or is bent upon following a course in open defiance of fundamental fiscal principles.

The Federal Government deficit, it should be noted, is only the tip of the iceberg as the huge deficits of the off-budget agencies are excluded from the calculations. The GLCs have weak balance sheets. Some have been bailed out several times. The hidden contingent liabilities of the Federal Government are like a dormant volcano waiting to explode. Illustrative of these are the contingent liabilities of the Government ; the PKFZ saga is a reminder.

Any discussion of Government finances must take account of the distorted allocations of expenditure. Some key distortions are:

• A large subsidy bill: The real size of the bill is hard to fathom given the less than transparent way in which the Federal budget is detailed. Witness the dispute between Datuk Idris Jala and the Ministry of Finance as to the exact size of the subsidy bill. Moreover, the broader issue has been distorted as the focus has been on consumer subsidies which are a smaller part of the overall subsidy bill which channels billions to corporate entities.

• Debt servicing of public debt which has mushroomed over the past decade: Debt service now consumes well over 10 percent of recurrent expenditure.

• A bloated and inefficient public service: For a country of the size of Malaysia (28 million) well over 10 percent (over 1.2 million) of the labor force is on the public payroll. Low productivity and inefficiency are legion. This distortion of the labor market can only be removed via a radical downsizing of the public service. The Government must answer the question: when was the last time that an overall review of the public service, its structure, and its functions last carried out? It should launch an Independent Commission to look into the workings of the public service leading to radical reforms, and the introduction of safeguards that correct the most egregious processes that are in place. The Public Service Commission has to play its due role and become more than just a home for senior level pensioners.

• The cost of goods and services acquired by the Government are high because of non-competitive bidding practices employed by the Government. These practices also contribute to corruption. The additional “rents” generated represent a cost to the Government and ultimately to the nation.

• Tax fraud and lax enforcement contribute to unmeasured revenue losses.

• The regulatory regime now in place, highlighted and personified by the system of licenses, approved permits for importing a range of goods, (motor vehicles being only one) contribute in a variety of ways to reducing the role of competitive forces and provide the means for price distortions. Other practices that merit attention are the manner in which utility prices are set. The granting of toll increases and the secret agreements governing independent power generation are yet other examples of flawed policies having an impact on price levels.

On the issue of subsidies, it would appear that the generous subsidies that Petronas extends to independent power producers (IPPs), which built a string of gas-fueled electricity generating plants in the 1990s remain in place whilst those on consumer goods are likely to be removed. Since the 1997 crisis, Petronas has supplied heavily subsidized processed gas not only to Tenaga but also to the IPPs. According to Petronas, these subsidies have totaled RM25 billion. These special arrangements enrich a handful of well-connected, wealthy tycoons. The Edge identified Genting Sanyen Power, YTL Power, Malakoff Bhd and Tanjong Plc/Powertek Bhd, as the beneficiaries.

It is legitimate to ask: Why this favored treatment? Why are subsidies still being paid? Why are these agreements a secret? It is time for answers. It is time that the Government comes clean. A saner policy would be to review all subsidies and to develop a comprehensive plan for the reduction and eventual elimination of all distorting subsidies over an extended time frame.

Approvals and licenses are required for a host of things. They create opportunities for corruption and abuse. It is time for an in-depth look at all regulatory arrangements, with a view to eliminating those that impede freedom of commerce, investment and opportunities for entrepreneurship. Achieving the goals of Vision 2020 – becoming a developed country – will demand more than fine infrastructure, high per capita income levels, broad based manufacturing industry and the use of technology. It will demand better governance, greater accountability, and institutions that are efficient and deliver public goods effectively. Thus, addressing the appalling state of public services must be high on the agenda, lest we fall short of developed country status in all aspects of that status. The License and Permit Raj must make way for a system that is service oriented.
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Reducing the deficit will demand a comprehensive review of all expenditures, a fresh look at the overall tax regime and greater attention to the cost-benefit calculations on future government investment projects. Particular attention needs to be directed at:

• A review of all subsidies and their gradual elimination over time
• More rigorous enforcement of tax laws and closing of loop holes
• Competitive bidding for the purchase of goods and services by the Government through transparent tender procedures leading to reduced procurement costs
• A freeze on hiring in the public service and targeted reductions in the size of the service over the next three years;
• A review of all tax rebates and exemptions to the business sector;