(Extracts from DAP Alternative Budget 2010 launched on 7th October 2009)

8. Thrust I: Economic Democratisation – Fiscal Decentralisation

8.2 Fiscal decentralisation policies

Other countries, such as Canada, Spain, and the UK have been moving in the opposite direction recently compared to Malaysia, by increasing decentralisation. Nearer to home, China and Indonesia have also successfully decentralised much of their financial and economic decision-making process. Even smaller countries such as Switzerland and Belgium have developed forms of fiscal federalism. To ensure that Malaysia is able to tap into the sizeable latent potential benefits arising from the political accountability, economic efficiency and economic growth, DAP proposes that states are granted greater control over their finances.

8.2.1 Tax revenue sharing agreements
It is proposed that the federal government enter into tax revenue sharing agreements with states so that there is a stronger link between a state’s performance and its revenue share. 20% of individual and corporate income taxes collected in a state, as determined by the residence of the taxpayer and location of the establishment, will become the state’s entitlement. Income taxes will continue to be collected by the federal government using the existing infrastructure, but the states’ portion will be distributed back to the states for each financial year. This is the system which has been adopted by Germany.
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(Extracts from DAP Alternative Budget 2010 launched on 7th October 2009)

8. Thrust I: Economic Democratisation – Fiscal Decentralisation

8.1 Greater economic efficiency and political accountability

Many countries have pursued fiscal federalism and have devolved or are devolving more power to state and local governments. China and Indonesia’s recent economic success has also been linked with the decentralisation of economic decision-making. In the UK, the Calman Commission has recommended that Scotland be given greater tax-varying powers in order to further improve their devolution process. This is largely because of the economic efficiency and accountability arguments.

Certain areas of expenditure responsibilities should be decentralised because states and local governments are better placed to tailor their programmes to local needs. For example, state governments are more likely than the central government to know their region’s comparative advantage and hence promote investment initiatives accordingly. In order to decentralise expenditure, revenue must also be shared with states. Instead of being dependent on the federal government spending directly in the states, states would be able to implement their own programmes encouraging tourism, SMEs and industry. In this case, when the 13 states are unshackled in their courting of investment projects with their tailored policies, it is very likely that more and better investments will be attracted and made.
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(Extracts from DAP Alternative Budget 2010 launched on 7th October 2009)

5. Key Policy Highlights

Based on the 3 key thrusts outlined above to achieve greater economic democratisation via fiscal decentralisation, to place rakyat first with restructuring and reallocation, and to empower Malaysians through economic capacity building, the key policy measures proposed include:

1. Tax revenue sharing agreements where 20% of individual and corporate income taxes collected in a state will become the state’s entitlement. For Selangor and Penang, this revenue sharing agreement would entitle them to approximately RM 3.2 billion and RM 500 million respectively. An equalisation and development grants formula based on a function of population, poverty, area development, cost, human development and gross revenue per capita indices will also be given to ensure that poorer states do not lose out.

2. States will be given the rights to borrow up to a maximum of 50% of their annual ownsource revenue, which is revenue raised directly by the state governments.

3. We will set up a fund of RM 400 million to provide grants to state governments to reinstate local council elections, conduct delineation studies, hold trainings and promote awareness via publicity and education campaigns after amending the Housing & Local Government Act.

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(Extracts from DAP Alternative Budget 2010 launched on 7th October 2009)

4. Budget Objectives

To meet the challenges of improving Malaysian global economic competitiveness while addressing the growing rich-poor disparity in Malaysia and being mindful of the fiscal constraints and harnessing our oil resources effectively, the DAP Budget 2010 is themed “Malaysian Economic Democratisation”.

The goals of economic democratisation is to ensure that public funds and expenditure by the government will be more effectively and efficiently spent in accordance to the needs of the people, ensure that public projects are structured in mechanisms which will benefit the rakyat as opposed to politically-connected operators as well as enabling Malaysians to achieve greater economic freedom.

The process of “economic democratisation” will hence focus on 3 key thrusts, that are:

1. Economic Democratision – Fiscal Decentralisation

2. Rakyat First – Restructuring & Reallocation

3. Empowerment & Enablement – Capacity Building

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The DAP Alternative National Budget 2010 marks the progress the Party has made in the field of economic policy making, and our readiness to assume the role of a governing party in the Federal Government as and when such opportunities arise in the near future.

Our first Alternative National Budget was launch on the 5th September 2007 for the year 2008, before the last historic general elections where Pakatan Rakyat denied the Barisan Nasional two-third majority in the parliament, and winning government in 5 Malaysian states. This new Alternative National Budget 2010 picks up from where we left off in 2007, enhancing our proposed economic policies with stronger strategies and proposals based on further in depth research and analysis.

As Malaysia face one of the most challenging economic period in times of uncertain global demand, it is critical that the Malaysian government takes decisive actions to spur the economy and ensure that we will not only recover from this recession, but also emerge stronger and more competitive than we were before the onset of the recession. However, a review of the Barisan Nasional (BN) government’s actions to date coupled with its track record over the past 12 years paints a less than optimistic picture.

At a time when the economy is faltering globally, is exactly the time for the government to be pump-priming to boost domestic demand and competitiveness. However, despite the urgent need to boost government expenditure, the BN government is now finding out the hard way that they have in essence, run out of money to spend and are struggling to contain and maintain the high and escalating cost of government. Read the rest of this entry »