The 2013 Budget: Najib's Last Hurrah?

A Brief History

The Budget unveiled by the Prime Minister on September 28th , his fourth budget, contained no real surprises. It followed the broad pattern of previous Budgets presented since 1998, the year of the East Asian Financial crisis.

A constant feature of these Budgets has been the use of deficit financing to further the BN agenda of promoting the interest of its key constituents while maintaining a grip on the loyalty of its traditional supporters. Tax giveaways and subsidies were part of the instruments used.

Despite buoyant revenues from the exploitation of natural resources which provided almost a third of revenue, the Government has consistently ran deficits which contributed to the buildup of a mountain of debt. The initial rationale for deficit financing was to stimulate and revive the economy after the devastating set back resulting from the East Asia Financial crisis of 1998.

Public funds were initially used to bail out corporations and to inject resources into the banking system. Simultaneously, a relaxed fiscal policy was justified on the grounds of encouraging the private sector to take the lead in accelerating economic growth.

Mega projects became a hallmark of the Mahathir era; generous tax concessions were granted to GLCs and crony corporations; toll operators and independent power producers benefitted from the largess extended by the government; consumer subsidies were extended to placate the electorate and to retain the loyalty of key groups.

In the years that followed, deficits continued to be incurred and became a constant feature of Malaysian budgets. The ritual promises to achieve fiscal balance were never kept.

The Abdullah administration made some feeble attempts but gave into pressure groups and vested interests. Deficits continued to be run.

The general elections between 1998 and 2008 were preceded by “feel good” Budgets that created the illusion of well-being. The electoral set back suffered by the BN in 2008 led to a change in the way public funds came to be utilized. The most recent Budgets delivered by Najib have moved towards targeted cash and other handouts to key support groups.

These transfers were directed to select voting groups and segments of the population. The Budget for 2013 proposes the following key transfers:

a) RM60 million to increase the minimum pension from RM720 to RM820 for pensioners who have been in civil service for at least 25 years.

b) RM301 million to provide a special incentive of RM200 per month to all military personnel, effective from 1 January 2013.

c) RM224million for a one-off RM1,000 to assist former members of the armed forces who have opted for early retirement;

d) RM3billion for assistance of RM250 to households where the head is earning less than RM3,000 and for single unmarried individuals aged 21 and above earning less than RM2,000 per month.

e) Individual income tax rate is to be reduced by 1 percentage point for each income bracket where annual taxable income falls between RM2,500 to RM50,000.

f) RM540 million will be allocated for the Schooling Assistance Program under which RM100 will be provided to all primary and secondary students.

g) Payment of an additional half-month bonus to civil servants in Dec-12 and another half-month bonus

The over-riding issue confronting Malaysia at this critical phase in its economic history is the alarming rate of increases in level of debt. Malaysia faces insolvency unless urgent measures are taken to check this slide to disaster.

Malaysia is in danger of a serious major debt crisis. It faces the very same issues that triggered the financial crisis faced by Greece and other weaker economies in the EUROZONE.

In a sense the circumstances in Malaysia are worse. There appears to be a total lack of willingness to learn lessons or to heed the polite warnings extended by the IMF and the rating agencies.

The lack of transparency and a sense of denial pose special dangers that the Prime Minster has chosen to ignore in his thrust to buy the next election. And buying the election appears to be the over-arching goal irrespective of the economic cost to the nation.

He is hell bent on his quest for power.

This potential crisis has been long in the making. The Budget deficits have ballooned and for the year 2012; the Federal Government’s debt is estimated to amount to RM502 billion or 53.7 percent of GDP just a little short of the 55 percent mark that sets limits to the size of permissible debt.

The Federal Government’s debt has grown from RM 229 billion in 2005 to RM 502 billion under the Najib administration. Thus, more debt has been accumulated in six years than what took 48 years after Merdeka to accumulate.

Some salient features merit mention.

The Government appears to have strayed from the path of fiscal sustainability even as it targets to reduce the budget deficit to 4% of GDP for 2013 from 4.5% this year, which was trimmed from the earlier target of 4.7%.

These estimates are based on rather rosy assumptions of growth, an under estimate of expenditures which conventionally increase after supplementary budgets are introduced like clockwork, a hallmark of the budget strategies of the Government. The final outcomes are likely to be higher if past experience is a guide.

Be that as it may, the estimates of the deficits and the resulting size of the Federal Government’s debt do not take account of the rising level of contingent liabilities which are debt guarantees issued by the Federal Government. These stood at RM96.9 billion or 12.2% of GDP at the end of 2010 and mushroomed to RM 117 billion by the end of 2011. They continue to grow.

Lim Kit Siang DAP Parliamentary Leader & MP for Ipoh Timur