Najib’s “mother of all budgets” delivering fake news
The Prime Minister Datuk Seri Najib Razak described the Budget being about “gifts, rewards and incentives”. It is most mistaken view. It is a tool or instrument for presenting a statement about the state of the economy, its prospects, and policy announcements for improving governance. A well-crafted budget statement should be an objective and honest presentation meeting the goal of accountability.
Sadly, the Budget for 2018 presented by Najib fails these basic tests. His speech of almost 12,000 words was more akin to a laundry list of items of giveaways, expenditure allocations both real and imagined, and vague statements about the economic consequences that would result.
The speech omitted any reference to urgently needed policy changes to restore the competitiveness of the economy that would enable the nation to escape the middle-income trap it finds itself in. The speech was silent about measures to correct the stagnation in real incomes, and address the looming danger associated with the mountain of debt: - public, corporate and household.
The Budget has been turned into an unabashed and irresponsible first salvo in the campaign for the GE 14. Page after page of the speech detailed expenditures and proposed allocations; no group was ignored in the largess being extended.
Little was said about how the proposed expenditures were designed to advance the overarching economic goals; no reference was made to how the addiction to deficit spending was to be overcome.
The projected deficit was itself a meaningless figure as the profligate spending in some measure would be financed outside of the budget, and nor did the Prime Minister in his speech or in the Economic Report provide details about the level of contingent liabilities or the new liabilities being assumed.
The Prime Minister chose to describe the Budget as the “Mother of All Budgets”. Ironically, he was on target as this Budget was an exercise in deception and was an unvarnished sales pitch seeking votes in the upcoming election.
The PM’s claim about “good news” needs to be taken with a large pinch of salt. The reality is that the news as reported in the Budget statement is more in the nature of “Fake News”. The Budget framework is built upon dubious interpretation of statistical data in a highly selective manner.
The Prime Minister gloated over the growth numbers but was being selective. He failed to make any reference to issues of a structural nature raised by the World Bank and the IMF in particular in the latter’s Annual Article IV Consultations and reported on its website.
Economic Growth Rates
The Prime Minister made much about the revised growth rates issued by the International Financial Institutions and attempted to claim credit. He omitted to indicate that the revisions pertained to almost all countries- Malaysia being one in the group.
The revised growth rates should not therefore be interpreted as an approval of the competence of the Government in managing the economy. Growth rates are revised to be higher because of global economic developments, primarily resulting from changes in monetary policies by the US Federal Reserve Bank and its counterpart the European Central Bank and the partial recovery in prices for oil and gas.
The Prime Minister’s has been selective in the use of data. This is best illustrated by his use of the year 2009 as the base for measuring change. There is no rational reason for this choice other than an attempt to glorify his own tenure of office. It is also pertinent to note that the year 2009 represented the Global Recession. The choice of this low base amplifies the recovery in the years since.
The Prime Minister however chooses to remain silent about the negative developments, for instance, in the losses in the country’s external reserves (from a peak of US$ 140.0 billion in 2012 to US$101.2 billion in Sept 2017.; Total Reserves as a percentage of External Debt fell from a high of 121.1 percent in 2007 to 47.2 percent in 2016 or the decline in the value of the Ringgit from US$1 =RM 3.34 in 2007 to US$1=4.20 in Sept 2017. These are not indicative of “efficient governance and prudent discipline” as claimed by the Prime Minister.
The Federal Government Fiscal Situation
For two decades the Federal Government has operated with a deficit; the reported Federal Government debt now approximates 55%; additionally, the Federal Government has concealed its borrowings and the true size of its debt by making GLCs and other quasi-government entities undertake borrowings to finance public sector projects under the guise of so-called public-private projects; the Federal Government has at the same time accumulated large hidden contingent liabilities by extending guarantees for borrowings by GLCs and other entities.
The fiscal situation has been worsened by corruption, mismanagement and other abuses including non-competitive acquisition of goods and services. The absence of competitive bidding results in price distorted costs. Tax revenues have been eroded by way of so-called “incentives” extended to cronies of the Government without resulting in any discernable rise in private investment.
The reference in the speech to the New Economic Model(NEM) is more in the nature of a throwaway remark.
Certain clear-cut goals and policies adopted at the launch of the NEM have fallen by the way side. It should be recalled that there was a commitment to pursue further privatization of Government’s Non-Financial Public Enterprises and reduce the Government’s holdings in the GLCs which in reality function as State Owned Enterprises.
It is significant that the Speech contained no reference to the pursuit of these stated goals.
The findings from a recent highly professional study led by Professor Terence Gomez has highlighted the dominant role played by GLCs in the Malaysian economy. They dominate almost all sectors of the economy from aviation, banking, manufacturing, plantations to various modes of transportation.
In 2013 a total of 455 companies (including subsidiaries) were classified as government-linked investment companies (GLICs). There were 35 publicly listed companies which were among the top 100 companies listed on the Bursa Malaysia. The latter account for an overwhelming percentage of the capitalization of the exchange.
Without a doubt the Government’s footprint is large in the business and commercial sectors. The entities in question act as monopolies or privileged entities thus stifling private enterprise. This has led to flagging private investment despite tax and other incentives.
Of late several entities (e.g. MARA, FELDA, Tabong Haji) have become mired in financial scandals. There is little or no accountability by such entities.
Furthermore, it is strange indeed that while Malaysia as a upper middle income country seeks to attract FDI flows, but government linked agencies are currently exporting capital. These endeavors taken represent contradictions. But, more troubling is the fact that they give rise to abuses and corrupt practices.
The claims of successes in employment creation merit comment. While indeed some 2.3 million jobs have been created in the past eight years, most of these have been low paying jobs with many filled by migrant workers.
Serious shortages of skilled workers exist; paradoxically the brain drain continues unabated. These labor market developments along with the stagnation in wages are indicative of a failed set of policies that are contributing to the loss of competitiveness and the entrapment as a middle-income country.
The self- congratulatory remarks about export growth are yet another example of delusion. The current level of exports expressed in Ringgit terms. The Prime Minister has chosen to ignore the fact that he is comparing values based on different exchange rates.
The comparison of international reserve levels is rather devious ---- this is the only comparison linked to 1997!
The reporting of an increase in income per capita from RM 27,819 in 2010 to RM 49,713 in 2017. This trend is contradicted by the World Bank as the following numbers show:
World Bank: MALAYSIA GNI per capita in US Dollars
|GNI per cap||8240||9040||10150||10760||11000||10440||9850|
The significance of these numbers points the extent to which Malaysia is lagging in terms of achieving "high Income" status which in 2016 was set as income levels in excess of US$ 12,235. Indeed, taking account of the current level of GNI per capita, projected exchange and growth rates, it is patently clear that the much-touted goal of achieving “high income” country status by 2020 is a fading dream.
The budget allocations for 2018 are projected at RM280.25 billion, an increase of RM 20 Billion, with RM 234 billion for operating expenditure and some RM 46 billion for development.
While further details are highlighted, the Prime Minister chose to be silent about a large item, namely debt service which amounts to 11 percent of the operating expenditure. The increased allocations are largely to restore cuts that were imposed earlier in the year.
Revenue collection in 2018 is projected at RM 240 billion and increase from RM 220 billion in 2017, an increase of approximately 9 percent.
No details are given either about the sources of revenue, or the in amounts reduced by way of tax cuts and exemptions. The projected growth lacks credibility given the rate of GDP growth, reductions in revenue attributable to the exemptions from GST granted for big ticket items alongside the reductions in income tax rates.
In brief the rosy estimates of modest growth in expenditure coupled with unrealistic level of revenue receipts follow a pattern. Revenue projections are pitched high whilst expenditures are restrained in the Budget.
There are inevitable supplementary expenditure requests later in the year. These approaches in budgeting enable the Government to put out massaged numbers for the deficit. These practices appear to be sharpened in the preparation of the Budget for 2018.
Lip service was paid about fiscal consolidation without mention of how the Minister proposes to reduce debt levels. While the Prime Minister was upbeat about all manner of “progress”, no mention was made about the record concerning deficits. It is noteworthy that it now more than 20 years since Malaysia enjoyed a budget in surplus.
Once again total debt along with contingent liabilities will rise in the year ahead. These will represent burdens passed on to future generations. With an ageing population, the burden will be all the greater. The nation’s long-term interests are being sacrificed for short term political gains.
The claim that “this document” (the Budget) will chart the course for building the nation for the next 30 years is a farfetched assertion. This is all the more questionable considering the fact that the Budget hardly lays out any long- term policies and goals but is only concerned with the “here and now” issues assumed to be of interest to a highly jaded electorate.
Most remarkable, however, is the Prime Minister’s assertion: “ Since we declared Independence, we have been fortunate as our forefathers have governed and administered this country embedded with sharia requirements”. The Prime Minister appears to be rewriting history by ignoring the fact that country adopted a secular constitution and up until recently Sharia played no major role in administration.
To claim that for six decades a Shariah framework has operated with the Federal Constitution etc., playing a secondary role, is an outright distortion of the facts. The formulation used by the Prime Minister ought to raise a red flag about his coalition’s intensions regarding the status of the Federal Constitution.
The Prime Minister while acknowledging that “the framework has not been written in any Government documents, but its practices are reflected in all inter-related national philosophies and policies”- by making this statement appears to be outlining a position that the Government will adopt in the event it is returned to power. It is thus a signal of how the secular Federal Constitution will be further sidelined.
Trends in Investment
The Prime Minister set out several targets dealing with investment and trade. The statistics about trends in investment were selective.
Once again by choosing a low bench mark year (2009), a year that recorded a Global Recession, and inflated targets for 2018, he attempted to project progress.
These statistics appear impressive in attributing performance of private investment. A closer review however paints a different picture.
Given that the GLCs dominate the private sector, and that they largely operate as SOEs, much of the “improvement “can be attributed to Government initiatives handled by these entities.
The process permits the Government to by-pass concerns about the debt ceiling and at same time permit nefarious projects as evidenced by the 1MDB saga.
The trends in private investment are erratic as inappropriate policies and political uncertainties have impacted on private investment, both domestic and foreign. The failure to announce corrective policy measures will result in sluggish investment patterns along with continuing outward capital flows
Passing reference is made in the 2018 Budget to accelerating exports. However, no indication is given as to what policies will be introduced to develop capacities in new products and promoting industries involving new technologies for instance the use of artificial intelligence.
No mention is made about how the Government proposes to deal with the withdrawal of the US Government from the TPPA; the PM was silent about what posture it intends to take viz other trading arrangements within ASEAN or with the EU and the China-led proposals for a regional trade arrangement.
The claim that “….for the first time in the history of the nation’s budget…” a large allocation “is provided to assist farmers, fishermen smallholders and rubber tappers” appears to be a most strange claim. Every Five-Year Plan, every Budget over the past 6 decades has contained allocations for these groups; it is disingenuous indeed to make claims that are short on a factual base.
The mega rail transportation projects that have been announced raise multiple concerns. For a start, cost benefit and feasibility studies have not been disclosed, assuming these have been done.
It is worthy of note that the projects will be financed by loans from China; the terms of these loans have yet to be announced. Reports in the media appear to suggest that major parts of these projects will be assigned to China’s enterprises who will invite some Malaysian entities to collaborate.
The Prime Minister evaded the entire issue of port expansion using loan funds in the face of overcapacity in the nation’s major port, Port Klang, following the departure of a major user. Many of the other transportation projects highlighted in the speech will not be financed from the Federal budget.
The following quote from the Prime Minister’s speech is most remarkable - it projects self-glorification and is somewhat insulting of past holders of the office of Finance Minister:
“This Budget that has never been crafted so well, even during the last 22 years or the past 60 years of our own nation, and marked in history, making this Budget the Mother of All Budgets.”
Ironically, this Budget may indeed qualify as the MOTHER OF ALL BUDGETS for reasons other than those offered by the Prime Minister. The Speech represents an open attempt to create Fake News in pursuit of gaining credibility with an electorate that is largely disenchanted by the workings of a Government tarred by endless scandals, led by someone viewed as a kleptomaniac.
The current budget also qualifies as a MOTHER OF ALL BUDGETS for its extensive giveaways, without a realistic vision or any demand for sacrifices. It provides no coherent strategies to permit the nation to escape the middle-income trap.
Malaysia urgently needs a course correction if it is to regain dynamism to enable it to move forward on the road to greater prosperity.