Editorial| Economic Management

Comment: Budget 2020

An odd assortment of highs and lows.

By Editorial Team | 14 October 2019


The year 2020 should be momentous for Malaysia but Budget 2020 comes at a time of worry about the global economy. The US-China trade war and anticipated global slowdown are expected to bring on tough economic conditions for Malaysia. This comes on top of longstanding domestic issues: stagnant wages, high household debt and rising cost of living. The government indeed needed to walk a fine tightrope.

Given this environment, economic analysts have pushed for a more expansionary Budget 2020 and on this score, the government did not disappoint. But will it be a good use of taxpayer money? Our thoughts on selected portions of Budget 2020 as follows:


Revenue

Politics over Good Policy

  • Despite expectations of a slower global economy next year, the government still projects that the Malaysian economy or GDP will grow by 4.8% – about the same as this year’s. If this proves to be overoptimistic, the government’s projection of RM244.5 billion revenue in 2020 will be severely threatened. Be vigilant for announcements of higher PETRONAS dividends or government asset sales to make up the shortfall.
  • The debate on SST vs. GST seems to be firmly closed – which in our view is not a step in the right direction. GST is a more transparent tax and harder to evade. Malaysian businesses have already gone through the pain of learning it and putting in the systems. Given the stink raised about the previous government’s handling of GST refunds, the PH government would likely be trusted to implement GST better and deliver GST refunds in a timely manner. Ultimately, if the rate was set at an acceptable level and if more essential goods were exempted, GST would be the way to go.
  • That said, implementing the Digital Services Tax as well as announcing tax increases on the very rich is a relatively gutsy move. Those whoearn  more than RM2 million a year will be paying a tax rate of 30%, up from 28% (though this will reportedly affect only about 2,000 income earners). Nevertheless, the government still missed opportunities here for showing real courage on making taxes more progressive, like raising SST on luxury goods or introducing wealth and inheritance taxes.


Short-Term Spending & Foregone Revenue

High Highs, Low Lows

  • We recognise the need to put more money in people’s pockets ahead of what could be a tough global economy next year. But after repeatedly being told that (a) belts need to be tightened and (b) BSH makes people lazy, the increase in social assistance spending from RM22B to RM24B is surprising to put it mildly. BSH will be expanded to over-40s individuals as well as all disabled persons earning less than RM2,000 a month.
  • Still on the topic of putting money in people’s pockets: According to BNM, Malaysia would save 1% of our GDP or about RM12B a year if people switched fully to paying via e-payments instead of cash. Does this warrant using RM450 million of taxpayer money to give people who earn up to RM8,333 a month RM30 worth of e-wallet credit? Why can’t we leave it to the market and the e-wallet companies who are already aggressively promoting their offerings?
  • But yes, measures to encourage women’s participation in the economy look very good, from a new RM200 million interest subsidy fund for women entrepreneurs to increasing the tax relief ceiling for childcare services to topping up EPF by RM500 a month for two years for women who are rejoining the workforce. Also laudable is the recognition of housewives’ economic contribution by allocating towards their EPF and SOCSO coverage.
  • However, the wage and hiring incentives to encourage hiring of unemployed graduates and locals look rather strange. Incentivising employers to hire sounds sensible but why give an extra RM500 a month in EPF to the job seekers? Unlike the women example, graduate job seekers do not need the extra incentive to be ‘lured’ into employment. Not only strange, but also expensive – these incentives are slated to cost RM6.5B over two years.
  • We laud the allocations for public transportation, particularly the procurement of electric vehicles as well as funds for bus companies to improve last mile connectivity (we highlighted this very issue here and here). However, the targeted fuel subsidy policy does not sound watertight or efficient; high-income car owners with vehicles of 1.6cc and below could still be eligible to get the subsidised petrol card.


Long-Term Spending

Still Looking for Structural Change

  • Measures to spur the digital economy look encouraging, from implementing the National Fiberisation and Connectivity Plan, to providing various grants for increasing digitalisation and growing more digital-economy companies, to tax deductions for Digital Social Responsibility projects. It’s also great to hear about the continuation of positive projects, like micro-digital entrepreneurship which help uplift low-income women and youth.
  • Due to political and social realities, we expected race-defined programs and budget allocations to continue. However, we did hope that the programs outlined would be more targeted towards pockets of real need and that the allocation amounts across different ethnic groups would reflect the size of the problem being solved.
  • A small example is the new RM300 million interest subsidy fund for Bumi entrepreneurs with the potential to become regional champions. If they have the potential to become regional champions, do they need it? There are already over RM200 million in financing schemes via TEKUN, TERAJU and others to benefit Bumis starting out in business which is arguably more in need of assistance. (By comparison, RM100 million has been allocated for Chinese entrepreneurs and RM20 million for Indian entrepreneurs on top of non-race based entrepreneur finance schemes). 

Note: This goes beyond the Budget, but there needs to be better data if we are to close the Bumiputera and non-Bumiputera opportunity gap. We agree with Associate Prof. Madeline Berma and Zainal Ajamain who recently called for a desegregation of Bumiputera data between Peninsular and East Malaysia.

  • But in some cases, do incentives really achieve what we want? The government says it will make available RM1B worth of incentives every year over 5 years to attract targeted Fortune 500 companies and unicorns. Will the high-quality high-paying jobs go to Malaysians or will Malaysians be trained to eventually take over these jobs? Anecdotal evidence from the creative sector indicate that they largely won’t. Perhaps MITI’s additional focus on investment monitoring (which got a RM10 million allocation) will ensure that it really does.
  • The continuation of the Pan Borneo Highway, the increase in development expenditure as well as Federal Government financial grants to Sabah and Sarawak is very good, nevertheless. Closing the income and development gap between East Malaysia and Peninsular should be a serious target for Shared Prosperity 2030.
  • Isn’t it high time to transition away from measures that focus on supporting CPO prices and production? Instead of funds to promote replanting and implementing biodiesel standards (will this really be greener than fossil fuels?), why not emphasise initiatives that transition smallholders out of commodities?
  • The lack of real meat on housing policy is perhaps the biggest disappointment for Budget 2020. Measures announced were almost entirely financial in nature, mainly to make it easier for people to qualify for or sidestep mortgages they may not be able to afford. We had hoped for game-changing measures that would help to increase the stock of truly affordable housing, such as land value capture tax, rather than focusing on clearing overhangs. Speaking of which, we wonder if the relaxation on foreign ownership would be reversed once the property overhangs clears or if this rule will become permanent, which could turn into another problem.


Non-Budgetary Reforms & Improvements

Let’s See!

  • Reducing the number of steps to register a business: it’s been talked about for a long time. Let’s see!
  • Because it’s BNM, we do believe this’ll get done: The licensing framework for digital banks is said to be issued by H1/2020. Looking forward to it. We hope for a bright new era of transparent charges and customer-centric products.
  • Increasing maternity leave from 60 days to 90 days effective 2021: this is a tough one. If not balanced by equivalent paternity leave, there could be the unintended consequence of reducing female hiring and promotion. Improving the handling of sexual harassment complaints: sounds good but let’s see!
  • Increasing minimum wage to RM1,200 per month in major cities: an improvement, but still much lower than a living wage of RM2,700 for single adults living in Kuala Lumpur (according to BNM).
  • Transitioning to a competitive electricity production market (and in future transmission and distribution): looking forward to it, particularly if it increases sustainable renewable energy generation.
  • Expansion of MySalam to those aged 65 years old, to those with gross annual income of up to RM100,000 and from 36 to 45 critical illnesses: good, but still a relatively short-term band-aid. We should be talking seriously about finally implementing a long-term health financing solution, namely comprehensive national health insurance that is integrated with the current tax-based financing.


Federal Government Debt & Guarantees

Nothing To See Here?

  • Due to the mildly expansionary nature of Budget 2020, the fiscal deficit is targeted at 3.2% of GDP instead of 3.0% as previously announced – which is a good thing. Weathering the storm of an anticipated global economic slowdown takes priority. 
  • Nevertheless, given the impact of the 1MDB scandal on current government debt, we have had very little debate on what the government should and should not guarantee. How can there be more transparency and accountability in the granting of government guarantees? Several new or increased government guarantees were mentioned in Budget 2020 – how do taxpayers know that these are good things to guarantee? We hope the Debt Management Office set up in May this year will propose fiscal rules that ensure transparency and long-term financial stewardship.

Update 15/10/19: The Auditor General has also weighed in, urging the government to impose a cap on government guarantees.


And Finally, Budget Reporting

Linking Spending to Outcomes

  • How can we tell whether the various allocations and spending are generating the outcomes we want? In the spirit of accountability, increased transparency and plugging leakages, we humbly propose that future budgets are accompanied by a scorecard that compare the trend in spending against the trend of selected key performance indicators.
  • Consider the following example: we routinely say that education deserves the biggest budget because of its importance. But what does this mean in terms of measurable outcomes? How did investments in education over time translate into some key benchmarks in education, such as our PISA and TIMSS rankings? We illustrate with a simple example below.

Note: (1) TIMSS rankings are published every four years. The next TIMSS exercise (TIMSS 2019) is currently being undertaken. (2) Education expenditure trend comprises both MOE & MOHE total budgets in years when MOHE was a separate ministry.

  • There could be better annual indicators for education than TIMSS; but the point is, we should establish appropriate annual performance indicators across all major spending areas such as education, health and defence.
  • All this performance data exist in different pockets or government reports sprawled across various agencies and ministries which is exactly the problem. We need to look at our spending effectiveness regularly, in one place, and there is no better platform for that then the yearly Federal Government budget. Reviewing it every five years via the Malaysia Plan is arguably too long.

Email us your views or suggestions at editorial@centre.my.