Prime Minister Najib – Fiscal discipline and efficiency for Malaysia first!

Malaysia will need to strengthen its fiscal discipline before expanding its tax base.

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Historically, Barisan Nasional’s (BN’s) fiscal management has failed in two related ways.  They have displayed no fiscal discipline, and their public service expenditure has been highly inefficient and corrupt. Malaysian Prime Minister Najib’s decision to introduce a Goods and Services Tax (GST) is therefore premature. Before introducing a GST, Najib must first demonstrate to the Rakyat that he has the ability to reform BN by reining in fiscal deficits.

A historic lack of fiscal discipline

There are two conventional approaches to fiscal policy: a balanced budget approach, where the government spends only what it earns or a counter-cyclical approach, where the government accumulates surpluses during high growth periods to use as deficit spending during recessionary periods. Up until now, BN has chosen neither approach.

Malaysia has recorded high growth rates every year since independence in 1957 except for 1985, 1998 and 2009. With average annual growth rates of approximately 6.5 per cent, one would expect Malaysia to record a fiscal surplus over the period. But the converse is the case. Malaysia’s fiscal deficit hit a twenty-seven year high in 2009 at 7.4 per cent of GDP.

The primary reason for this huge fiscal deficit is that spending has exceeded revenue. Although federal government revenues have increased since 1957 by approximately 3 per cent per annum,  this spectacular rise in revenue has been exceeded by an even more spectacular rise in expenditure, which reached a colossal RM220 billion in 2009.

More specifically, this increase in spending corresponded to BN’s need to ‘finance’ its ‘New Economic Policy’. This ‘New Economic Policy’ began in the 1970s, when the government got involved in the economy through state owned enterprises (SOEs) to promote ‘Bumiputera’ interests. The SOEs were a colossal failure. Then, in the 1980s, Prime Minister’s Mahathir’s venture into heavy industries caused a fiscal crisis. Finally, since the financial crisis of 1997/98, the BN government has been pump priming the Malaysian economy to keep it afloat.

Highly inefficient and corrupt public fiscal management

BN has historically engaged in extremely inefficient public expenditure. There are two types of public expenditure – operating expenditure for the maintenance of existing goods and services, and developmental expenditure to create new goods and services that enhance the productive capacity of the economy. Despite extensive privatisation, in Malaysia operating expenditure has unacceptably kept pace with increased revenues, while development expenditure has not.

A key reason for this is that the public sector has expanded uncontrollably. Malaysia boasts the largest public sector in Southeast Asia. Yet it still faces shortages in critical areas like doctors, nurses, mathematics and science teachers, which suggests a serious misallocation of resources. There must be a serious reduction in the number of Malaysian ministries, agencies, statutory bodies and ultimately civil servants. Wages must be linked to productivity to extricate the public sector from the low-wage, low productivity trap that it finds itself in. This would also reduce the currently high level of income inequality afflicting the public sector.

Another important reason for ballooning public expenditure is the collusive behaviour among public sector, the BN and private sector – best illustrated by the ongoing Port Klang Free Trade Zone (PKFZ) scandal. The auditor general’s annual report reveals that all forms of government procurement – tender, open tender, quotations, and direct purchase – are currently prone to abuse. Kickbacks, rigged bids, the use of ‘shell’ or ‘front’ companies, excess payments and misrepresented facts seem to be the norm rather than the exception. The Performance Management and Delivery Unit (PEMUDAH), set up by BN to facilitate business, has estimated that corruption could be costing Malaysia approximately RM10 billion a year – about 1-2 per cent of GDP. In the book ‘Malaysian Maverick: Mahathir in Turbulent Times,’ Barry Wain reported that Mahathir squandered RM100 billion or more through corruption and mismanagement.

This evidence suggests that the BN cannot be trusted with the nation’s finances. Given the current problems afflicting the public sector, the benefits of any new tax would also be dissipated and so would not solve Malaysia’s fiscal problems. Furthermore, based on its past record, BN would likely raise the GST tax rates to meet unrestrained spending habits.

Prime Minister Najib must focus on putting his house in order before considering implementing the GST or any other new taxes. In discussing fiscal reforms, he must reach out to the opposition. After all, they represent half of Malaysia’s voting population. Only after this occurs should the introduction of a GST be countenanced.

This article first appeared in Malaysiakini.

Author: Greg Lopez

I write about Malaysia, Singapore, Southeast Asia and Australia’s policy towards the ASEAN region. I am also lecturer with Murdoch University’s Executive Education Centre, fellow at its Asia Research Centre, and a a member of its Centre for Responsible Citizenship and Sustainability. I am also a visiting fellow at the Department of Political and Social Change, Australian National University. Trained as an economist at the University of Malaya and the Australian National University, I have worked and researched the region extensively focusing on its economic and political reforms.

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