Budget 2013: Eh, This is Not So Bad Lah!

With the next General Election on the horizon, Budget 2013 naturally attracted more public scrutiny than usual across the political spectrum. The political stakes are high as the central government attempts to establish an electorate-friendly yet fiscally responsible budget. I am no BN sympathizer or PR supporter, but at least on paper, I actually find Najib’s Budget 2013 reasonably progressive and sensible. Of course, several fronts remain work in progress, the biggest of which, is the progress towards cutting fiscal slippage or so-called “leakages”.

The primary concern on our minds: does Budget 2013 help or detract us from debt sustainability? As terrifying as it sounds, the fact that Malaysia has one of the largest fiscal deficits in the region does not really address this question. A simple, albeit rough quantitative method to do so is to determine a sustainable budget deficit ratio, defined by the product of the projected nominal GDP growth and the current debt-to-GDP ratio. The budget can be deemed as fiscally sustainable if the actual deficit ratio does not exceed this ideal deficit ratio. Assuming a median estimate of 7.8% nominal GDP growth (sum of 5.0% in real terms and 2.8% in inflation) and the latest debt ratio of 52.6%, we see that the sustainable deficit ratio of 4.1% (7.8%x52.6%) is marginally above the 2013 fiscal deficit target of 4.0%. Obviously, the margins are tight in this analysis, and if the government fails to deliver the necessary growth results, a 4.0% fiscal deficit will be insufficient to reduce the debt ratio.

Other indicators also suggest that for now, Malaysia’s public finances remain fiscally stable. First, the government projects to run an operating surplus of around RM2.15 billion next year, although this figure has shrunk gradually over the past decade due to the general outpacing of operating expenditure growth over tax revenue growth. Second, Malaysia is still running a current account surplus (latest figure of RM9.6 billion in Q2 2012). This does allow the government to spend a little bit beyond its means without triggering harmful inflationary pressures. The worry here is the slower export growth this year due to weaker external demand, and as such, the government still has to be fiscally vigilant to prevent  a “twin deficits” (trade and budget deficits) scenario that could undermine the Ringgit. And finally third, we have a very favorable federal debt structure. According to Bank Negara Malaysia, our foreign debt currently stands at RM16.9 billion, a mere 3.6% of the central government’s total current liabilities. None of the external debt is short-term as well, providing the Najib administration more breathing space to implement its investment-driven development agenda.

Alright, time to move on to the specific contents of Budget 2013. As expected, subsidies will be a major driver of operating expenditures again, constituting RM38 billion or 15.1% of the budget. Barring any major spikes in energy prices (and fiscal slippage), the subsidy bill in 2013 could actually be lower than that in 2012, which is projected by the Ministry of Finance to hit RM42.4 billion. I also appreciate the move to gradually replace inefficient, blanket subsidies with targeted subsidies. While it is too soon to expect the termination of subsidies on the widely-used RON 95 grade of petroleum, the government did call for the subsidy on sugar to be reduced by RM0.20 per kilogram. Other financial assistance appear to be more industry or income-group specific. For example, the government intends to subsidize RM20,000 for each unit of low and medium-cost apartments built under the Rumah Mesra Rakyat program, while loan interest rate subsidies will be provided to groups ranging from bus operators to youth entrepreneurs.

Budget 2013 also reveals the government’s intention to be less reliant on oil, which currently contributes about a third of its annual revenues. The plan to transform Malaysia from an oil producer to a high-tech, integrated trading hub for oil and gas might help that cause. Personally, I think that this is a very promising strategy, given that vertical integration would allow us to both manage the costs of oil production and move up the value chain in the energy sector. To attract foreign investment and the appropriate talent, the government will roll out investment tax incentives for oil refiners and liquefied natural gas (LNG) traders.  Another major project is the Tun Razak Exchange (TRX), a potentially vibrant regional financial center. If effectively implemented, the TRX could further expand services growth in Malaysia and reduce our dependence on oil. The biggest challenges of these ambitious projects are once again, minimizing fiscal slippage and coping with regional competitors such as Singapore.

In the past, some have criticized the government for failing to address the needs of the urban, middle-class segment. The rising costs-of-living coupled with stagnant wages have financially strained young working professionals in urban areas, at times to unbearable levels. I think Budget 2013 has fared slightly better in this compartment. I certainly welcome the government’s plan to build not just low-cost houses, but medium-cost houses that cater to the middle-class population in major cities in the country. The increase in real property gains tax should also help to stem speculative investment and slow the rise in housing prices. I was pleasantly surprised by the decision to reduce personal income tax rates by 1% for the first RM50,000 of chargeable income. Although this move does free up more disposable income, I suspect that it will be more difficult politically to raise income tax rates again should the time come for tougher fiscal consolidation.

Overall, I am quite satisfied by the contents and the principles underlying Budget 2013. Personally, it is reasonable to expect an “election budget” this time around, but I do think that Budget 2013 is balanced in terms of providing adequate safety nets and exercising fiscal responsibility. Unfortunately, the government does not have a track record of seamless implementation. It will take much political will to crack down on fiscal slippage that could threaten to unwind this otherwise sound budget plan.

This article reflects the personal opinion of the writer and does not reflect the official stand of Teh Tarik Economists (TTE) or any of the writer’s professional affiliations. 


3 thoughts on “Budget 2013: Eh, This is Not So Bad Lah!

  1. Hello there, TTE! I would just like to ask about something that i couldn’t really understand :/ I dont really get the part where you found the sustainable deficit ratio figure of 4.1%. 52.6%x7.8% or something like that? :/ Do let me know if its no trouble! Cheers to you guys! You guys are awesome btw!

    • Hello Aqil, I don’t write for the TTE – but here’s a (sorta shaky) shot :
      So basically the way economists think about national debt is that the absolute numbers don’t really matter; billions, trillions, gazillions – it’s all good as long as the country’s real rate of growth exceeds the growth of the debt ratio. A simplified equation to represent this would be :
      (Change in long-term debt-to-GDP ratio) = -(Primary account balance) x (real interest rate – real growth rate)

      To get a sustainable deficit ratio, you set the left side to zero and rearrange the equation such that Primary account balance = Real interest rate – Real growth rate. (I noticed that the author had not included the real interest rate as part of his calculations; there might be a reason for this but I’m afraid I can’t tell you what it is; sorry dude.)

      If the term on the left is anything other than zero, say a positive number; then debt will infinitely grow as a proportion of GDP, which makes it unsustainable. The same goes for a negative number (debt-to-GDP ratio goes on shrinking and eventually you get a massive surplus; which is a different problem on its own). Ideally, we would like the number to be 0; where there is no change in the debt-to-GDP ratio and debt evolution is said to be in a steady state.

      In this framework, the two terms on the right side of the equation determines the fate (debt-wise) of the country : A primary deficit or surplus tells you whether fiscal expenditure exceeds or is below the government’s revenue respectively; excluding all interest payments. The second term basically says that if r>g; or if the rate at which the amount that is needed to repay the debt (interest payments) is growing exceeds the rate of growth of the amount you’re able to collect from your country’s GDP in the form of tax revenue – then you could be in trouble since this will increase the term on the left (rate of growth of debt ratio increases). If you’re in a primary surplus, then the first term on the right would be negative and there might be a chance at redemption – although when you think about it, it’s highly unlikely that a country facing the r>g case would be in a surplus anyway. As the author pointed out; assuming there is a primary deficit (which is the case for most countries), if the government doesn’t deliver on growth, it could find itself wandering into dangerous waters (debt growth becomes positive and unsustainable).

      There could be issues such as a feedback loop where huge debt leads to a confidence crisis among creditors and the interest rate is raised as a premium on the increased risk of default, which further fuels the debt-to-GDP ratio; but that’s not really the issue for our economy at the moment. It’s been arbitrarily set by the Euro committee that anything below 60% is ‘best practice’; and according to Reinhart and Rogoff, (if you are interested in crises; you could check out their book) from historical data, 90% of GDP is a good time to sound the alarm bells for a potential crisis.

      So I wouldn’t worry too much about Malaysia’s 53%; so long the debt’s being incurred for a good reason. As to whether it is..well, that’s for another TTE post. I hope the explanation helps (and is accurate). Embarrassingly, I’ve forgotten quite a bit of macro theory despite STILL being in university.

      • Correction to that formula; it’s :

        (Change in debt to GDP ratio) = Primary deficit + (Real Interest Rate – Real growth rate) x (Stock of debt or current debt-to-GDP ratio)

        (Note: If you have a primary surplus; the first term on the right would be a negative number.)

        So setting the left hand side to zero, sustainable primary deficit would be :

        Sustainable primary deficit = -[Real interest rate-real growth rate] x Stock of debt or current debt-to-GDP ratio

        Sorry about the confusion! Hopefully the blog admin can help edit the mistakes.

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