The Goods and Services Tax has buffered the economy from the loss of oil and gas receipts. FILE PIC

THE recently announced budget, understandably, has invited its fair share of comments. Issues were raised on income distribution, rising cost of living, employment and competitiveness. To a layman, understanding budget debates can be tough. The views from experts vary — some positive, some negative. How does one make sense of the budget? What are the concerns? Are they valid?

A budget is a policy document. It reflects a government’s public policy priorities and decision processes. The budget essentially reveals the political, social, economic and ideological underpinnings of a society.

As a policy document, the budget naturally means different things to different people. Albert Hyde, a famous public administration scholar, says that budgeting is partly political, partly economic, partly accounting and partly administrative. To a public policy analyst, budgeting is about allocating resources among conflicting and competing interests to deliver the optimum public good and increase public value. To an economist, the budget concerns the distribution of income, promotion of growth and employment, curbing inflation and maintaining economic stability. To an accountant, the budget concerns rating the government expenditure and ensuring allocated funds are sufficient.

For sure, a budget goes beyond economics. Though there are aspects of the budget that need economic scrutiny, we will not do justice to the budget analysis if we only adopt purely economic rationale. Here are a few examples why this is so.

One criticism of the recent budget is that it does not address the nature of Malaysia’s tax structure. Some economists have claimed the tax regime is structured to favour top-income earners. They reason that the tax regime did not provide for capital gains tax and wealth inheritance tax. Such conditions, they argue, go against the principle of fairness and equity, qualities so essential in a tax design.

The comments are unfair. To start with, the government’s recent announcement to take two percent off the income tax for those earning less than RM70,000 annually addresses the concerns. Now, 216,000 more taxpayers no longer need to pay taxes. As for inheritance and capital gain taxes, is this a good time to introduce new taxes?

Experts tend to compare Malaysia’s tax regime with that of the European Union countries and the United States, but these are different political economies at different points on the development trajectory. The worry is that introducing such inheritance and capital taxes at this stage of Malaysia’s development could see a flight of capital to tax havens. Introducing capital gains tax could create liquidity problems to a nascent capital markets, stifling the build-up of capital and investment. Put another way, it is untimely to introduce such taxes given a still unsteady global economy and intense regional competition for investment.

Economists also raise the issue of rising prices. Three reasons are given — imported inflation, the introduction of Goods and Services Tax (GST) and the removal of subsidies. Rolling back on the GST and subsidies will only exaggerate Malaysia’s fiscal position. The truth is that GST receipts have buffered the economy from the loss of oil and gas receipts. The removal of subsidies has relieved Malaysia of much financial burden and reduced market distortion. Rolling back these policies could worsen fiscal deficit, as well as promote leakages to the economy that the GST attempts to address. A long-term public policy concern is needed here. At a time when Malaysians are getting used to the idea of lesser subsidies, reinstituting the subsidy mentality will only make future subsidy cuts more difficult.

Last, some economists have raised the concern of an increasing operating expenditure, highlighting that emoluments make up a big portion of the expenditure, about 35 per cent of the total operating expenditure. This might be a concern, but there is an alternative perspective. An obvious one is that total expenditure is only about 16 per cent of the total Gross Domestic Product, a small amount that speaks of prudence. Second, Malaysia’s civil service headcounts include teachers who are excluded in some countries. The solution is not just about cutting back on public sector employment, but also ensuring the growth of the private sector. The government’s continuation of SL1M (1Malaysia Training Scheme) and investment promotion addresses this. In appraising expenditure costs, the harsh reality is that we need to consider social and political, not just economic aspects, of the public good. Rolling back on expenditure at this stage of growth could affect the delivery of the public good. This is usually lost with mere economic prescription.

The 2018 Budget, like the 2017 budget, is centred on unlocking the huge latent potential of every Malaysian, and improving the quality of the public good. The budget addresses the costs issues by releasing more disposal income to the bottom 80 per cent of the population. Direct transfers (BRIM payouts), financial incentives for young entrepreneurs and small- and medium-sized enterprises, reducing personal income tax, encouraging women to rejoin the workforce and unlocking economic potential from infrastructure projects are policies meant to unlock Malaysia’s huge potential over the long term.

There are indeed no firm answers to budget assessments. For sure, when assessing the budget, the concern is the political economy — economic sustainability, ensuring political stability and enhancing the public good. From a public policy standpoint, ultimately, it is the people that matters when we address the budget.

Dr Abdillah Noh is an associate professor at Tun Abdul Razak School of Government, Universiti Tun Abdul Razak. He can be reached via abdillah@unirazak.edu.my

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