Malaysia’s Budget 2014 represents the most important economic policy initiative of Najib Razak’s premiership. After scraping through GE13 and deal-making his way to an unchallenged presidency of Umno, there are no immediate political obstacles undermining his ability to implement the economic reforms he has repeatedly promised investors and international financial institutions such as the International Monetary Fund.
Najib has gone on record to claim that he will reduce government debt, tighten spending and make the Malaysian economy more competitive. International watchers were initially bought over by all the different acronyms coined by the government, such as the ETP (Economic Transformation Programme).
However, they have become increasingly negative with regard to Najib’s financial management which continued to involve massive overspending and this led to a negative rating by Fitch in July this year. With debt reaching 54 percent of gross domestic product, near the 55 percent government self-imposed limit, Malaysia stands on the precipice of future downgrades.
As the Budget debate begins, it is important to highlight some of the key issues and patterns that have characterised Najib’s tenure as prime minister.
A political adept captive
First of all, it is necessary to appreciate that arguably more than any other premier, Najib uses the Budget to win political support. His four years in office has seen the practice of seeking public approval, time and again. He has not been willing to make hard decisions, especially at Budget time.
This deep-seated insecurity of Najib has led to Budget after Budget full of goodies. This was put down to electioneering. He no longer has this excuse.
This Budget will test whether Najib is confident enough to make unpopular decisions, or continue to be beholden to his need to seek public approval. If the Budget includes additional cash handouts such as BR1M (Bantuan Rakyat 1Malaysia), this is a sure sign that Najib is still not on firm political ground.
Second, Najib has been adept at spreading out the pain. His approach to the reduction of subsidies has been to do it slowly, hoping that the public can be duped by these initiatives and not lay blame on him. Petrol and gas prices have increased through this method.
Energy subsidies are one of the main areas placing great strain on government finances. They are keenly watched by the public who depend on these subsidies, especially in states like East Malaysia where incomes are comparatively lower and transportation costs higher. The approach has been to wean the public off these subsidies, but without taking blame for doing so.
The same can be said for other measures on revenue that involve public spending, such as the recent increase on cigarette taxes. He hides the pain and showcases the sweet, all of which is a pattern of Najib’s financial management.
Spending without development
Third, spending has reached record proportions. Najib has spent much more than any other premier in real terms and on an annual basis. When one looks at spending in the last two years, he has shattered records.
Najib has outspent his own father, Abdul Razak Hussein, Tunku Abdul Rahman Putra, Hussein Onn and Abdullah Ahmad Badawi and is now going after the record of the spending of the entire Dr Mahathir Mohamad’s 22-year period.
The place to look at this is not the Budget speech but the supplementary budget, which is passed by Parliament often without effective debate to cover what was spent after the fact. Last month Najib’s government passed a supplementary budget of RM15 billion! This is the spending beyond what was originally forecast. Indeed, Najib is a big spender.
Fourth, the spending has not been targeted beyond seeking political support. Let’s take the Bumiputera Economic Empowerment (BEE) Agenda. It has no targets, no timeline, no clear objectives, no parameters for assessment and frankly no rationale beyond seeking political support.
The racial basis of BEE is seen by the market as limiting competition and hurting the development of the Malay community, as it increases their dependence on the government rather than nurturing globally competitive entrepreneurship.
It is poised to foster more corruption in a system that is deeply burdened by graft and is skewed to the elites with access within the system, the Umnoputras. The RM30 billion in spending for BEE is pure politics.
BR1M is another measure blinded by politics. How much have people been able to bring longer security from these short-term handouts? At best it has been a band-aid on the fiscal challenges on high household debt – also at record levels of 70 percent of household incomes – and the increasing high cost of living. What is clear is that the spending has centred on short-term initiatives, not long-term development.
Fifth, Najib has yet to clearly outline his development priorities. There is little development planning going on. In fact, the development budget under Najib has shrunk.
Unlike Abdullah, who presented a framework to address development and poverty, including an initiative on rural communities, the broader vision is missing from Najib’s planning. Abdullah did not meet his targets, but put on the table initiatives that generated discussion, such as the development of the halal industry and northern corridors.
All current indicators are that manufacturing exports are on the decline. The only industry that seems to be coming out of the Najib government are the money-making big infrastructure projects such as the MRT (Mass Rapid Transit) expansion. In fact, Najib’s development model appears to replicate the “big” projects and spending of Mahathir, with little attention to how this spending is affecting ordinary people and its long-term implications.
Some go as far to suggest this big project focus is about making money for the elite, rather than promoting development. Where ordinary people fit in, and how Malaysia is to raise incomes, promote jobs and improve the quality of life for citizens is not fully clear.
Najib may be be touted as a technocrat by market watchers, but as a leader focused on development, he has yet to effectively address these concerns.
Managing the money
The Najib administration continues to highlight that it knows how to manage public funds. This claim has increasingly come under scrutiny and raised scepticism.
There are three issues: First is Malaysia’s fiscal deficit – now at record proportions as a result of Najib’s spending. The related second is Malaysia’s revenue shortfall. The third is the excessive government debt.
It is in this vein that the Najib pre-budget spin has been assuring that Malaysia will reach a target of 3.5% fiscal deficit and increase revenue through the introduction of the Goods and Services Tax (GST).
The reality around each of these measures is clouded by exaggerated estimates of growth and performance in the economy (which has been slowing and on the decline), a lack of transparency in how funds are being managed in different accounts and through different government-linked companies and with less than clear estimates on actually how much the GST will bring in as a source of revenue.
There are no timelines and this creates a void in credibility. The costs of these measures have not been outlined, as the burden for revenue moves regressively towards ordinary citizens irrespective of their incomes and backgrounds with little attention to the real wastage for taxpayers – corruption.
By most domestic and international measures, corruption has increased under Najib’s tenure, not decreased. The sources for additional growth in the economy, especially in light of global uncertainties, are not being made clear. The pattern is to rest on the past, with increasing dependence on oil and gas revenue, commodities and government spending to promote growth, rather than prepare for the future.
The Najib administration has engaged in spending cuts: these have come from operating expenditure in the funds to implement policies and carry out government policies. While directly providing civil servants with more money as salaries, the budgets they have had to work with have shrunk.
Najib is the only premier in the history of Malaysia that has repeatedly cut funds for the implementation of government policy. The effect is that government departments are now struggling to actually carry out programmes compared to the past. While everyone can agree that tighter spending can improve efficiency, butchering cuts in operating funds is not helpful for governance.
This is one of the ironies of Najib’s spending – he has increased allocations to salaries which cannot be easily reduced and are in effect permanent increases in outlays, while simultaneously hurting government programming through cuts to actual governance. These cuts can be seen in lower funding of maintenance of facilities, less engagement with citizenry and less funds for training and improving the quality of the civil service.
Today, Budget 2014 will be announced. We will see whether Najib uses his ‘victories’ – however imperfect – for setting Malaysia on a more financially viable track for quality governance for all Malaysians. The test is whether there is a clear direction that is putting Malaysians first and looking out for future generations.
Whatever happens today – from goodies to the GST – Najib will be showing how he envisions the country’s development. One can hope that he shows leadership in making fair decisions, rather than continuing the pattern of trying to play politics. One can hope that he can come out of the shadow of trying to please and point to a path for inclusive development for all Malaysians.