Eye on budget preparation

THE announcement by Finance Minister Lim Guan Eng that the new Pakatan Harapan government will table its first federal budget on Nov 2 has fired the starting pistol on speculation about what we will see on Budget Day and how it will affect the lives of millions of people in Malaysia in the years to come.

This type of speculation is normal and healthy in any economy but raises many challenges for the new government, which, with little or no track record at federal level, needs to establish its credibility early and decisively in the face of many issues that demand firm and immediate responses in some cases and considered, longterm responses in others.

The motto “credibility, accountability and transparency” (CAT) has been coined by the Finance Ministry and these are certainly important for investor confidence, in particular international investors who would want to know, among other things, how the RM1 trillion debt/liability issues will impact government spending and how the abolition of GST will impact revenue.

The challenge is to balance market calls to tackle the debt and deficit issues with fulfilling promises made in the GE14 manifesto, many of which have fiscal implications. The starting point is Promise 29: Enhance the transparency and integrity of the budget and budgeting process, which states: “The Pakatan Harapan government will improve the transparency of Malaysia’s financial administration and we will implement a more responsible budget.”

In the current debate, even early decisions have raised questions about, for example, who makes the decisions on the budget when possible tax concessions for foreign companies appear out of the blue; whether misappropriation should be revealed publicly or concealed to avoid spooking the markets; and how the hole in the budget due to the abolition of GST will finally be resolved and what impact this will have on other taxes and overall spending.

These issues are a challenge for the new government and will likely become more acute and frustrating. There is an urgent need to depoliticise and depersonalise the federal budget quickly and to focus on the technicalities of responsible budgeting, including the efficiency of fiscal plans, their economic and social impact and their longterm sustainability.

One way is to have an independent fiscal institution (IFI) such as the Office for Budgetary Responsibility (OBR) in the United Kingdom which was recommended in the Report of the Bank of England Commission in 2000 and established in 2010 during the early days of the Conservativeled coalition government.

In the unusual situation after the 2010 UK election, there was a need for independent, credible and transparent budget information to avoid disputes between the coalition partners and to provide information for the wider investment community.

Markets feed on timely, good quality information that comes from credible, independent sources and this is exactly what Malaysia needs in the runup to the November budget.

The International Monetary Fund counts 39 national IFIs in 36 countries, some of which have existed for many years. For example, the Netherlands Bureau of Economic Policy Analysis was established in 1945 and the US Congressional Budget Office was set up in 1974.

The number of IFIs increased after the global financial crisis and member countries of the Eurozone are required to have such bodies.

The role of an IFI is not to impose taxes or set government spending but to provide credible and transparent analysis of fiscal policy which helps to hold the government to account.

It is also an advisory body that provides independent economic forecasts and analysis of the public finances as background to the preparation and delivery of the budget and can report to parliament rather than to the government.

The main functions of the OBR in Britain are firstly, to produce timely economic and fiscal forecasts of the impact of tax and spending announcements; secondly, to evaluate the government’s performance against its fiscal targets and overall economic and welfare aims; and thirdly, to provide sustainability and balance sheet analysis of the public finances to build confidence among investors that the budget is under control over the long term.

In addition, the OBR scrutinises the economic and social costs of specific tax and spending measures in each budget and provides an evaluation of upside and downside fiscal risks. This includes specific fiscal risks such as contingent liabilities of the type that the Malaysian Government now takes into account in the RM1 trillion national debt estimates and in itself is sufficient reason for Malaysia to consider establishing an IFI or OBR of its own.

In the Malaysian context, an OBR can advise on the coordination of fiscal policy with interest rate decisions made by Bank Negara, and provide fiscal analysis at the state level to coordinate with the federal budget and ensure that needs in each state are assessed independently.

Building capacity for economic policy analysis and expertise and linking to international centres of excellence would also be a key benefit to raise international confidence in Malaysia’s budget process.

So as we approach the first Pakatan federal budget in November, it is time for Malaysia to follow 36 leading economies worldwide and establish an independent Office for Budgetary Responsibility to ease political and personal disputes and help deliver a responsible budget that stabilises the Government’s finances, fulfils its social and economic promises, and provides longterm sustainability that satisfies international financial markets.