A broad and thin spread of gen­eros­ity

POL­ICY MAT­TERS

The Sun (Malaysia) - - SPEAK UP -

HOW does one char­ac­terise Bud­get 2017 in one sen­tence? Per­haps, as a bud­get that of­fers a lit­tle bit to a lot of peo­ple. Be­cause there is a fair sprin­kling of in­cen­tives to a wide range of stake­hold­ers.

Therein lies the bud­get’s strength and its weak­ness.

There are two fronts that chal­lenge the econ­omy. One comes from do­mes­tic sources, and the other from the ex­ter­nal sec­tor.

The global econ­omy has more down­side risks than usual. China’s econ­omy is go­ing soft; one can­not ex­pect much from the Euro­pean Union; the US econ­omy, may, per­haps, be im­prov­ing but surely not enough to drive global de­mand, then again, there is the prospect of the Fed rais­ing in­ter­est rates. With Iran and Iraq not want­ing to be bound by cuts in oil sup­ply, a drop in oil prices can­not be ruled out.

The In­ter­na­tional Mon­e­tary Fund has re­vised global growth rates down­wards and that should sum­marise ex­pec­ta­tions.

The do­mes­tic econ­omy does not pa­rade it­self at its best. The cost of liv­ing has been go­ing up, a phe­nom­e­non that is not cap­tured by the con­sumers’ price in­dex; house­hold debt is high; pub­lic debt is high; and the ring­git is not soar­ing up.

Against the con­straints posed by the global econ­omy and do­mes­tic con­cerns, we have a third bind­ing fac­tor, and that is the de­mand to en­sure that fis­cal dis­ci­pline is main­tained. The rat­ing agen­cies will not tol­er­ate any slack in fis­cal deficits.

The fourth con­straint is to keep in mind that the next year (2017) could be an elec­tion year.

The prob­lem spi­rals down to fig­ur­ing out what can be done un­der these press­ing cir­cum­stances to de­sign a bud­get.

Pre­sented with the oner­ous re­stric­tions a be­wil­der­ing op­ti­mi­sa­tion prob­lem emerges. The op­tions turn out to be lim­ited. The con­fines of a nar­row fis­cal space test one’s cre­ativ­ity in de­sign­ing a vi­able bud­get.

There are some ar­eas where the bud­get could have been leaner but was not. For in­stance, given the bloated civil ser­vice, the im­me­di­ate course of ac­tion would be to trim it. Or at least, to im­pose pro­duc­tiv­ity linked re­wards. That has not been done. Re­turn­ing to the con­straints, one re­alises that it could not have been done. In­stead, the pub­lic ser­vice has to be re­warded, even if it means rais­ing op­er­a­tional ex­pen­di­ture.

Again, BR1M has been treated in an un­sat­is­fac­tory man­ner. While in the­ory it is meant to be a com­pli­ment to the GST, and to be part of the strat­egy where tar­geted sub­si­dies bal­ance the bur­den of the GST, BR1M could pro­duce per­verse re­sults. When BR1M pay­ments are made year after year, they could end up be­ing an­other crutch that will have to be painfully with­drawn at some point, by some other lead­er­ship in the fu­ture.

Be­sides, try­ing to fo­cus on 40% of the pop­u­la­tion (or what is called the B40) is hardly a tar­geted ap­proach. It would be mean­ing­ful to di­rect mea­sures that cush­ion the most dis­ad­van­taged, and that might be more mean­ing­fully lim­ited to, per­haps, 10% of the pop­u­la­tion.

Fur­ther, it is in­com­pre­hen­si­ble that 430,000 teach­ers will re­ceive free tablets. Tablets are hardly a ne­ces­sity the way rice is. Nei­ther is it pru­dent to ex­tend loans for smart phones.

More sen­si­ble would have been to in­tro­duce mea­sures that would cush­ion the ris­ing cost of health­care. While there is ur­gent need for health­care fi­nanc­ing that will make good qual­ity health­care avail­able to all, it seems to be an is­sue that is re­peat­edly ig­nored.

Af­ford­able hous­ing, too, should have re­ceived more at­ten­tion than it did in the bud­get. The mea­sures that have been in­tro­duced un­der the dif­fer­ent schemes do not give due credit to the enor­mity of the prob­lem. A more com­pre­hen­sive plan for af­ford­able hous­ing is nec­es­sary and it has to en­com­pass first home buy­ers across eth­nic groups.

The fo­cus on small and medium en­ter­prises (SMEs) in Bud­get 2017 is com­mend­able. First, it will help to boost do­mes­tic in­dus­tries. Se­cond, it will in­cen­tivise ex­port-ori­ented SMEs. Equally pos­i­tive are the mea­sures di­rected at spurring ex­ports, some­thing that is rel­e­vant in a damp ex­ter­nal en­vi­ron­ment.

These mea­sures an­swer the ques­tion on what will be done to coun­ter­act the pos­si­bil­ity of weak ex­port de­mand. How­ever, the an­swer is less clear when it comes to do­mes­tic de­mand.

Aside from the in­cen­tives to SMEs, the ap­proach to in­vig­o­rat­ing do­mes­tic de­mand is fuzzy. Ar­guably, the hand­outs will in­crease dis­pos­able in­come and so con­trib­ute to an in­crease in con­sump­tion.

Other ques­tions do not find an­swers eas­ily. For in­stance, it is dif­fi­cult to un­der­stand which sec­tors the bud­get seeks to step up. Surely not prop­erty. Con­struc­tion would ben­e­fit from the in­fra­struc­ture projects, though not hous­ing.

As for the lower cor­po­rate tax rate, it is more likely to pro­vide re­lief from a harsh en­vi­ron­ment than to spur pro­duc­tion. That is be­cause with nega­tive sen­ti­ments on con­sumer de­mand the lower tax rate will do lit­tle to en­cour­age pro­duc­tion.

Fur­ther, the ra­tio­nal for giv­ing funds to fund man­agers to in­vest in small and mid-cap firms does not seem to have a clear ob­jec­tive. There is no doubt that it will help make it eas­ier for these firms to raise cap­i­tal; but there is the dan­ger that all that we will have at the end of the day is some stock mar­ket play – with no ap­pre­cia­ble in­crease in real out­put.

On bal­ance, it seems that the thrust of the bud­get is to help soothe enough peo­ple against the blows of de­mand­ing con­di­tions. But that is not the same as try­ing to im­prove con­sumer sen­ti­ments, re­duce the nega­tive sen­ti­ments of firms, or to en­cour­age growth.

The im­pres­sion one gets is that pol­i­cy­mak­ers have sur­ren­dered to the con­straints that frame the game. They have tried to be cre­ative (within the given con­straints) but not bold.

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