A broad and thin spread of generosity
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.