Thursday, September 27, 2012

Malaysia will go bankrupt if...

In anticipation of the upcoming general election, we have seen the federal opposition trying to introduce more policy proposals to sway key voting segments.  In particular, they have targeted young, first time voters, who make up the bulk of the more than two million newly registered Malaysians on the electoral roll, and the middle class in general.

Theory Opposition Budget
Two of the federal opposition’s policy proposals that were announced this year are designed to strike at these two voter demographics directly.  The first was a promise to write of all National Higher Education Fund (PTPTN) loans and provide free university education, and the latest, a policy that will see a reduction in passenger car prices.

Both policies have clear political objectives in mind.  
The student loan write-off is an attractive promise for young voters still saddled with paying off their PTPTN debt in addition to dealing with higher living costs and for some, the financial commitments of marriage and starting a family.
  The promise of lower car prices casts a wider appeal as most Malaysian car owners bemoan having to pay more for same car than people in other countries, which results in a bigger chunk of their salary being used to service their monthly car loans.

By selling these promises, the federal opposition is saying that it can assist with increasing your disposable income because you will have more to spend on other things and also save because these two expenditure items will either disappear (PTPTN loans written off) or be reduced (cheaper car prices).

The purpose of this article is not to examine the two proposals directly but to discuss one fundamental question that arises when political parties – especially those not in power – make electoral promises:  How do they hope to pay for these pledges?

If this question does not require answering, then politics would be an easy game.  Promise people everything under the sun, sit back and enjoy watching voters swing your way – hook, line and sinker.  But we do not live in a world where the electorate believes they can get everything for free.

Also, importantly, international investors and credit rating agencies are watching our fiscal discipline to see if we live within our means.  In an age of sovereign defaults and bailouts, fiscal responsibility is a key measure of sound public administration that will have an impact on our attractiveness as an investment destination and on our credit ratings.

As far as the federal opposition is concerned, it is doubtful that fiscal discipline is high on its agenda.  They have not really explained how they are going to pay for its electoral promises. 
 And just to put it on the record once again – its electoral promises amount to a whopping RM206.5 billion in the first year alone.

  The table summarises the financial cost of its promises.

Let’s just put the cost of the opposition’s promises into context.  The federal government budget for 2012 was RM 232.8 billion.  The opposition’s electoral promises alone account for almost 90% of the total federal government’s budget. 
 So if it were to fulfil its promises in the first year of office, the government would effectively not have enough money to pay the salaries of teachers, doctors, nurses, police and army personnel, let alone have the funds for building roads, schools, hospitals or providing welfare assistance to the poor. 
 Most of the money would have been used to deliver on its Jingga promises.

If this happens essential services would grind to a halt and the country would cease to function.  
If it decides to borrow more money to fund its promises and keep government going, the fiscal deficit would balloon to more than 25% of GDP and Malaysia would effectively be bankrupt within the first two years.

Current Federal Budget

Let’s analyse the 2012 federal budget.  Of the total RM 232.8 billion that was originally budgeted, RM 148.5 billion (63.8% of the total budget) was earmarked for salaries of civil servants as well as fixed charges and grants such as subsidies, servicing debt, scholarships, research grants and funds for state governments.  These are all fixed charges or payments.  That leaves RM 84.3 billion for procurement-related spending, whether it is purchasing supplies, services and assets or paying for projects under development expenditure.

Since corruption and leakages can only occur for procurement-related expenditure as opposed to fixed charges like salaries, any savings can only be made from this portion of the budget.  If you get 10% savings from procurement, that would be just RM 8.43 billion extra – hardly enough to pay for the opposition’s election promises.  Even the entire sum related to procurement expenditure – RM 84.3 billion – is short of the RM 206.5 billion needed to pay for its promises to Putrajaya.

The key point is this:  It is easy to say that savings can be made by reducing leakages,  but nobody really asks how much you can save.  While 10% of procurement – related items can yield a significant figure as explained above, but it is not so significant when measured against a slew of promises that cost so much more to fulfill.

Federal Opposition Talk
So, it is not enough for the federal opposition to say its can save from getting rid of corruption.  That alone – even if it can be done – is not going to pay for its pledges.  It has to tell Malaysians how else it will raise the money.  Will they borrow more?  What programmes will it cancel?  Which projects will it scale down?  Which schools and hospitals will it not build?  What taxes will go up?  How many civil servants will it lay off?

Unless the opposition can answer these hard questions and explain how it will raise the money to fulfill its promises instead of copping out with the corruption explanation (which doesn’t add up), we can safely assume that either it will drive Malaysia to ruin by spending what we don’t have or, in fact, they have no intention whatsoever of fulfilling its promises because it knows it simply can’t pay for them.-TheEdge

*(underline, size of text- from me)

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