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Is it time to take the economic bull by its horns?

By March 9, 2023November 1st, 2023No Comments

The prime minister is under far greater scrutiny than allows for comfort.

Under less demanding circumstances, Anwar Ibrahim would have been able to enjoy a more leisurely pace to accomplish whatever it is that he wants to do, but the environment now is highly challenging. And he brings with him expectations such as were never demanded of a Malaysian prime minister.

There is competition for political space in a market where once one party, Umno, reigned supreme.

There is a short time span to achieve economic goals. The revenue that the government had no difficulty earning in the 1990s is constrained, and the global economy is constrained in several ways.

This is the backdrop against which Anwar had to table the revised Budget 2023. Much was expected of it, perhaps far too much, and it turned out to be a reasonable, predictable budget. Not the bold, inspiring and brave budget many had expected.

Why did some see the re-tabled budget as a flaccid document?

The prime minister had spoken of an administration that would be tough on corruption, ruthless on leakages, and trim as far as government expenditure is concerned.

The same toughness was expected to be seen in the budget in raising government revenue, addressing subsidies and reducing costs of living pressures.

I think the prime minister preferred to adopt an approach where he would be careful with expenditure and leave the more pressing problem of raising government revenue for a later date.

Therein lies a problem: the economy ends up being safe, but less than an optimal point.

It would have been quite a different approach to seek to increase revenue, by taking on a more aggressive stance on tax income and also committing to more aggressive expenditure.

It was a fundamental error to have expected anything different from the budget: the constraints were sharp. Given the global economy and domestic pressures (economic as well as political), the prime minister chose to take the oft-tread, safe path.

Handling political economy problems is not quite the same as tackling textbook economic problems, where issues of efficiency are prime.

The goods and services tax (GST), which has been suggested by, for instance, the World Bank and Federation of Malaysian Manufacturers, could not have been considered for fear of triggering widespread rejection.

Early in his political cycle, Anwar, who is also the finance minister, would not have wanted to go heavy on wealth and inheritance taxes, ruling out another tack.

Neither could serious measures such as reviewing the size of the public service be entertained.

A possible path could have been to encourage productivity, increase corporate income and raise corporate taxes. Such an approach will not work in the short run and surely not when external demand is riddled with uncertainties. Increasing productivity, something that Malaysia cannot delay for too long, will be a longer-term measure.

Although the finance minister had mentioned targeted subsidies prior to the tabling of the budget, like his predecessors, he must have realised that the details can be daunting. The precise mechanisms to make sure that the Bottom 40 (B40) get a petrol subsidy and not the bourgeoisie must be a bureaucrat’s nightmare.

The war in Ukraine is not the finance minister’s making, neither is it that of the economy minister; but both have to deal with one of the fallouts from the conflict – rising prices of vegetables and eggs.

The government has been fumbling with the issue. It is incorrect to think of banning exports (a lesson probably learnt from Indonesia’s attempt to stop the exports of palm oil) as it is to take over the role of middlemen.

In the end, we have a budget that does not allow markets to function in an unfettered manner, and we resort, yet again, to seeking recourse in trying to raise aggregate demand. Hence the support for various economic and social groups – and the biggest ever budget.

There may be a saving factor: with the budget that was released, the economy is perhaps well-cushioned to withstand shocks that might arise from a slowdown in the economy.

Meanwhile, we will have to wait for a clear statement of the direction the economy will take in the coming months, and even coming years.

If we can think of the economy as an unruly bull, then the bull is still waiting to be taken by its horns.

The views expressed are those of the writer and do not necessarily reflect those of FMT.