Missing the forest for the trees? A quick take on Budget 2021

There are a few aspects of YB Tengku Zafrul’s 2021 Budget speech that I found disconcerting.

The first was that my wife and I are both going to receive one-off payments of RM300 each as we are government pensioners. Does the government have a surplus of funds such that it can reward people like us who have not suffered any loss in income? Shouldn’t finite government funds be focused on those whose income has been ravaged by the pandemic and the recession. The women working as daily paid helpers in restaurants, retrenched workers from hotels and tourism companies, operators of stalls in the pasar malams around the country, school canteen operators and others like them – these are the people whose life has been upended by the pandemic. Some of them are facing problems putting food on the table. Shouldn’t they be the main recipients of government support?

The Bantuan Prihatin Rakyat of RM 1800 per family with household income below RM 2500 per month will be of help to the groups of people mentioned above, but will not be enough. Families with a monthly income of less than RM 1000 per month will need a monthly cash transfer of RM 500 to RM 1000 to be able to provide the basic necessities for themselves.

The Minister does say in paragraph 9 of his speech that, above all, the government prioritizes the protection of the citizens. Well, in a situation where the economic downturn has affected different sectors of the economy to different extents, shouldn’t the government be focusing more on the 700,000 families who are really struggling to make ends meet? Unless of course the real intention is to build goodwill and political capital in case an election has to be called a few months down the line.

The second point that I found very disconcerting came in paragraph 14 of the Honourable Minister’s speech where he said that the government expects the economy to bounce back to a 6.5% to 7.5% GDP growth rate next year. He goes on to say that the global GDP is expected to expand by 5.2% in 2021.

It would be great if his projections are correct, but given the fact that a safe and effective vaccine is still not at hand, and that it will take months for such a vaccine to be administered to populations across the world, the uncomfortable truth is that the Covid aggravated recession is going to last for most of 2021 and perhaps even longer.

This raises the question whether the Ministry’s projections of Federal Government income for 2021 and the level of economic want in the population and the SME sector is premised on the Minister’s over-optimistic expectations of GDP growth in 2021. If so, the deficit will be much larger than the 6% the Minister announced.

The third disconcerting point is that the elephant in the room was not acknowledged at all – the source of funds. In a time of recession, government taxes will go down – businesses make much less profits, and the government gives tax breaks to stimulate aggregate demand. In the case of Malaysia, our returns from Petronas has already been affected by the collapse in petroleum prices. We are already using 13% of our operating budget for debt servicing – paying the interest on the RM 850 billion of Government Securities (MGS) that we floated in previous years. Relying on the market for all the deficit spending we need to do in 2021 would push up debt servicing costs too much.

The PSM has proposed previously that Debt Monetization be used to raise RM 60 billion out of the total of about RM 190 billion that we need to borrow for 2021 – RM80 billion to roll over the MGS that are maturing in 2021, and the remainder RM110 billion for deficit spending in 2021. Debt monetization refers to the selling of government bonds to the country’s own Central Bank at low interest rates. This is being done in several countries including Australia, India and Indonesia.

This budget session would have provided a good forum to debate the pros and cons of such an approach and to determine guidelines how debt monetization could be deployed in the Malaysian context. Unfortunately the issue of where the funds are going to come from was not discussed in any detail by the Minister.

We are in unfamiliar territory. The Minister himself acknowledged this is paragraphs 6 and 7 of his speech. Sadly his presentation focused on a myriad of programs but did not broach the major issues. Well, our parliamentarians have 2 weeks to give their input. Hopefully they will bring the issues flagged above as well as other relevant issues to the floor.

Dr. Jeyakumar Devaraj
Parti Sosiais Malaysia
7th November 2020

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