Published June 22, 2009

MALAYSIA INSIGHT
Cutting budget deficit not easy

KL must stop many leakages to achieve its goal

By S JAYASANKARAN
KL CORRESPONDENT
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SECOND Finance Minister Ahmad Husni Hanadziah said last week that Kuala Lumpur intended reducing its budget deficit as early as next year without sacrificing Malaysia's pump-priming efforts at mitigating the recession. He said the Finance Ministry would do so by trimming operating expenditure while keeping development spending intact.

That will be easier said than done. Malaysia is estimating a budget deficit of 7.6 per cent of gross domestic product (GDP) for 2009, its highest in 22 years. The problem is that the deficit estimate could be higher than that.

This figure was arrived at when the government was still contemplating annual growth at between minus one and one per cent. Now they're talking about a contraction of between 4 and 5 per cent. That means projected revenues will not be as great as actually envisaged.

The government also anticipates that oil revenues - from taxes and dividends from Petronas, mainly - will contribute as much as 15 per cent of revenue in 2009. But global oil prices have fallen and only began recovering in mid-May. Once again, it all points to a fiscal deficit that could be greater than 7.6 per cent.

Given that almost all countries - with the exception of budget-surplus countries such as Singapore, perhaps - will be experiencing deficits this year because of the financial crisis, one may be tempted to be blase about the size of the gap but consider that Manila last week said, in rather alarmed fashion, that it could be running a deficit of 2.5 per cent of GDP in 2009.



The main thing would be to get growth back on track. Once that happens, revenues would come back and the deficit would correct itself. This means that development spending has to proceed. It also means that taxes cannot be raised at this point.

But the government also must recognise that its leakages are enormous and that is something that can be corrected. One way would be to go back to the old ways of doing business with open, transparent and competitive tenders that offer the best value for money.

One clue that there are, indeed, a lot of leakages is the fact that businessmen frequently complain of the difficulties of doing business overseas because of the 'low margins' afforded them. This implies that the margins in Malaysia are fat, especially those where the government is the paymaster.

And this has to be true because we have heard of IT contracts dished out where the margins are as much as 30-40 per cent. This would not have happened if the contracts were tendered out on a competitive basis.

Subsidies are the next great frontier. Malaysia subsidises everything from oil and milk to fertiliser and rice. They cannot all be removed at once but they have to go in gradual fashion. On this score, it is regrettable that the government, after having raised the price of fuel, sharply reduced pump prices when oil began dropping to US$40 a barrel. With prices now at US$70, Kuala Lumpur must once again be hurting.

And wasteful projects have to go. Why does a middle-income developing country such as Malaysia has to have a 'space' programme? Why do we need astronauts? It is an absurd notion and this kind of nationalism has no place in sensible economic planning?