Budget Deficit & Investment Uncertainty Harm People Economy

(积累与利用资本促进经济 财政赤字阻碍人民经济)
夏伟文 & 陈薛卉 (11 Jan 2016)

Long time ago, economics debates were dominated by Classic versus Keynesian school of thought. Classic school advocates free market through price mechanism while Keynesian school supports active government intervention in the economy. Nonetheless, both mostly focus on accumulation and use of capital to generate growth. Indeed, some may wish to take a bit from each school of thought, which are the efficiency of competition under free market to generate growth and role of government to ensure fruits of growth are share equally among citizens.

Adds some political flavor to economics theory, comes the term “people economy”. Indeed, Bill Clinton’s 1992 United States Presidential election campaign slogan is “Putting People First”. Somehow, similar slogan (“Rakyat Didahulukan / People First”) is also used by Najib Razak in his 2013 Malaysian election campaign and government policies. The people economy concept itself brings two different perspectives. First is how the economic system and/or government’s policy can maximize the welfare of the “people” (citizens). Thus, “people” is the end focus of economy and acts as success-or-fail indicator of economic system and planning. Second is the emerging trend of “people” (human/labor/talent) in replacing capital (money/machines) as most important input to the economy. Here, “people” is the beginning of economic process in generating growth. We would like to combine both the first and second thought for a fully people-centric economy. In this case, “people” will become an important input while people’s welfare will be a desirable output to the economy.

People welfare

Professor Dr. Robert Pollin has published an article in New Labor Forum (2007, Vol. 16, page 9-17), associating “people economy” as an egalitarian economy, where all members of society receive equal amount of goods, rights and opportunities. He is Professor of Economics and Co-Director, Political Economy Research Institute, University of Massachusetts-Amherst, Economic Spokesperson, Presidential Campaign of Gov. Jerry Brown and consultant to various United States agencies and departments.

Dr. Robert Pollin highlighted five objectives to achieve and four obstacles to overcome for the United States to be an effective egalitarian people economy that are also very relevant to Malaysia’s economy. The five goals are (i) something close to full employment at decent jobs; (ii) universal health care; (iii) dramatically expanding decent educational opportunities at all levels; (iv) creating a clean environment on the foundation of conservation and renewable energy; (v) rebuilding an effective system of business regulations, in particular, in the areas of financial markets and antitrust. These five objectives provide moral imperative for fair economic system. There are four main economics obstacles most likely may prevent the achievement people economy’s goals. They are (i) the federal government’s fiscal deficit; (ii) the prospect of an investment strike by private business; (iii) controlling inflation; and (iv) countering the pressures resulting from globalization, including the trade deficit, immigration and managing the dollar. Overcoming these four obstacles is also essential for sustainable development.

Obstacle 1: Fiscal deficit

Malaysia has been running budget deficit for many years. At its peak in 2013, fiscal deficit reached RM45,056 million (see Table 1 and Figure 1). This is equal to 4.13% of gross domestic products (GDP) or 23.52% of revenue. Nonetheless, the deficit reduced in 2014 to RM36,077 million, which equal to 3.25% of GDP or 17.44% of revenue.

Table 1: Malaysian Government’s Fiscal Account (RM million)

Component	2014	2013
Public Sector Operation
Revenue	206,901	191,554
Operating expenditure	242,978	236,610
Deficit	36,077	45,056
Gross Domestic Products (GDP)	1,106,600	1,018,800
Deficit / GDP	3.25%	4.13%
Deficit / Revenue	17.44%	23.52%

(Source: Expenditure and revenue from Bank Negara Malaysia, GDP from Statistical Department of Malaysia)

Figure 1: Malaysian Government’s Fiscal Deficit, 2007 - 2014 (RM million)

(Source: Bank Negara Malaysia)

In order to further improve the fiscal balance, expenditure cutting as well as Good and Services Tax (GST) have been implemented. No doubt those strategies are necessary but various questions still linger? Yet, how effective can these strategies help to solve fiscal deficit problem? Will these strategies (particularly GST) bring negative side effects such as spiral inflation that can deteriorate people welfare? Is there any other better solutions?

From expenditure perspective, compensation to employees (public servants) takes up large portion of total public expenditure in Malaysia and its amount is too high. Public sector grew so large. Since public servants are expected to vote for the ruling government in election, public sector becomes “too-big-to-downside” and like a cancer cell in Malaysia’s public finance.

Cutting expenditure to reduce fiscal deficit is good but making sure every Ringgit spent worth it is better. Table 2 shows “worthiness of money spent” in term of “total operating expenditure to GDP” for Malaysia and Singapore.

Table 2: Malaysia’s Operating Expenditure Analysis

Total operating expenditure to GDP (%)	2010	2011	2012
Malaysia	21.02	22.38	23.87
Singapore	10.37	10.48	10.07

(Source: Ministry of Finance Malaysia & Department of Statistic Singapore)

Malaysia’s total operating expenditure to GDP is twice larger than Singapore. This implies every unit of currency Singapore spent yield twice return as compare to Malaysia. In addition, the Malaysia’s figure has been rising in the three years as shown in the table, thus putting extra difficulties to overcome fiscal deficit obstacle.

Malaysia’s fiscal deficit is improving since 2014 and expected to get better in near future. However, its cumulative of years of deficits will eat up people welfare for years to come. Imposing new taxes on public like the GST on one hand improve fiscal deficit but on the other hand burden the people, thus also an obstacle to achieve truly people economy. Perhaps, drastic downsizing and restructuring public sector are the answers. This Milton Friedman’s (Nobel Prize in Economics) advice may be a valuable insight:

“The cure to big government is not by having a bigger government. Instead, the most effective cure is to reduce the size of the government by getting the government out of involving in businesses and prohibiting government in engaging activities that can benefit certain groups.”

Friedman’s advice reflects the economics classic school of thought – free market with minimum government intervention – that forms the foundation for microeconomics studies. In this case, it justifies the downsizing and restructuring Malaysia’s public sector towards people economy. Preventing government from favoring certain groups (selective business groups) can swing the welfare from crony capitalists back to the people.

Obstacle 2: Investment strike by private business

Investment strike is blamed for British economic slump in 2008 and 2009 that had drag-on effect until 2012. The investment strike is a refusal by the private sector to invest. Thus, reduction in interest rates may not be effective because firms are saving instead of borrowing to invest. Micheal Burke (2012) claimed that investment strike caused British pound fell by around 30% in 2008 and has recovered only a proportion of that ground since. How about Malaysia and its Ringgit?

Malaysia’s private investment seems easily effected by negative happening. As shown in Table 3, private investment recorded negative growth rate during Asian Crisis years (1998 & 1999), burst of “Dot.com” bubble (2001 & 2002), Severe Acute Respiratory Syndrome (SARS) epidemic (2003) and Global Financial Crisis (2008/09). Public investment looks to acts like counter-cyclical to private investment. However, given huge burden of debt and administration expenditures, can Malaysia’s increase its public investment if private investment decline? A “no” is more likely answer.

 Table 3: Growth Rate of Private and Public Investment and FDI inflow (%)

Year	Private investment	Public investment	FDI inflow
1996	15.8	3.2	5.0
1997	11.0	11.9	5.1
1998	-53.3	-0.3	3.0
1999	-24.1	3.1	4.9
2000	26.7	21.7	4.0
2001	-19.7	15.5	0.6
2002	-6.1	9.8	3.2
2003	-1.1	3.6	2.2
2004	15.8	-3.5	3.7
2005	8.5	1.9	2.7
2006	7.0	8.9	4.7
2007	12.3	8.0	4.7
2008	1.5	0.7	3.3
2009	-21.8	12.9	0.1
2010	13.8	5.5	4.4
2011	14.4	-2.4	5.2
2012	21.9	17.1	3.2
2013	13.6	6.3	3.7
2014	11.0	-4.9	-

(Source: Bank Negara (BNM) Annual Report various years. Note: All growth rates are in nominal term except investment in 2000, 2002 and 2003 due to lack of data available. Figures are quoted from their respective years in BNM Annual Report (AR) to avoid discrepancy. However, public investment growth for 2013 is quoted from BNM AR 2014 because figure shown in AR 2013 (0.7%) is likely typing error). FDI Inflow is in percentage of GDP.

Several unfavorable events around the world may again trigger decline in Malaysia’s private investment as well as foreign direct investment (FDI) inflow. Examples of those events are continuous oil price slump (Malaysia as net oil exporter), political uncertainty (which include variety of corruption scandal brought up and spread into international news), low value of Ringgit and potential global economic crisis due to economics problem in countries like Greece, China, Costa Rica, Argentina, Brazil and Venezuela.

Decline in private investment will negatively affect economic growth. Subsequently, reduce in growth (or even recession) may decline people welfare. This is a potential obstacle we should ensure it would not become reality.

Summary

Budget deficit reduces ability of government to provide people-oriented welfare or increase development expenditures that are needed to generate higher growth. Various potential social, political and economic factors domestically and internationally put investment growth into serious danger. Decline in investment cost loss of employments and negative impact to economic growth. All these are serious obstacles for the government to achieve what they have promised – people-economy.

[Chinese version published at 南洋商报经济周刊 Nanyang Press – Business News, page A8 on 11th January 2016. Available online at http://www.nanyang.com/node/743403. This English version may be slightly different from the Chinese online/printed newspaper version]