Budget 2009: Initial Thoughts

I wrote an immediate short column for Malaysian Insider yesterday after my budget forum on my thoughts with regards to the Budget for 2009 announced yesterday.

Not surprisingly, the media is full of praise of the RM35 billion allocated towards building a better public transportation system between 2009 to 2014. However, big numbers and big headlines aside, the actual allocation may not be that impressive.

Despite an impressive headline figure of RM35 billion allocated for public transportation, it actually only works out to RM5.8 billion a year over the next six years. In fact, if one looks carefully at the budget for the transportation sector, it has declined by RM1 billion to RM11.5 billion.

But what is of greatest concern will be the reckless spending spree the government seems to be undertaking. Barisan Nasional Pulai MP, Datuk Nur Jazlan wrote in his piece in Malaysian Insider that we should "Grow the Economy, Not Give it Away". Although he meant it in a different way, but I thought the title was apt in describing how we are just spending literally all our windfall (as opposed to hard-earned) tax revenues, particularly from the oil and gas sector, without a thought about saving for a rainy day.

Next year, the budgeted operational expenditure is another record RM154.2 billion. This figure is both shocking and scary as operational expenditure for the government when Abdullah Badawi first became prime minister in 2004 was only RM80.5 billion.

In just a short period of four to five years, government operational expenditure has increased by 91.5% or RM73.7 billion. This raises the question as to what the government is spending its money on which requires such substantial increase in operational expenses?

Even more worrying is the fact that most of the government's revenue is sourced from the petroleum sector. Last year, the estimated contribution of the sector to our government's coffers was 37%, but for 2009, this is estimated to increase to 46.4%.

There are a few separate tracks of criticisms that are worth further developing. And as I flesh them out over the next few days, I'll blog them here. So watch this space. ;-)

Malaysia Budget 2009

Flash updates:

Government's 2009 Budget

Record government expenditure: RM207.9 billion (2008: RM176.9b)
Operating Expenditure: RM154.17 billion (74.1%)
Development Expenditure: RM53.73 billion (25.9%)

Budget Deficit

Budgeted deficit 2008 - 3.1%
Revised anticipated deficit 2008 - 4.8%(!)

Budget deficit 2009 - 3.6%

Public Transport

RM35 billion allocated for 2009 - 2014
(Average of RM5.8 billion per annum)

Public Sector

To expand by 4.7% in 2008
1.1% contribution to GDP growth in 2008
Share of GDP high at 24.1%

2008 Operational Expenditure (OE) Exploded

2008 OE Budget (announced last September) - RM128.8 billion
2008 Revised OE Budget - RM151.0 billion
Variation of 17.2% or RM22.2 billion(!)

2008 Development Expenditure (DE) Shrunk

2008 DE Budget (announced last September) - RM48.1 billion
2008 Revised DE Budget - RM46.2 billion

Government Revenue

Original 2008 Budget revenue: RM147 billion
Revised 2008 Budget revenue: RM161.6 billion (increased by 9.5% or RM14 billion)
Budget 2009 revenue: RM176.2 billion (increase by 9.2% or RM10.6 billion)

Petroleum Sector Contribution to Government Revenue:

Direct Taxes: RM35.826 billion
Indirect Taxes: RM2.939 billion (Export Duties)
Non-Tax Revenue: RM30.0 billion (Dividends) + RM6.272 billion (Royalty)
Total Revenue Contribution: RM75.04 billion (46.4%)

Education & Training Expenditure (Major Beneficiary - Yay!)

Operational Expenditure 2009 (2008) - RM37.7b (RM35.5b)
Development Expenditure 2009 (2008) - RM10.1b (RM8.5b)
Total Expenditure 2009 (2008) - RM48.8b (RM44.0b)

Transportation Expenditure

Drop despite public transport plan
Operational Expenditure 2009 (2008) - RM3.9b (RM4.7b)
Development Expenditure 2009 (2008) - RM7.6b (RM7.8b)
Total Expenditure 2009 (2008) - RM11.5b (RM12.5b)

OK, that's all the updates for now. I'm off to a series of interviews and a budget forum @ Sin Chew Jit Poh tonight (come if you are free and understand Mandarin, 8pm). More later ;-)

DAP Budget Brief 2009

The Government's 2009 Budget is being tabled in a couple of minutes, and I'm ploughing through the reports which include the Auditor-General's reports, which are approximately 3 feet tall i.e., not much leg-room now.

A few days ago, DAP released its budget brief for 2009, on how we expect to deliever our budget should we be in government. It's adapted from our complete 2008 budget delivered last year as most of the policies have not been adopted by the Government and are still relevant.

You can download the budget brief (10 pages) or you can download the complete version for last year for a more detailed understanding of the party's economic policies (60 pages). Or you can also read The Star's report yesterday on DAP's CAT Budget.

In summary, we are anticipating a small increase in government revenue of approximately 3%, largely driven by oil and gas revenues but limited by a decline in corporate taxes to RM154.5 billion. However, we intend to maintain budget expenditure to RM177 billion as per the Government's budget 2008.

However, the allocations for operational and development expenditure will be restructured to increase the efficiency and effectiveness of government expenditure. Operational expenditure will be reduced from RM129 billion to RM120 billion or a 7% reduction. On the other hand, development expenditure will be increased from RM48 billion to RM57 billion or an increase of 19%.

Reductions in the government operating expenditure which has ballooned by more than 43% since 2005 will be achieved through strict enforcement via the policy of competency, accountability and transparency. The effects of such policies will create greater expenditure savings over the next few years.

Savings from reductions in operating expenditure will instead be channelled towards development expenditure which will have a greater economic multiplier impact. The major beneficiaries of the increase in development expenditure in the DAP Budget 2009 will be the education, transportation and health sectors.

As a result of financial prudence, increasing the effective utilisation of the Government's revenue, the Government will be able to reduce its budget deficit from its estimated 3.1% in 2008 to 1.4% in 2009, without compromising its ability to pump-prime the economy in a weak global economic environment.

The 14 key measures to lift our economy proposed are:

1. Protecting Oil Revenues
2. Investing in Education
3. Creating an Efficient Transportation System
4. Renegotiating Unfair Contracts
5. Implementing FairWage and Malaysia Bonus Scheme
6. Open, Competitive & Transparent Tenders
7. Open, Competitive & Transparent Auctions
8. Seeding Creativity & Innovation
9. Revitalising Malaysian SMEs
10. Restructuring Personal Income Taxes
11. Introducing Green Taxes
12. Increasing Women Workforce Participation
13. Reviving the ICT Sector
14. Participation from the Civil Society

As mentioned earlier, details on these policies and others are available from our 2009 Budget Brief as well as our 2008 Budget.

Najib Needs Better Economic Advisors

Firstly, I would like to congratulate the new Finance Minister, Datuk Seri Najib Abdul Razak for having at least read the alternative budget presented by Pakatan Rakyat, as admitted during his budget wrap-up speech and his subsequent press conference.

However, he certainly needs a better understanding of public economics, or at the very least engage better economic advisors.

The designated future prime minister has during his speech claimed that we have tabled an alternative budget which was “contractionary” (speech item 25) in nature, while the one by the Barisan Nasional (BN) government was “expansionary” in nature.

We would like to point out to the Finance Minister that a “contractionary” budget is one which results in a budget surplus, whereby the government's expenditure is less than its revenue. However, the budget tabled by Pakatan Rakyat was clearly an expansionary budget as it will result in an estimated 3.0% in budget deficit.

The key difference between the BN budget and the PR budget is hence not that the latter is “contrationary” as alleged but the fact that the former is overly expansionary, which will result in a sizeable increase in budget deficit from the initially projected 3.6% to 4.8% or possibly even higher.

The Barisan Nasional government has over the past 5 years nearly doubled its operational expenditure from RM80 billion in 2004 to RM154 bill for 2009. In addition, the proposed government's operational expenditure for 2009 has exceeded even the total expenditure just 2 years ago in 2006, which amounted to RM136 million.

In the light of a sharp reduction in government revenues arising from significantly lower petroluem and corporate tax revenues due to falling oil and commodity prices, the Pakatan Rakyat budget has taken the responsible move to cut wastage and inefficiencies incurred in the operational budget. The RM24 billion savings in operational expenditure of the PR Budget, compared to the BN budget can hence be better and more effectively utilised in other development expendtires which will benefit the rakyat.

Hence, Datuk Seri Najib's insistence that he wasn't lying when he said Pakatan Rakyat's alternative budget a contractionary budget on the basis that "[PR] suggest an operating expenditure of RM130 billion when ours is RM154 billion," is completely baseless.

As the economy faces critical challenges in the coming months and possibly years, it is important for the government to not only spend money to strengthen and boost the economy, we must spend money effectively without wastage and corruption while at the same time be cognizant of our financial abilities, so as to not over-extend our expenditure which will result in a runaway deficit and its corresponding implications.

In the interest of Malaysians at large, we will hence be more than happy to explain our Pakatan Rakyat budget to the Finance Minister or his advisors, should he not have the necessary expertise to understand our budget document.

ValueCap: Stop the Half-Truths!

The New Finance Minister Should Stop Misleading Malaysians with Half-Truths

Two days ago, in a shocking expose by TheMalaysianInsider.com, it appears that the RM5 billion injection into ValueCap Sdn Bhd was not intended as “additional” investment to support the flailing stock market as suggested by the new Finance Minister – but instead it's a rescue package designed for ValueCap Sdn Bhd to repay its RM5.1 billion debt which is due in a few months.

We are now in possession of documents which are publicly available from the Securities Commission website, which include the Term Sheet as well as the Principal Terms & Conditions of the RM5.1 billion bond issued by ValueCap Sdn Bhd on 28 February 2003.

Issue Size : Up to RM9,950,000,000 nominal amount of Bonds.

Tenor of the issue:

Three (3) years from the date of the first issue of the Bonds. Upon maturity, the Bonds shall be renewable for up to three (3) years at the discretion of the Bondholders.

The Bonds will be issued over a a period of twelve (12) months from the first issue of the Bonds (or such later date as may be agreed by Valuecap and the Bondholders, but in any case not later than three (3) years from the date of the first issue of the Bonds).

The lastest Audited Report of ValueCap in 2007 also confirmed that there is an existing “long-term deferred liability” amounting to RM5.1 billion.

As the bond has already been extended by 3 years as allowed in the terms of the bond in 2006, ValueCap is required to return the monies to the 3 bondholders, EPF, Khazanah and Permodalan Nasional Berhad come February 2009.

Therefore, when the new finance minister, Datuk Seri Najib Abdul Razak said that “the Government has doubled the amount of money available to buy undervalued stocks to RM10bil and will also continue with its spending to boost the country’s economy,” as reported in the Star on October 21st, his statement can at best be described as a half-truth.

The injection of additional RM5 billions from EPF to ValueCap has been widely criticised as not being able to achieve its purported objective of “to boost the economy and protect Malaysia from the effects of the global financial turmoil” for the amount forms only an estimated 1% of the Bursa Malaysia stock market capitalisation and supporting the stock market only treats the surface impact of the global financial crisis, and not the fundamental elements of the economy.

Hence, the expose clearly provides the real rationale behind the sudden RM5 billion loan from EPF to ValueCap which is a mega bail-out of Valuecap whose investment lifespan has already ended nearly 3 years ago.

However, despite the expose and media coverage over the last 2 days, the new Finance Minister has refused to answer the allegations, and instead brushed them aside by saying that the involved parties knows best what to do with the new RM5 billion(!)

Finance Minister Datuk Seri Najib Razak defended the RM5 billion injection into ValueCap via a loan from the Employees Provident Fund (EPF) despite an outstanding RM5.1 billion debt, saying that the company has performed well so far.

"The shareholders are happy and have gotten returns. They will decide what is the best way to handle it," he said referring to the sum owed in interest-bearing unsecured bonds.

In addtion, we demand full and immediate accountability and transparency of ValueCap investment since 2003, as per all international investment funds to explain its inability to “repay” the initial loans from EPF, Khazanah and Permodalan Nasional Bhd.

We would like to call upon the new Minister of Finance to withdraw the RM5 billion injection to ValueCap which serves only deal with the symptoms of global financial crisis and does not in anyway serve to increase Malaysia's ability to face the challenges brought about by the crisis. What is worse, is that it puts at risk the hard-earned retirement savings of ordinary Malaysians.

Our EPF Savings In Jeopardy

The Finance Minister, Datuk Seri Najib Tun Razak announced two days ago that the Government will inject RM5 billion into ValueCap Sdn Bhd to invest in “undervalued companies”, presumed to be those listed on Bursa Malaysia. This was part of the initial slew of high-level measures announced by the Finance Minister, who at the same time confirmed that there will be no cut in the budgeted expenditure for 2009, currently debated in Parliament.

He then further announced yesterday that the source of the RM5 billion additional investment will not be from the Government's budget but instead be sourced from Employee Provident Fund (EPF)!

To me, directing EPF to fund RM5 billion ValueCap investment to shore up Bursa Malaysia is an abuse of Government's authority and puts to risk hard-earned savings of millions of its contributors. This clearly is an example of Barisan Nasional's bad governance and damages the credibility of Datuk Seri Najib as our new Finance Minister.

This RM5 billion off-budget measure raises several very worrying questions and concerns:

1. 1.What measures have been put in place to ensure that the RM5 billion will be utilised in a fair and transparent manner and not be used instead to bail out Government-linked or crony companies whose stock prices have plummeted during the current financial crisis? Will ValueCap for example, be investing a substantial amount into Malayan Banking Berhad who has been hit badly, to a large extent due to its purchase of Bank International Indonesia at exhorbitant prices?
   
   
2. Secondly and more critically, how will supporting the prices of stocks listed on Bursa Malaysia actually change the fundamentals, including but not limited to the efficiency and productivity, of our economy and its companies? 
   
   
3. Most importantly, while agencies such as the EPF are under the purview of the Finance Minister, he has no basis to direct the EPF to make particular investment decisions. EPF investments is led by an investment panel, headed by Y.Bhg. Tan Sri Samsudin b. Osman and they should be given the leeway to decide what they regard as the best investment approach to protect and grow the hard-earned savings of ordinary Malaysians.
   

As a trustee of members' savings, the EPF must discharge our responsibility with sincerity, honesty and trustworthiness at all times. The investment panel's key objective should be looking at making investments at best prices to maximise returns, instead of investing for the purposes of supporting the stock market which will inevitably put at risk the EPF contributors' interest.

The 2nd Finance Minister's attempt to reassure the public that ValueCap will make money for EPF isn't reassuring at all, as it fails to consider the very real possibly that ValueCap can at the same time lose money for the people!  Why must EPF be forced to invest via ValueCap when it has its own investment panel?

And since our financial institutions have been declared to be sound and financially stable, and hence not susceptible to the current global financial crisis, the Government should let the market dictate its stock prices, while the Government focuses its spending areas which will generate high economic multipliers for the economy.

Better Mum or Dumb?

This piece of parliamentary interaction (Hansard Pages 64/65), which I thought quite amusing, happened last Thursday while Azmin Ali [PKR-GOMBAK] had his turn debating the 2009 Budget, and was emphasizing on the fact that the budget is already rendered irrelevant due to the changes in the global economic circumstances.

Dato' Abd Rahman Dahlan [BN-KOTA BELUD] was eager and anxious to interject GOMBAK a few times, and was finally given permission by the latter.

[KOTA BELUD]: Terima kasih Tuan Yang di-Pertua, terima kasih Yang Berhormat Gombak. Tadi pada mula perbahasan Yang Berhormat Gombak ada mengatakan bahawa pihak pembangkang menuntut Menteri Kewangan yang baru untuk membentangkan bajet yang baru berdasarkan keadaan ekonomi semasa dunia. Saya ingin hendak tanya kepada Yang Berhormat Gombak pada tahun 1998, pada waktu itu Ketua Pembangkang yang berangan-angan menjadi Perdana Menteri sekarang ini adalah Menteri Kewangan. Pada waktu itu situasi ekonomi dunia juga meruncing seperti sekarang ini.

Saya hendak tanya kepada Yang Berhormat Gombak, Ketua Whip yang berangan-angan menjadi Menteri Kewangan kononnya. Pada waktu itu beliau adalah setiausaha sulit kepada Menteri Kewangan tetapi pada waktu itu saya tidak teringat walau saya tahu pada waktu itu Menteri Kewangan yang Ketua Pembangkang sekarang ini tidak membentangkan bajet alternatif walaupun pada waktu itu ekonomi dunia merudum dan pasaran saham jatuh, kadar faedah melonjak angkara Ketua Pembangkang menaikkan interest rate. Pada waktu itu Kementerian Kewangan, Menteri Kewangan yang bertanggungjawab tidak membentangkan bajet alternatif. Ini adalah satu hipokrit, satu putar belit, lidah bercabang, talam dua muka. Tolong jawab.

And rightly so, GOMBAK went straight for the “kill”:

[GOMBAK]: Tuan Yang di-Pertua saya gembira kerana memberi laluan kepada Yang Berhormat Kota Belud sebab kalau dia tidak bercakap tidak nampak dia tidak cerdik. Akan tetapi bila dia buka sahaja mulut nampak kedangkalan dan kejahilan seorang pemimpin UMNO. Apa yang berlaku tahun 1997, 1998 boleh check rekod dalam Dewan Rakyat. Dalam menangani krisis kewangan pada ketika itu Menteri Kewangan membentangkan dua kali revised bajet dalam Dewan Rakyat. Masa itu dia budak hingusan di Sabah sahaja dia tidak tahu.

And I couldn't resist adding further:

[PETALING JAYA UTARA]: Terima kasih Yang Berhormat Gombak.

Adakah benar bahawa pada tahun 1997 pada masa itu kita tidak ada pergerakan harga minyak seperti pergerakan yang kita tengok hari ini. Di mana harga USD140 se barrel turun kepada USD70 . Pada masa itu harga minyak adalah hanya antara USD12 dan USD15 sahaja. Pada masa itu hasil negara kita, hasil kerajaan negara kita tidak rely kepada hasil daripada Petronas kita tidak hanya lebih kurang 10% sahaja. Tidak macam hari ini di mana Petronas sumbangannya lebih kurang 46.4% daripada kesemua hasil negara kita. So situasi sudah tidak sama. Tidak boleh gunakan isu 1997 untuk 2009. Terima kasih.

KOTA BELUD sank low in his chair after that, and not adding anything else during GOMBAK's 40 minute speech ;-)

Budget Deficit Target Under Threat

The Government's 2009 financial budget which had been highly aggressive with a record RM207.9 billion expenditure and overly optimistic in its revenue projection of RM176.2 billion will only lead the Government to fail to meet its budget deficit target for the 2nd year in a row.

For 2008, despite having projected a decline in budget deficit from 3.2% in 2007 to 3.1% in 2008, the Prime Minister has announced that the Government has failed to keep a lid on the deficit, which will balloon to 4.8% this year. This increase in deficit was despite an RM14.5 billion increase in revenue from the earlier projected RM147.1 billion, thanks largely to the substantial increase in oil prices in 2007/8.

For 2009, the Government has projected a 3.6% budget deficit. However, in the light of the global economic crisis triggered by the financial markets turmoil in the United States, it will no longer be possible for the deficit target to the maintained.

In the 2009 Budget, the Government has projected a substantial revenue contribution from the petroluem sector of RM75 billion, which will comprise 46.4% of the Government's total revenue. This record contribution from the sector is based solely on the assumption that the global crude oil prices remaining sky high, and the Malaysian crude, the Tapis blend will average US$125 per barrel for 2009.

Table: Revenue Contribution of petroluem sector
to the Government relative to price and output 2004-2009

(1)2008 budget estimate presented in 9/2007
(2)2008 revised budget estimated presented in 8/2008
Sources: Malaysia 2008/9, 2007/8 Economic Reports; Petronas Annual Report 2007/8

However, with the global recession and curtailed economic demand, global oil prices have fallen dramatically, with the Tapis blend now costing under US$100 per barrel. With nearly all analyst agreeing with a bleak 2009, it is now anticipated that oil prices may fall further.

The more than 20% fall in crude oil prices will have a major impact on the Government's revenue. We anticipate that at US$100 per barrel of Tapis blend, the Government will lose an estimated RM14 billion in expected revenue from the sector.

Without a any reduction in the Government's planned record expenditure, this will mean a massive increase in the Government's budget deficit to a precarious 5.4%, from its projected 3.6%.

Aside from the Petroluem income tax, the Government has also projected a RM3.3 billion or a 6.7% increase in personal, cooperatives and corporate income tax revenues despite a cut in corporate tax rate by 1%, adjustments to lower personal income taxes as well as the global economic slowdown. The government has also estimated the crude palm oil (CPO) price to average RM3,000 per barrel in 2009 although it has already dropped to less than RM1,800 today. This will only mean substantially lower profits for the Malaysian plantation companies. Any threat to these tax collections will hence further undermine the Government's ability to maintain its fiscal prudence.

As the Parliament will commence its debate on the 2009 Financial Budget from Monday next week onwards, the new Minister of Finance, Datuk Seri Najib Abdul Razak should table a new, revised and improved financial budget in parliament. This is especially required in the significant events which had occurred since the former Finance Minister had presented it in Parliament on 29th August, including the collapse of the global financial markets as well as commodity prices.

As part of the “new” budget, the new Minister, as his first task in Parliament to slash operational expenditure which has exploded in recent years under Abdullah Ahmad Badawi's administration, from RM80.5 billion in 2004 to RM154.2 billion in 2009, or by 91.6%.

In the light of the volatile economic circumstances, Datuk Seri Najib must not only spew rhetoric about Malaysia's sound economic fundamentals and be in denial about the economic fallout which is about to hit us very hard, but instead take action and demonstrate his ability to soundly managing the country's financials to reassure investors and return the loss of confidence in Malaysia's economy.

Otherwise, the failure to even defend the budget deficit in his first year as the Minister of Finance will seriously erase any credibility he may have in managing Malaysia's economy.

Budget 2009: Skyrocketing Operational Expenditure

The above chart tracks the increase in the Government's
operating expenditure over the past 12 years (in millions)

The budget for 2009 announced last Friday, is once again, a record budget amounting to RM205.9 billion relative to RM176.9 billion which was budgeted for 2008 last year.

While everyone was expecting an expansionary budget in the light of a global economic slowdown, the very substantial increase of 16.4% raises the question of the Government's efficiency and effectiveness especially when the bulk of the increase has gone towards operational expenditure. Operational expenditure includes financial items such as rental, maintenance, emoluments, general supplies and services as well as other items such as compensation to toll concessionaires.

As per the chart above, the Government's operating expenditure has been increasing very rapidly over the past 10 years. It has increased by 189.0% since 2000.

I find it very difficult to fathom why the Government's operating expenditure has to increase by as much as RM53 billion or 52.4% in just 3 years since 2006. It has more than doubled since Datuk Seri Abdullah Ahmad Badawi took over as the prime minister in 2003.

In fact, the proposed Government's operating expenditure in 2009 of RM154.2 billion has exceeded the entire Government's budget expenditure of RM136.8 billion by 12.7% just 3 years ago in 2006.

The Government must put in more effort to rein in operational expenditure which has clearly grown fat and unwieldy and is becoming difficult to maintain. Most importantly, the Government must act firmly to cut down on wastages, corruption and unfair contracts such as expensive repair and maintenance bills for poor quality construction like Middle Ring Road II, purchasing equipment with highly inflated prices as discovered by the Auditor-General as well as lucrative compensations paid to toll concessionaires.

This rapid expansion of operational expenditure has deprived the country of sizeable funds for development expenditure which has greater economic multiplier effects. It has also resulted in a larger than necessary deficit in our budget, which leaves no surplus for our future generation. If this trend were to continue, our economy will be certainly at the risk of collapse in the near future.