Thursday, December 29, 2011

Federal Government Debt: Evidence of Fiscal Irresponsibility

by Dr Subramaniam Pillay

That the Budget that was tabled in the Dewan Rakyat on October 7, 2011 was an election budget is very clear. There have been numerous detailed comments on the Budget by politicians and analysts (since then). In this article, we are just going to focus on one of the long term issues from the Budget. It concerns the increasing debt burden of the Federal Government.

How big is the government debt?

The Federal Government’s outstanding debt has been increasing since 1970. From the detailed data available from Bank Negara’s website, in 1991, it reached a temporary peak of RM99 billion and then decreased to RM90 billion by 1997. From then, it has been virtually doubling every five years. By the end of 2011, we can expect the figure to reach RM450 billion.

In other words, since the Asian crisis of 1998, we have been growing by borrowing heavily. In the 10 years since 1999, our debt has quadrupled. If we continue on this path, by 2020, our national debt will reach RM1.6 trillion. If our population is 40 million then, each Malaysian will have a debt burden of more than RM40,000 and this does not include our own personal borrowing. Assuming an interest rate of five per cent, paying the interest alone will cost the taxpayers RM80 billion per year!

The government has been reassuring us by saying that our debt is manageable. It argues that the debt at the end of 2012 will be only 54 per cent of our GDP, which is relatively low compared to the current crisis nations like Greece and Italy.While it may not reach the levels of Greece by 2012, at our current rate of borrowing it won’t take long before we become another Greece. Just to put this in perspective, our giant neighbour, Indonesia has a debt of only 23 per cent of GDP! Singapore has no debts.

The Federal Government debt alone does not tell the full story. Many government-owned enterprises also have borrowings. If these figures are included, then the total debt would be much higher. It is difficult to get the complete data on these borrowings.

Why has the debt been growing so rapidly?

Since the 1998 Asian Financial Crisis, government expenditure has consistently exceeded its revenue by a considerable margin. For example, in 2011 the spending is estimated to be RM229 billion while the revenue will be only RM183 billion. So the shortfall of RM46 billion has to be met by borrowing.

Of course it is not expected that the government balances its books every year. Prudent economic management requires the government to balance its budget over an entire business cycle. So we can have deficits during bad years and budget surpluses during good years. Since 1998, we have had at least two business cycles; yet every year without fail we have had budget deficits!

This is evidence of fiscal irresponsibility. Here is a government which does not know the meaning of saving for a rainy day. A good example is the situation in the current year.

Actual revenue for 2011 is going to be higher than the budgeted figure by RM17.6 billion. This is mainly due to the increased income from the rise in oil prices in 2011. The Federal Government relies heavily on different forms of revenues (corporate tax, petroleum profit tax, royalties, Petronas dividends, etc) that originate from the production and export of oil and gas in Malaysia. The proportion can be 30-40 per cent of the total government revenue. Thus a rise in the world price of oil translates directly into higher income for the government. So essentially, we had a windfall income.

What would a prudent government do with this windfall? It would reduce the planned borrowing. But that’s not our BN government’s way of financial management. Uncannily, the increase in the actual spending is going to be the same amount of RM17.6 billion!

When asked about this at one of the post-budget forums, a Treasury official explained that it was mainly due to higher spending on salaries and increased subsidy for petrol and diesel. We can understand the increased subsidy but why the higher salary? Did we just increase the size of the bureaucracy? This is a clear case of a government that has no control on its spending.

Why is the federal government spending more than it earns?

There are a few reasons for this consistent imbalance. A major factor is the large leakage in government spending due to corruption and wasteful spending that has been highlighted by the Auditor General year after year in his annual reports. It has been estimated that we can easily save RM25-30 billion without changing any of the deliverables if we can get rid of corruption and cronyism. Transparent practices like open tendering can cut down the cost of much of the procurement and project spending.

In addition, spending can be reduced on military procurements. If a fraction of the money that is saved here can be used to improve the quality of our diplomats in Wisma Putra, we can avert any potential threat to national security. We can also cut down on the excessive use of foreign and local consultants by the government for work that ought to be done by the civil service. Reduction of subsidies to the operators of privatised projects such as the independent power producers and toll road operators will also narrow the deficit.

Another reason for the deficit is the under collection of revenues including income tax and customs duties. Better compliance to and enforcement of existing laws and provisions can increase government revenue.

It is common knowledge that many business operators evade paying their full share of income tax by under declaring their true income. Similarly, evasion of customs duties is rampant due to corruption in the Customs department.

What will happen if the debt keeps increasing at the same rate in future?

As the debt gets larger, interest payments will take an increasing share of total government spending.

If the government continues with the trend of the past 13 years, by 2020 we may be spending about 18-25 per cent of the operating budget on interest payments. In fact, as the borrowing increases, the government will be forced to pay higher interest rates to borrow more because its credit rating will be downgraded. (For example, in Europe, currently the German government can borrow at around 2 per cent per annum while the Italian government has to pay about 7 per cent for its loans.) So the interest cost will rise exponentially.

This will leave much less money for other social and economic spending. It will also widen income inequality as the government will have to cut spending on many public goods like education, health care and public transport. At the same time, the interest it pays goes mainly to foreigners and the better off segment of the population.

What is even more worrying is that given our large revenue from petroleum-related sources, we should not really be running deficits. It is only a matter of time before we run out of oil and gas and thus become net importers of these two commodities. When that happens, our budget situation may become very critical.

A prudent Malaysian government would have saved a sizeable portion of the petroleum revenue from the past few decades as a fund for rainy days. Many other countries have done this. Norway is a prime example. Abu Dhabi is another country that has a huge sovereign wealth fund set up from its petroleum windfall. Botswana in southern Africa saved its windfall earnings from the discovery of diamonds and invested it abroad for its long-term well being.

Unfortunately, we are governed by a spendthrift government that is beset with problems of corruption and incompetency. Unless the situation changes, we are leaving a huge burden to our children and grandchildren. They are not going to forgive us if we do not try to change the situation. —

* Dr Subramaniam Pillay, an Aliran exco member, is an adjunct associate professor with the School of Business at the University of Nottingham Malaysia.

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