Wednesday, February 19, 2014

MALAYSIA : A fiscal bidding war



The main opposition Pakatan Rakyat (PR) alliance is making many costly promises to the electorate in its eagerness to gain power. 

However, the price of a PR victory to the Malaysian economy has attracted less attention than the generosity of the Barisan Nasional (BN) coalition government, which has spent lavishly in two consecutive budgets in order to please voters. In addition, the government is offering many local incentives to ensure the return of BN representatives at federal and state level. For example, the prime minister recently offered Penang's opposition-controlled state assembly 20,000 affordable houses and a monorail to ease traffic congestion. The next election is likely to be a tight race, but we do not expect the outcome to lead to a dramatic improvement in the public finances.

The budgets for 2011 and 2012 were crammed with voter-pleasing measures and helped to raise expectations of an early parliamentary election, which many observers believed would be held in early or mid-2012. Previous BN governments rarely served a full term and preferred to call a poll a year before the end of their term. However, for various reasons the prime minister, Najib Razak, decided to break with his predecessors and appears set to oversee the BN's first full term of office in decades. Both budgets offered cash handouts to low-income families and extra bonuses for civil servants. The 2013 budget, which was unveiled in September 2012, included a cut in the income tax rate and transport discounts for low-income groups, in addition to cash handouts and smartphone purchase incentives for low-earning individuals.

Fiscal imprudence

One consequence of the BN's near defeat in the March 2008 general election has been slow progress in reducing the budget deficit, which the government estimates at the equivalent of 4.5% of nominal GDP in 2012 and forecasts to narrow to 4% in 2013. Subsidy cuts and tax increases lose votes. At some point this year, when all of the voter-related fiscal incentives are added up, the 13th general election will be shown to have been the most expensive poll in Malaysia's history. Although successive BN governments (which have governed Malaysia for more than five decades) and a wide-ranging subsidy scheme are to blame for the country's weak fiscal position, Mr Najib has made tackling Malaysia's persistent fiscal weaknesses one of his long-term policy objectives. However, only a clear victory for the BN would prompt it to accord a higher priority to this particular policy initiative—outlined in Mr Najib's medium- to long-term transformation plan.

By contrast, comments from the PR indicate no commitment to tackling Malaysia's weak public finances. The opposition alliance's economic agenda is intended to appeal strongly to a younger electorate and, taken collectively, appear as fiscally imprudent if not more so than the BN's voter-pleasing measures. The PR's populist items include free secondary education (abolition of student loans); lower car prices (through reform of the National Automotive Policy); a higher monthly minimum wage (of M$1,200, or US$390, compared with M$900 under the BN); the elimination of toll roads; and lower fuel prices. The oil-producing eastern states of Sabah and Sarawak would receive a larger share of oil and gas royalties, of 20%, compared with 5% at present. The PR also has no plans to expand the tax base, whereas the BN is likely to adopt a new goods and services tax (GST) later this year. Recently, the PR added a promise to lower electricity tariffs, which would be paid for by renegotiating supply contracts with the independent power producers, as well as through the sale of the finance ministry's stake in the national electricity utility, Tenaga Nasional.

Broken promises
The total cost of the PR's campaign promises is unclear, but revenue collection would be hampered by giving a larger share of oil royalties to the eastern states. BN politicians have criticised the PR's policy agenda, believing that the implementation of its measures would threaten the country's financial future. It is clearly not feasible to implement all of the measures in one go. For example, providing free secondary education would cost the government M$43bn (US$14.1bn), while abolishing car duty would cut tax revenue by M$4.6bn a year.

Yet the PR will be judged on how quickly it makes good on its election pledges. In Malaysia's richest state, Selangor, the alliance has already been accused of breaking its promises. The BN, which is in opposition in Selangor, claims that the PR has implemented only 15% of the M$2.4bn-worth of its 31 election pledges, made in the 2008 PR manifesto. The promises include financial assistance for pre-school education, and for university students, senior citizens and the disabled; free healthcare for those over 65; lower property taxes; and assistance for home buyers. Selangor's chief minister, Khalid Ibrahim, commented that a manifesto is not a promise but conceded that voters may think otherwise.
To help to strengthen the country's public finances, the PR is relying heavily on the eradication of corruption, greater transparency and better financial management. This is part of a broader effort to reform the Malaysian economy, which includes dismantling cartels, the abolition of monopolies and reforming the role of government-linked companies. For example, in December 2012 the PR published an alternative budget for Perak, the state assembly of which it lost to the BN in February 2009 after four PR assembly members defected to the coalition. Under the BN, Perak had a history of successive fiscal deficits. The PR's alternative budget promises a large increase in total revenue and no fiscal shortfalls. It says that it would achieve this through better financial management and accountability; an end to corruption and cronyism; open tenders for all public undertakings; and through the revival of the state's mineral industries.

New voters on the block
The latest opinion polls show that Mr Najib remains popular, with an approval rating of more than 60%, according to a survey conducted by a local pollster, the Merdeka Centre, in December 2012. But support for the BN was much weaker, with just 47% of those surveyed saying that they were satisfied with the government. This disparity might translate into a loss of seats for the BN at the next election. Both the BN and the PR will need to appeal to young, first-time voters, given that nearly 3m people in this crucial voting block have been added to the electoral register since the last election. The bulk of this group is undecided about which party to vote for and could swing the outcome of the next poll. Both sides will also need to appeal to voters in Sabah and Sarawak. Currently, lawmakers from the two eastern states combined account for one–third of the total number of sitting BN members of parliament.
The stakes are high for both the BN and the PR. The bidding war is likely to continue as both sides make preparations for what is being billed as one of the hardest-fought elections in Malaysia's history. On the one hand, Mr Najib needs to win big in order to secure the future of his reform agenda, while on the other hand, the opposition leader, Anwar Ibrahim, wants to be the first to break the BN's stranglehold on power.

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