Policy Matters - Challenges of a people-centric budget

THE 2016 Budget is a reflection of the dire straits the economy is in. It is an attempt at trying to resolve some of the economic problems that the country faces within the tight constraints that abound.
There is a range of issues that demands attention: the price of oil has declined and so has the ringgit, the cost of living has shot up, a long history of fiscal profligacy needs to be corrected, and government expenditure is flabby and growing fast.
Against this the government has committed itself to narrowing the fiscal gap. It is impossible to renege on this without attracting the wrath of creditors. To do so would result in the loss of confidence on the side of creditors, something that will immediately result in a downgrade from rating agencies. That would be an intolerable prospect, with no buyers for Malaysian government securities and the like.
Since the fiscal deficit has to be closed whatever may happen, there is little fiscal space that is available to the government for manipulation.
Fortunately the government introduced the goods and services tax. This is to the government's advantage, but much to the detriment of consumers. Whatever the GST raked in has helped to counterbalance the decreased government revenue (due to the fall in commodity prices) and the constantly increasing government expenditure.
But consumers have had to bear the brunt of this tax. A lower personal income tax, especially for the bottom and middle 40 would have helped, but given the awkward position the government has found itself in, this could not have been extended.
Could the 2016 Budget have selected the restoration of value of the ringgit as its theme? It obviously did not. There was not a sliver of attention that was directed at this problem in the budget. The government could, for instance, have introduced measures to ease the pressure of the low ringgit on SMEs (perhaps by using fiscal measures to reduce the cost of imported equipment and machinery). Or for parents whose children are studying overseas.
Clearly, the "fallen" ringgit is left to market forces. To some extent the call to bring back some of the foreign investments that have been made by government-linked companies and agencies is meant to counteract the outflow of ringgit. The 2016 Budget was not meant to be used as an instrument to mitigate the effects of a cheap ringgit.
Neither could supporting consumers' incomes have been the main theme of the budget. Everybody is aware of the burden of the GST on consumers. That is a necessary evil: the government needs adequate sources of revenue, what with the loss of revenue from oil. Under better times it might have been possible to buffer the weight of the GST with a cut in personal taxes, but not now.
The best the government could do was to zero-rate a number of controlled medicines and several food items (soybean-based milk, dhal, lotus root, mustard seeds, jaggery powder and dried mee kolok), and offer rebates on prepaid telecommunications services and prepaid cards.
Other attempts have included increasing tax relief for children, taxpayers whose spouses have no income, children studying at institutions of higher learning and the like. These would result in a decrease in tax payments, but certainly nothing that would result in a tangible increase in monthly disposable income.
It is to be noted that although subsidies and cash assistance worth RM19.3 billion were slotted for 2015, the amount will decrease to RM10.6 billion in 2016. Any cushion for the rising cost of living that is inscribed in the present budget will be effectively erased by the decreased subsidies that, at any rate, would have been most valuable to those in the lower-income strata.
It appears that the oil price bust will result in retrenchments in the oil and gas and related sectors. The banking sector is also set to face employment cuts. The budget does not seem to anticipate these problems nor those of a global slowdown; neither is it equipped to do much to help minimise job cuts or its effects.
There are some positive social measures. Unfortunately, they are too small and sprinkled too lightly. For instance, the idea of building affordable housing is commendable. One wonders if building 175,000 houses will satisfy the demand.
The allocation of RM5.9 billion for Bantuan Rakyat 1Malaysia (BR1M), though not as substantial as the RM41.3 billion that will go towards "improving education", is a bit of a puzzle. Although the government seems keen on shaving its fiscal excesses, it is nevertheless indulging in a bit of it through the BR1M handouts.
The budget has stayed clear of tough decisions: the bloated civil service deserves to be downsized. That would have gone into the heart of the matter of ridding the economy of unnecessary government expenditure.
In addition, this is not a budget that has favoured the private sector. In fact, some government-linked companies stand to gain, which is yet another example of the contradictions that run through the budget.
The central thrust of the 2016 Budget is to avoid a poor credit rating at all costs; but given the rising cost of living, the government has had no option but to offer patches of relief although it will in no way pump up household spending and increase aggregate demand significantly.
Given the range of problems that has beset the economy, the government has tried to solve its own problems; it has also tried not to displease the people.
It is doubtful if the government has convincingly accomplished the latter. To do so would be a miracle.
Dr Shankaran Nambiar is a senior research fellow at the Malaysian Institute of Economic Research. The views expressed in this article are his own. Comments: letters@thesundaily.com