By Wong Chen
On 2nd November, I will be heading back to Parliament for the most important session for the year; the Federal Budget 2021 debates. This session will last until 15th December. I have been tasked to lead, guide, monitor and analyse the budget on behalf of PKR for the last eight years. Prior to GE14, I headed the Opposition Alternative Budget Team for 4 years, taking over the task from my friend, Rafizi Ramli in 2014.
Most people don’t understand the budget and admittedly, it is a somewhat esoteric topic. So in this article, I will try to explain the basics of the budget, so that you can try to follow what goes on in Parliament this and next month.
The first thing you should know is that the budget for next year is presented this year. In other words, the budget is really a set of educated projections for next year 2021, based on several assumptions. The tabling of the budget normally happens in the month of October; but this year the PN government will table it very late, on the 6th of November. Another little quirky fact is the budget is tabled on a Friday. Friday is the one working day of the week that the Malaysian Parliament does not have sittings.
The budget speech is presented by the minister of finance. What is widely reported by the media is the “budget goodies”. These goodies are in fact, a very small component of the budget. As a rule, budget goodies over promise and under delivers in impact; tens of million ringgits are shuffled from here to there, and in a good year, a small percentage cuts are given on some taxes. Sometimes the goodies that are announced are in fact, not even accounted for in the budget! In other words, off budget projects are often announced to make the budget sound sexier than it really is. The truth is budgets don’t actually change much, year in year out. Nevertheless, the budget is a still a very big amount, averaging around RM300 billion per year, making the government sector almost 20% of the GDP.
So when you read “budget goodies” please remember that these do not even represent 5% of the budget. By and large, about 95% of the budget is more or less fixed or constant. Operating expenses of government represents around 85% of the budget and these do not change much on a year to year basis. The balance 15% are development expenditure, of which most of these projects are in fact continuation of existing projects started years earlier.
The key to better scrutinise the budget is to avoid the sensational goodies announcement, but to first focus on the projected government revenue for the upcoming year. Why? Simply because before the government can decide what to spend on, the government needs to ensure that it has the ability to collect taxes and revenue first. I usually spend many more hours analysing the projected revenue of the budget and economic outlook, rather than the expenditure document, to assess if these projections are real or fictional.
For this coming 2021 Covid-19 infected budget, I am pessimistic. I project a severe drop in revenue for budget 2021. In particular, I think corporate income tax will be severely hit, as low as a 50% drop from the average annual collection of RM70 billion. Personal income will also be hit by rising unemployment. Covid-19 will impact the lower income earners more, and most low income earners do not pay any personal income tax. From that point of view, I project personal income tax collection will fall around 10%. Petroleum revenue will also likely drop, in view of the persistently low oil prices of USD40 per barrel. Petronas earnings would have fallen by at least 30% this year alone and as Petronas will be hard pressed next year to issue a high dividend to the government. That being the case, I believe the government will have to issue a lot more sukuks and government bonds next year. I am projecting the government to issue RM100 to RM150 billion of sukuks and bonds next year.
In terms of expenditure, I expect austerity measures to lick in across the board on the operating side. I don’t think civil servants will be taking a pay cut, but I also don’t expect bonuses too. When there is less money to spend, in theory, we should see a corresponding drop in wastage and corruption. Therefore this would be an ideal time for the government to totally revamp the procurement policy to finally practise full open tenders. However, I won’t be holding my breath on this miracle, as successive governments have failed to revamp procurement. Malaysia’s sad perennial problem on this front has been the consistent lack of political will to reform.
I would also expect to see a drop in development spending. More projects will be differed, stalled or reined in. On the other, the government’s health budget should increase a lot as more to provide extra resources to contain the pandemic and purchase vaccines. The Home ministry should also see an increase in budget, as enforcement frontliners will need additional resources for deployment.
Lastly, during the upcoming Parliament session, I will be continuing my Monday Night Chat video series on my Facebook account (https://www.facebook.com/wongchen.pkr/). I will be talking a lot more about the budget in those videos, so do tune in from time to time. Stay safe, sanitise, social distance and wear your mask.