Reforming Malaysia’s Government Finances
The case for a reformist budget 2023
Ramesh Chander, Murray Hunter and Lim Teck Ghee
Last year’s Malaysian budget, which could only be characterized as racially contorted and politically driven, served neither the short- nor long-term needs of the nation, which has spent the better part of the past two decades in deficit and paying no attention to the revenue side. Now that an ostensibly reform-oriented government is in power, can it deliver a spending plan that addresses the shortcomings of earlier budgets which have squandered the nation’s considerable financial resources with relatively little return?
This upcoming fiscal package is the first real test of the Pakatan Harapan government and of Prime Minister Anwar Ibrahim, who has taken the finance portfolio for himself. This budget will be the test of how much of a reform government it can really be. For reform to begin in earnest, the new government must tackle the major challenges facing the country. Otherwise this year’s exercise could end up as another instrumental agency misshaping the country’s socio-economic development further, which is clearly evident from the following:
● The widening Gini index of inequality. The coefficient inequality worsened from 0.399 in 2016 to 0.407 in 2019. This was the first time since 2004 that the household income gap had been recorded as widening.
● Poverty numbers remain large and have grown, with little evidence of progress in the recent decade. According to the Department of Statistics in 2021 a majority of households experienced a decline in income with many from the higher income decile moving to the lower income group. Some 20 percent of households from the M40 group with income between RM4,850 and RM10,959 moved to the B40 group.
● Inequalities in regional development have been uncorrected. The latest data has led the World Bank to observe that significant differences now exist between Bumiputeras in Peninsular Malaysia and Bumiputeras in East Malaysia with the latter experiencing more chronic poverty, more downward mobility and less upward mobility.
● Burgeoning government debt and liabilities have reached record levels. Total government debt and liabilities as of June 2022 were estimated to be at RM1.42 trillion. Federal government debt accounts for 61 percent of debt-to-GDP, at RM1.04 trillion up from RM 979.8 billion in 2021. Total debt and liabilities are about 82 percent of GDP.
The PM has signaled what will be the main concerns in the coming budget. According to reports there will be a mix of focus on everyday issues such as cost of living and food security as well as on the ignored elephant in the treasury related to debt reduction. He has also indicated that he will not reinstate GST, which was enormously unpopular and contributed to the downfall of the Barisan Nasional government in 2018, until income levels rise.
While this is encouraging to hear, the new government should not only take up the public concerns of the day but also begin to address the structural deformities in the nation’s socio economic situation.
Tackling Long-Standing Issues
Despite the challenge that the PM and the unity government face on the political front, the launch of the new budget provides a historic opportunity for
● Nurturing more competitiveness. Malaysia is suffering a relative decline in productivity growth. This must be turned around to sustain economic growth.
● Shifting from low-cost labor production towards creativity and innovation-led industries run and operated by the private sector. Government-linked companies have been good in rent-seeking monopolistic and oligopolistic structured industries. These business units are coming to an end in their potential to keep growing without further subsidies from the taxpayer.
● The low wage model, with its emphasis on primary industries including oil palm and rubber, has given rise to the huge brain drain, with two out of every 10 Malaysians with tertiary education working overseas, according to the World Bank. This needs to be checked to enable Malaysia to seek new growth engines.
● There need to be radical changes to the education system. Within humanities there is a glut of graduates in relation to job availability. The value of these degrees in current and future employment is questionable. Thus, there needs to be a radical evaluation and immediate change of plan on what is taught and curriculums.
● There needs to be a refocus towards technical-vocational education and training (TVET) to provide relevant skills to sole proprietorships and SMEs. The Micro, small & Medium Enterprises sector is a major segment of the economy that can be quickly enhanced through TVET. This would have quick and positive effects within some of the B20 and M40 groups.
● The budget must be centered on SMEs rather than a GLCs, which have proven to be riddled with mismanagement, corruption ans featherbedding. Pouring extra money into the public sector is only adding to inefficiency and leakages.
● Aggregate ‘ikan bilis’ (small fish) corruption is as much if not greater than the big news worthy corruption scandals such as the massive 1Malaysia Development Bhd scandal, which nonetheless, robbed the public treasury of the equivalent of UD$5.4 billion. The systemic corruption raging through the public sector must be stemmed through reform of the Malaysian Anti-Corruption Commission and within the civil service itself.
The Big Challenge
To tackle the first three concerns identified above -- widening income inequality, rising and stubborn poverty levels and regional inequalities -- the government needs to craft a universal basic income mechanism and appropriate social safety net.
This could also facilitate a new development paradigm for the nation to reverse the current pattern of wealth accumulation and concentration which, while rewarding the upper and middle class, has been hijacked by a small elite to the detriment of the national interest and that of the great majority of Malaysians.
The new paradigm and the type of reforms that are necessary to go along with it will be elaborated on in another article.
Datuk Ramesh Chander is a former Chief Statistician of Malaysia and a Senior Statistical Adviser at the World Bank in Washington D.C.
Lim Teck Ghee is a former senior official with the United Nations and World Bank. Murray Hunter is an independent researcher and former professor with the Prince of Songkla University and Universiti Malaysia Perlis and a regular contributor to Asia Sentinel.
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