This article is in response to blogger SatD’s recent article last night.
The Economic Transformation Program (ETP) celebrated its one year anniversary yesterday with a dire scenario stated by Tan Sri Idris Jala, the man behind PEMANDU.
But before we go on, we must understand the fiscal rules and guidelines set by the Constitution of Malaysia and few other administrative laws that would show how the Government should exercise its fiscal responsibility. Particularly this part below:
Basically the document sets out the guidelines on how the Government should manage its debt and borrowings. We must thank SatD for graciously providing us the link.
It is clear above that the government must use the money to finance it’s operating expenditure (subsidies included) through government revenue while development expenditure must only use borrowings.
This is a good rule.
Money from borrowings is channelled for development expenditure as investment in development will create more money to finance the debt while expenditure such as subsidies and emoluments is financed by revenues since these kind of expenditure normally do not create more income.
This is a simple principle similar to what is contained in Robert Kiyosaki’s Rich Dad, Poor Dad book.
Fungibility aside, essentially, you must never ever use money from borrowings to finance operating expenditure. It would be irresponsible for the Government to do so.
But Tan Sri Idris Jala in his presentation yesterday said that there is a risk this country going to bankruptcy “if it spends borrowed money on operational expenditure such as subsidies instead of investing the cash.”
KUALA LUMPUR, Nov 1 — Datuk Seri Idris Jala said today that Malaysia could still become bankrupt within a decade if it spends borrowed money on operational expenditure such as subsidies instead of investing the cash.
“If our economy grows less than four per cent… and we don’t cut our operating expenditure, if we borrow at 12.5 per cent, if our annual debt rises to 12.5 per cent and our revenue does not grow, then it will happen,” Idris said today after announcing the latest investment updates for the government’s economic transformation programme (ETP).
The performance management minister triggered alarm bells with his controversial bankruptcy forecast last year.
Malaysia’s national debt rose by 12.3 per cent to over RM407 billion last year, according to the Auditor-General’s latest report released last week.
Although the economy grew by 7.2 per cent in 2010, last year’s fiscal deficit maintained public debt at over 50 per cent of GDP for the second year running.
The Auditor-General said in the report that the government owed 53.1 per cent of GDP, slightly down from 53.7 per cent last year.
Economists have also said the country’s economic growth could slow to just 3.6 per cent next year from a projected 4.3 per cent this year due to the increasing risk of a double dip global recession.
Idris said today that Malaysia will not go through a recession but will suffer an economic slowdown as a result of the ongoing financial crisis in Europe spreading.
“It’s not as rosy as we would like,” the Sarawakian minister admitted during a public question-and-answer session.
He noted that the GDP this year was only at 4.4 per cent.
But he assured Malaysians “our government will not allow that to happen”.
He also said his forecast did not mean Putrajaya should stop borrowing.
“We should borrow money provided the money is spent as investment rather than as operating expenditure,” he said.
“We must make sure our borrowing is in proportion to investment,” he added.
Subsidies are among the government’s biggest operating expenses.
The CEO of the government’s Peformance Management and Delivery Unit (Pemandu) said bankruptcy could be avoided even if the GDP falls below the targeted six per cent a year as long as it can increase its revenue collection.
Idris said that the country’s population has grown to 28 million but highlighted that only one per cent was currently paying income tax.
He said one of the ways to raise revenue was to implement the goods and services tax (GST).
He added that the GST would also help make the country globally competitive, noting that 140 other nations have already done so.
“If we do that, it propels competition. Sooner or later, we’ve got to implement GST,” he said.
He said the government has proposed the consumption tax but was unable to carry it out due to objections from the opposition Pakatan Rakyat pact.
What does that mean?
Is he implying that there is a dereliction of duties by the Minister of Finance over its fiscal responsibilities?
Is he saying that Malaysia will go bust if Government continues to finance subsidies through borrowings?
Since we know that it is against the law to do that, we are now stuck in a quandary.
Idris Jala is harping on this ‘Malaysia will go bankrupt if it borrows money to pay for subsidies’, therefore alarm bells should be triggered because rules and guidelines have been breached.
We have two Finance Ministers and yet this simple rule cannot be adhered too?
Prime Minister Najib Tun Razak and Husni Hanadzlah have a serious issue at hand here. They have a senator in charge of the economic transformation of this country accusing the finance ministry of being irresponsible.
I am sure Idris Jala is not that reckless and misleading as what SatD implied at the end of his article posted last night.
But if there is a small chance that what Idris Jala was wrong, and that he was just listening to the many con-job con-sultans encircling PEMANDU, then he must do what is honourable; which is to retract his statement.
Because like what SatD had said:
…you (Idris) give the impression that our Government does not have any Financial Discipline and does not adhere to the Law as provided for by the Constitution and its guidelines.
True enough, looking at the many comments in the Malaysian Insider article, he had created a widespread negative perception towards Barisan Nasional. Worse, it could possibly based on a superfluous assumptions.
We all know his pride in telling the world that he is a non politician minister. The amount of backpedalling he had to do last year over his ‘Malaysia will go bankrupt’ remark caused PEMANDU some serious public relations nightmare.
Yes the powers that be within PEMANDU are all exponents of eliminating subsidies in order to proper Malaysia to a high income economy. Move away from this supposedly ‘middle income trap’, although real economist is sceptical whether Malaysia currently is suffering from middle income trap as suggested by the economic gurus in PEMANDU.
By the way, this is the summary outlook on Malaysia’s debts all through these years:
It seems these days everyone can become an economist; more so when the person entrusted to manage the New Economic Model seems to be shooting in the dark when it comes to giving economic diagnosis.
When tweeted about this issue, Idris Jala response was:
Pls watch my speech on video, I spoke positively abt our economy! I spent 1 hour explaining what the Govt is doing
Which prompted me to respond with:
TQ for d reply TS
@IdrisJala_ but it didn’t answer e Q. Is govt breaking e fiscal rules by using borrowings to finance subsidies? TQ
I end this article with a word of thanks to SatD. I hope The Mole will look into this issue by interviewing Husni Hanadzlah over the matter.