Budget 2013 signals the end of an era of record budgets with a slow down in Government revenues

Over the past few years, the Government has been able to increase its budget tremendously to achieve record expenditures annually. This has allowed the Government to prop up the economy as we faced challenges in attracting private investments, as well as a drop in our trade contributions.

However, the Budget has projected an increase of only 0.7% (2012: 11.8%; 2011: 16.1%) in projected revenues from RM207.2 billion to RM208.6 billion in 2013. This is the slowest projected increase in the tabled budget since 1999, barring the global financial crisis in 2009.

Consequently the Government is forced to table a smaller budget than the prior year. The proposed operating expenditure has been reduced by 0.3% from RM202.6 billion to RM201.9 billion, while the development expenditure is also reduced from RM46.9 billion to RM46.7 billion or 0.4%.

The marked decline in revenue growth will have a very significant impact on the Government’s ability to impact growth in the Malaysian economy through fiscal means. The fact that we have not been able to reduce our budget deficit below 4% over the past few years reflects the years of wasted opportunities, where we have failed to curb our expenditure through reduced wastages, abuses and corruption.

Consistent Decline in Development Expenditure

Of concern is also how the Government has consistently reduced its emphasis on Development Expenditure which will create greater multiplier effects on our economy.

The proportion of the budget expenditure dedicated to Development Expenditure has reduced from 31.5% in 2003 to 27.1% in 2007 to 21.3% in 2012. The worrying trend continues in 2013 where the proportion is reduced further to only 18.6%, a record low in Malaysia’s history.

This represents lower investment by the Government with its current revenue, which will result only in lower returns to the economy in future years.

Federal Government Debt increased precariously to RM502 billion

Our Federal Government debt has increased rapidly from RM242 billion in 2004 to RM363 billion in 2009 and RM456 billion in 2011. For 2012, it is projected that our debt will hit RM502 billion. That represents a marked 107.4% increase in debt over the past 8 years.

More worryingly, the debts have increased our structural debt service commitments significantly. The rate at which our debt servicing commitments are growing will severely constrict our future operational and development expenditure. This together with a much slower rate of growth in government revenue as shown in the budget for 2013 will have a major impact to our economy, given its current heavy reliance on public spending and investments.

From 2003 to 2008, our debt servicing obligations increased by 21.9% from RM10.5 billion to RM12.8 billion. However, in the next 5 years from 2008 to 2013, the annual commitment has increased by a whopping 73.4%!

The official federal government debt is also expected to increase as a proportion of our GDP from 51.8% to 53.7%, staying marginally below the 55% legal federal government debt limit. However, even the 53.7% is an artificial figure as it fails to take into consideration the Government’s contingent liabilities and hidden debts which amounted to RM117 billion as at Dec 2011.

What is frightening is, the Government’s contingent liability is expected to increase exponentially in 2013 due to the expenditure for the RM53 billion MRT project as well as other mega-infrastructure projects. These debt driven expenses are completely off-balance sheet or not considered part of the official Federal Government debt, despite it ultimately being Federal Government funded.

In Europe, Spain is facing major financial crisis which requires hundreds of billions of Euro bailout, has an “official” debt to GDP ratio of 68.5%. But due to various contingent liability and bank bailouts, the “real” ratio which is significantly higher has caused a near collapse of the economy, in a crisis that is still evolving.

We must not allow ourselves to get entangled in a similar crisis.

Budget deficit would have been 6.7%; 2015 2.5% deficit target a lost cause

Based on the Economic Report, the Government was able to keep its deficit below 5% at 4.7% for 2012 only because of an unbudgeted increase in revenue by RM21 billion for the year. If not for the above, based on the Government’s expenditure in 2012, our deficit would have increased to 6.7%.

The Government has announced its plan in the 2013 budget to keep the deficit at 4.0%. However, it has become clear that the Government’s original target as late as 2011 to reduce our deficit to 2.5% by 2015 is no longer achievable. The steep decline of growth in the government’s revenue will make the task seemingly impossible.

No political will

The budget demonstrates no political will on the part of the Federal Government to make the necessary structural changes to the way we manage our budget. We see a decline in the proportion of funds spent on development expenditure. We also do not see a serious effort to tackle federal government debt, both “official” and “hidden”.

The 2013 Budget reads like a repeat of prior year budgets, using the same formula without taking into consideration the changing circumstances and increasing economic challenges we face today.