‘In public administration, there is no connection between revenue and expenditure.’
— Ludwig von Mises (1881-1973), economist.
While the 2023 budget may have met some expectations previously outlined, it falls woefully short in several critical areas, particularly in creating a secure foundation for spending and revenue.
It’s a disappointing result from a government that should prioritise responsible fiscal management over political expediency. Except this time, it established clearer priorities for operational spending and reduced wastage and leakages. The budget also included minor changes to the tax rates, indicating the need for a comprehensive review of the tax system.
The budget had also continued its reliance on subsidies to address the cost of living, but this often led to money being transferred to companies instead of reaching the people who needed it most.
Although a targeted cash transfer was included in the budget to help the B10 group of hardcore poor, with the aim of increasing their monthly incomes to RM2,500, there were concerns that this could be the first step towards a universal basic income model, which would not be sustainable in the long run.
Certainly, the allocation of a record RM388.1 billion in the budget had received praise from many economists. But when adjusted for inflation, this amount was 4.3 per cent higher than the abandoned October 2022 budget and 19.8 per cent higher than the original 2022 budget.
The practice of one-upping each other with larger budgets was considered akin to childish behaviour. Rather than focusing on responsible fiscal management, the government was drawn into a game of fiscal poker where it felt compelled to keep raising the stakes. The excessive spending in 2022, fuelled by EPF withdrawals and aimed at gaining pre-election popularity, had negative consequences such as an inflationary boom, higher interest rates and a rise in old-age poverty. As a result, the government felt compelled to match this level of spending in the 2023 budget or risk a decline in Gross Domestic Product (GDP) due to the high base set in the previous year.
Despite an increase in GDP, the deficit level remained largely unchanged, although the deficit ratio decreased. The subsidies bill decreased to RM64 billion due to a drop in oil prices. However, the high debt level was concerning, and there were limited options for reducing it quickly. Additionally, the contingent liabilities, which include PTPTN, became more unstable. The cost of debt financing remained high, and there were so few indications of how the government planned to address this issue.
The inflation forecast was revised upwards, which, in combination with the fiscal expansion, put pressure on Bank Negara Malaysia (BNM) to increase interest rates, particularly after the pause in the previous month.
The ad hoc attempts to broaden the tax base highlighted the necessity for a comprehensive tax reform. For instance, even if the tax on luxury goods with a market of RM8.4 billion was set at 5 per cent, it would only have generated RM420 million, indicating the need for a more efficient and effective tax system.
In the current budget, implementing a higher income tax on the T20 income group was proposed as a potential source of revenue, with estimates suggesting it could generate between RM1.7 billion to RM3.4 billion. However, this would only account for 0.6 per cent to 1.2 per cent of the government’s total revenue. While this amount is larger than the revenue generated by a tax on luxury goods, it still falls short of the potential savings that could be achieved by cutting waste or improving tax efficiency more broadly.
While the 2023 budget was set to provide tax cuts to 2.4 million M40 taxpayers, it was important to note that the savings would not have made them significantly wealthier. For instance, those earning between RM35,000 and RM50,000 could have expected to save only RM25 per month, while those earning between RM50,000 and RM70,000 would have saved RM50 per month, and those earning between RM70,000 and RM100,000 would have saved RM110 per month. Thus, most people would hardly have noticed the change in their income.
The positive impact of lowering taxes for the M40 group was expected to be felt through increased spending and higher company revenue, which would boost the government’s income from SST and company tax, resulting in a net positive effect on the economy. However, the crucial benefit of tax reform has not been effectively communicated to the public, leaving many unaware of the potential long-term benefits of the tax cuts.
The assistance for micro, small and medium enterprises (MSMEs) was primarily in the form of loan facilities worth RM40 billion, which raised concerns about whether the 1.2 million companies with five or fewer employees would be willing to take on additional debt, especially when their cash flows had not yet fully recovered. Since these loans required application and vetting, the implementation process was slow, and many MSMEs might have opted not to apply at all.
The decision to offer a 2 per cent tax cut to MSMEs was considered a positive move, but the actual benefit may be relatively small. For example, companies earning RM150,000 would only see a tax reduction of RM3,000 or RM250 per month. Moreover, a significant portion of MSMEs, around 78 per cent, have fewer than five employees and do not generate substantial profits that are subject to taxation.
As a firm believer in market forces, reducing the involvement of government-linked companies (GLCs) in the economy is necessary to prevent them from overshadowing MSMEs. The privatisation or sale of GLC subsidiaries is a better option as it would promote market competition and benefit MSMEs.
A significant concern is that the budget’s list of initiatives was quite long and the bureaucratic design could have potentially led to more leakages and wastage. Instead of implementing straightforward cash transfers to the intended beneficiaries, the government seemed to continue with the traditional approach of providing projects to specific groups, with no clear and transparent mechanisms for how this would be carried out.
The lack of boldness and innovation in its design suggests that the government is still mired in traditional thinking, ignoring the pressing need for fundamental change. True reform requires not only a change in government and prime minister but also a transformation in mindset and approach.
