Today must
borrow nothing of tomorrow. German proverb
The noted New
York Times columnist David Brooks recently lamented on the state of the
democracies of the US and Europe. He said, Leaders today do not believe their
job is to restrain popular will. Their job is to flatter and satisfy it many
voters have come to regard their desires as entitlements they command their
politicians to give them benefits without asking them to pay. (As a result)
governments have made promises they cannot afford to fulfill.
Brooks was
referring to the rise of populist pressure from voters and the readiness of
leaders to accede to their demands. The result has been chronic government
deficits in the US, Europe, Japan, India and Malaysia too.
At a talk given
by a retired senior Malaysian politician, I asked him for his views on the
populism affecting our country, proof of which lay in our persistent government
deficits, subsidised fuel and commodities, pressure to forgive National Higher
Education Fund Corporation (PTPTN) loans and doing away with quit rent and
assessment.
His reply was:
That is democracy; you make promises and the other party makes
counter-promises. Let the voters decide.
At the time I
was quite taken aback by his dismissive reply. But if Brooks is correct, then
that is the way of all democracies doomed to financial insolvency and
disaster brought about by the worst in human nature (wanting goodies without
paying for them) and the willingness and readiness of leaders to pander to the
irresponsible wishes of voters.
We can all agree
that national finances do vary from family finances in that for national
finances, we do not have to maintain surpluses every year. When the economy is
in recession, it is appropriate to have a small deficit so as to activate the
economy by building some needed infrastructure. But when the economy is
enjoying good growth, it is necessary to maintain surpluses so that debts can
be reduced and the government's coffers replenished.
Such alternating
between surplus and deficit in government finances was what we had practised in
the decades up to 1997, the last year in which we achieved a federal government
surplus (of 2.5% of GDP). During the years of good commodity prices and steady
inflow of foreign direct investment (FDI), we achieved surpluses. However, from
1998 onwards, it has been only deficits. Why is that?
The answer lies
in what Brooks said. In the new millennium, we have had more competitive
politics. There has been endless campaigning, particularly since 2008, and like
all political campaigning, it invariably boils down to promises to tax less,
waive charges, cancel proposed new taxes and spend, spend, spend.
The
much-considered Goods and Services Tax (GST), which was proposed at least 15
years ago, was resuscitated four years ago and is still under study. The GST is
much needed to diversify our tax base, to provide a new source of revenue and
to modernise financial record-keeping and transparency throughout the economy.
However, due to populist pressure or the perceived view that it is too
unpopular, this much-needed tax has been kept in abeyance once again and not
even mentioned of late.
I can think of a
long list of issues relating to the prudence versus populist divide. For these
issues, the economic impact on government revenue and spending is clear —
deficit improving or deficit worsening. Sad to say, many politicians invariably
succumb to the populism strain.
*PTPTN*
On May 22, there
was a celebrated debate between the shining political stars of the new-generation ruling coalition and the opposition Khairy Jamaluddin and Rafizi Ramli
respectively. The debate brought up several important issues relating to PTPTN
and raised some fresh perspectives.
In my view,
however, the arguments and orientations of both debaters were imbued with
populist sentiments. The public had been caught unawares that PTPTN
disbursement up to now had reached RM44.2 billion and growing at a phenomenal
rate. From a prudent taxpayer's perspective, I would venture the following
questions in respect of the student loan fund.
First, how is it
that the PTPTN loan fund was allowed to grow so big without public or
parliamentary scrutiny? For such a huge allocation, there had to be strict
evaluation and supervision of the agency’s management and corporate
practices.
Second, the loan
fund had unwittingly emerged as a major source of funding for many private
sector educational institutions. In fact, many private institutions survive
mainly on the funds disbursed by PTPTN. Such dependence is not healthy as it
leads to possible corrupt relationships as well as insufficient supervision of
the quality of education provided.
Third, it was
revealed that a significant proportion of the PTPTN disbursement had been going
towards students’ living expenses. Surely, the living cost of PTPTN students
should be the responsibility of their parents? And the living costs of very
poor students should be taken care of by welfare bodies or scholarship schemes,
not loan schemes. It seems that some families are utilising PTPTN loans to
supplement their income.
Fourth, PTPTN
seems to exercise a potentially unhealthy policy of forgiving loans once a
borrower obtains first class honours or similar academic achievements. Such
forgiveness now totals RM475 million. Of course there are worthy students
deserving a better deal, but forgiving a loan would seem to be outside
PTPTNs jurisdiction. Very good students should have access to scholarship
schemes issued by other bodies, not PTPTN. Furthermore, there are many
contentious issues to consider when determining what constitutes first
class the quality of the
institution issuing the degree, the quality of the faculty itself, whether the
student took easier options and so on.
The point is
that the public should not be overly dependent upon political arguments and
considerations when evaluating programmes like PTPTN. It is indeed difficult to
wean politicians off populist appeals. With the rise in populist tendencies,
one must widen one horizon to seek out non-partisan studies and
perspectives.
*GST *
This stuck tax
proposal had been referred to above. Will politicians from either side of the
divide ever support it? If the nation is governed by political sentiment and
the need to win votes, such a tax will never be passed.
So what happens
to national interests in tapping new revenue sources, diversifying the tax base
and instilling international confidence in our financials? Obviously, the
country needs a new form of consensus when it comes to taking bitter economic
medicine like imposing a new tax. We just cannot depend upon traditional
populist politicking to ensure financial prudence.
Subsidy Much has
been written about fuel, food and water subsidies and I need not elaborate
here. Subsidies are the converse of VAT. Due to the faulty design of the
subsidy structure, the nation has inadvertently fallen into the trap of giving
subsidies to make up for world market price changes instead of fixed ringgit
allocations approved by Parliament.
Under the
present system, as world prices of fuel or sugar increase, the subsidies or
government allocations automatically increase. Quite apart from the legality of
such a budgetary procurement practice, it is simply imprudent for the
government to issue blank cheques to power producers, motorists and consumers.
The proper practice is to allocate a fixed ringgit sum for whatever products to
be subsidised. These allocations cannot be exceeded until and unless new
allocations are passed by Parliament.
Pension and
medical commitment liabilities of the government I have yet to study this issue
in detail. However, observations lead me to the conclusion that we have a major
issue on our hands. There are some well-established facts to build upon.
First, the
number of public servants is large, very large in fact for a country and
economy of our size. Consequently, the wage bill for the public sector is very
high. So are the numbers enjoying and will be enjoying pensions.
Second, pension
payments are indexed to current salaries, so as salaries are increased, pension
entitlements are also enhanced.
Third, pension
eligibility for elected federal and state representatives and the senate is
only three years. Such a short eligibility period should not have been granted
in the first place.
Fourth, medical
benefits are extended to virtually all retired civil servants, spouses and
their young children.
Fifth, medical
costs have increased astronomically due to medical advancement and a change in
the nature of ailments.
Sixth, both
medical and pension burdens are liable to explode due to the longer life expectancies of
retired civil servants and their spouses. Previously, it was unusual to find
people living into their 80s. Now, many are reaching their 90s. There are two
financial issues related to pension-cum-medical liabilities. First, these
liabilities are largely non-funded, meaning there is little by way of a sinking
fund earmarked for the payment obligation as it falls due. Second, these
liabilities are not fully accounted for in the statistics used in the
calculation of government deficits and the all-important deficit-to-GDP ratio.
*Activities deserving of higher taxation
*In the old
days, we used to have development tax, excess profit tax and estate duty tax.
While Australia, the UK, France, Japan, Indonesia and many other countries have
been looking for new ways to increase their tax base, in Malaysia, we have been
doing away with several taxes while taking many residents out of the existing
tax net.
In Indonesia,
there is an exit tax of IDR150,000 (about RM50) on every person exiting the country.
Australia has passed a higher mining tax (to take advantage of miners record
profits) and is imposing a new carbon tax. Both France and the UK have
implemented or are introducing higher income and sales taxes.
It is high time
that the country considered new taxes and increased the rates on existing ones.
We need to introduce new and increased taxes on selected sectors/activities and
backed by good reasons. New/increased taxes can be considered for palm oil, banking,
gaming and cigarettes.
For palm oil,
the government missed out on a potentially huge revenue source when crude palm
oil prices increased from a low of RM2,000 per tonne in 2009 to RM3,400
recently.
As for the banks, we have seen them earn
record profits largely due to the deposit rates being kept low by the
authorities. The extra-high profits earned at the expense of depositors should
have been suitably taxed. As for gaming, these are basically profits in the
nature of bounty since only a few lucky permit holders are allowed to operate
legally in an activity otherwise deemed unlawful under the general law. The
government's offtake from gaming is much too low and an increase is
warranted.
Take a look at
what gaming operators pay to the revenue authorities of the UK, Singapore and
Hong Kong. As for cigarettes, we need not introduce taxes that go as high as
those in the UK or Australia, but a low tax does not provide sufficient
deterrence and does not take into account the high medical costs to employers
and to the Health Ministry for all the ill-effects caused by smoking.
In tandem with
higher taxes on cigarettes, the government must find better ways to combat
cigarette smuggling, which has reached crisis levels.
Well, all said
and done, what do we do about the populist plague? The problem is so broad and
intractable as to cause mayhem even in old democracies like the US, France and
the UK. Furthermore, it is no use pleading to the opposition because those not
in power are also fighting on a platform of lower fuel prices, forgiving PTPTN
loans, subsidising water bills and wanting to reduce quit rent and assessment.
The situation is
almost like the fairytale lesson of belling the cat. We know the problem
and what should be done, but who is to do it and how? I have three suggestions.
First and
foremost, the public must be clear in its mind that financial populism trying to get benefits without paying for them, reducing taxes, avoiding taxes,
stopping charges/fees will destroy our economy and country. Our currency
will be devalued, deposits will leave the banks, capital will flee the country
and other untold horrors will unfold.
Second, the
public should not seek freebies from the government or simply oppose new or
higher taxes. At the same time, the public should demand greater accountability
in the selection of projects, choice of suppliers and costing. We should not be
impressed by off-the-cuff approvals of spending and waivers of charges since
such impulsive approvals reflect lack of prudent decision-making.
Third, broad
financial policies and targets for taxes, operational expenditure, subsidies
and big-ticket projects should be determined in a multi-partisan manner so as
to minimise their appeal to populism. Such multi-partisan commissions can be ad
hoc or institutionalised as a sort of privy council to advise the king. Such a
body would lay out the limits to various deficit measures, examine government
accounting practices and set out broad policies on taxation and spending
targets.
The studies,
conclusions and pronouncements of such a body would contribute to a reduction
in the populism currently besetting the country. There will be less opportunity
and less need for the ruling government to resort to populist appeal since
broad deficit limits would have been laid out over the long term. In this way,
the citizenry need not worry about all those terrible prospects associated with
sustained government deficits.
Radzuan Halim, a
former merchant banker, teaches MBA and law students
No comments:
Post a Comment