A tale of Malaysia….good indication of our country and how to improve from it?

Populism plague

Commentary Written by Radzuan Halim Thursday, 23 August 2012 00:00

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 fulfil.”

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.

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 PTPTN’s 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’s 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


Tags: , , , , , , ,

No comments yet.

Leave your comment