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Wednesday, 7 July 2010

Responsible fiscal policy


A commentator asked:
…agree we can boost the economy if we spend but we need to spend wisely and with total transparency. So how do we ensure that the government will do just that when all the so-called spending to date is shrouded in suspicion and mired with controversy?
Unless we also work in tandem to weed out corruption, I'm afraid that "business will be as usual" with the cost of projects highly inflated to enrich certain people. The Auditor General's annual report is sufficiently proof of such blatant abuse of funds and yet no one to date has been censured and taken to task.
Actions speaks louder than words.


My answer is by demanding the government spends on things we need most. And judge them in those aspects. Allow me to continue discussing this topic.
The perceived wrongs done by the government and listed by many bloggers will surely be debated endlessly and passionately in blogosphere. I am sure of that. Critically examining what the government has spent on isn't the monopoly of anti BN bloggers alone. It's open season on UMNO and BN now. everyone knows that. Even within UMNO and BN there are pockets of conscientious bloggers. I count myself as one of those who will unreservedly condemn any government policies that injure the public.
But surely at the same time, we are drawn to a common cause of offering our thoughts on how to make good for our country. That ideal, I think isn't the monopoly of anyone. Certainly not one owned by BN or UMNO and equally not one owned by self righteous anti UMNO and BN people.
I have written the government ought to be honest on the state of our economy. The DAP's Tony Pua who is also an economist has urged the government to come clean. We speak about the same objective, despite coming from two different camps.
What we have done is, is responding to the possibility of this government having to spend money to pump prime the economy. If it has to spend, then these are our thoughts about that. Or in my blog here, my thoughts about how the government should be spending the money- our money.
Most important, the government must do it quickly. But do it properly ok. Don't do it under duress as when our military boys are needed to answer calls to serve by the UN, we used that as an excuse to award contracts to people who charge whatever price they like. If we are under duress, lets spend with cool heads.
Government spending falls into the category of its fiscal policy. As such, the more relevant issue is to assess what is a responsible government spending policy. Issues such as corruption, leakages, even downright fraud are important issues in themselves, worthy of  separate and in-depth analyses. I am sure we will not be short on that. Unfortunately we won't be able to go far into a meaningful discourse, if right from the beginning, we heckled at the idea of government spending.
A responsible government spending policy is not measured by some arbitrary accounting result called the deficit, but by the impact it has had on the real economy. This same sentiment has been echoed by others. Different fiscal policies will have different effects on output, employment and inflation. It is on the basis of these effects that fiscal policy should be judged.
Those of us, who have gone to great lengths to explain how such a modern money system works, have never advocated 'printing money' or deficit spending in unlimited amounts for anything and everything. I will argue that a responsible government policy is not one that waits for months and years for the economy to recover to see job growth, but acts immediately and directly to create jobs without delay.
I am gratified to hear a top banker, Nazir Razak asking the government to act fast. It was reported:
The government needs to execute its spending plan quickly to sustain economic activities, a move which can help to offset possible slowdown in the global economic recovery, according to a top banker.
We must insist that government  spending be intimately linked to actual production and employment. The absence of direct job creation programs indicates a government that has not taken its responsibility to the unemployed seriously. That is why I asked the government to publish data on unemployment. The blogger Hishamh has alerted to me that the DOS has published employment figures since March 2010.
I am not sure, our government has an unemployment insurance policy or a dole policy. unemployed men and women want jobs, not the dole. Paying a pittance to the unemployed (who are not producing) is not the same thing as paying a living wage to those producing something of value. It's a dignified way of earning income.
My thinking is this:- If government deficit spending fills the coffers of the non-government sector with net financial assets, then a responsible government does so for all private sub-sectors in need, and links its deficit spending to actual employment and production. So while the government could not sit idly by and watch the global financial system collapse, a responsible policy would have immediately provided relief for households, small business owners, and states, all of whom have probably received inadequate assistance in comparison with the financial sector. It has always been that way with our government. Permission to spend means giving money to distressed financial agents, giving money to companies to pay off existing debts etc.
Therefore I am sure, those anti UMNO/BN bloggers and I agree on this point:-
That, while it is true that government deficits create non-government surpluses, the real question we like to ask and answers given is, not how large the deficit is, but who benefits from the deficit and whose coffers does it fill? Right?
If the deficit went to bailing out banks, then we know exactly who accumulated net financial assets. If we knew that the deficit saved state programs and prevented school shut downs, teacher layoffs and civil servant furloughs, then we would know that it is they who 'received' the deficit. If the deficit went towards massive infrastructure investment and direct job creation, we would know exactly which individuals and which firms got the funds and how many jobs and projects were created.
So I come back to the basic question as how should we treat deficit spending? We should not be angry with the deficit itself, but we are right to ask the question which sector is earning and accumulating net financial assets as a result of the government's deficit spending. And if our unemployment is high, personal bankruptcies and foreclosures unacceptably high, broken state budgets and disappearing public programs, when we see a lot money going to promoters of Swiss challenge biddings, going to masters of direct negotiations, I think the answer is quite clear.
Our own 'Wall Street' players comprising of fund managers, bankers, big construction companies, big gaming companies- know all too well that the government cannot go bankrupt, which is why they never objects when the government socializes its losses. But once profits are to be socialised, they start making a lot of noises.
The average person, however, does not know that deficits are forever sustainable and that the government is not obligated to raise anyone's taxes to 'pay' for them. Whoever suggested that the only way of paying our deficit is by raising taxes should be shot. Because we thought that if there are deficits, then we must inevitably pay taxes we refrain from demanding the things we want most.
What do we want?
what the taxpayer genuinely wants and needs: more jobs, more infrastructure, better education, higher quality public services, and a standard of living that only a resource-rich nation as our country should and can provide. It is time to stop buying into the deficit phobia and demand that the government deficit spend … responsibly. By spending on the things we just mentioned.

18 comments:

emergence,  7 July 2010 at 16:28  

You are indeed a good Malaysian. You dont care who they are. Good means good. Bad means tembak.
You are right. The audit repart should be sufficient evidence of either wrong doing, negligence or corruption , if there is any.
But, surprisingly, when Govn agency buy a spanner of RM10 or so at RM2,000 and yet nothing happen.
If that is the case, why have the audit Department.Why not disband.

Anonymous,  7 July 2010 at 17:21  

Dato,

Another Krugman in the making?

Yr call for deficit spending for M'sia echoes Krugman's critical objection for the apparent tighter fiscal controls that most developed countries r considering now!

The Krugman camp is right at this juncture.

But M'sia is a very different kind of fish!

Just as the 10MP been layout, all the big-money jobs r already been secretly awarded. So after all the cuts, here & there, how much of these spending will actually filter down to benefit the M'sian economy? Or will it be siphon off to oversea for personal investment to cater for the next 7 generations?

Control & monitor - INDEED!

By who & with what, that the ultimate question.

Definitely we CANNOT depend on the current bunch of blood-suckers, who think only about their OWN pocket, while shouting Alif Ba Ta here & there!

Changing the govt now is like bringing distant bucket of water to an ongoing inferno. Time is not on anyone's side!

So how?

donplaypuks® 7 July 2010 at 19:04  

Dato

You are pretty much preaching to the converted.

We all agree and know what has to be done. People like me are not, PER SE, against affirmative action, Art 153, subsidies and Govt spending its way as a pre-emptive strike against possible or actual recession.

The $64,000 question must surely be:

Is PM Najib and this UMNO/BN Govt capable of ensuring fair play and honesty in carrying out their duties to the Rakyat and nation?

Therein hangs a HUGE question mark!

dpp
we are all of 1 race, the Human Race

Anonymous,  7 July 2010 at 19:30  

"You are pretty much preaching to the converted." donplaypuks

If I am may add " and to the stone deaf, dumb and bodoh sombong in UMNO leadership".

The fact is the government knows what ought to be done but DOES NOT HAVE THE COURAGE and WILL TO DO IT!!!!

Anonymous,  7 July 2010 at 19:57  

Agro Ministry only good at feasting MPs and Minister with free Durians & mutton curry...

Hey Mister..thats my money ur using.And the Ministers got enuff money to buy their own durians n mutton.

Belanja tak sedar diri..lagi bising tak ada duit for scholarship.Everything u label as subsidy..health,education included.

Makan durian free tu apa dia?Is it a sincere gift from Rakyat cos ur doing fantastic job?

Haram beb.

Anonymous,  7 July 2010 at 20:18  

Dato..pls go visit any of the Govt offices in PutraJaya..the space utilisation is terrible>>I wish someone can give us some actual data of m2/employee etc..
Ministers have huge rooms that needs an LRT system to navigate.

Seriously..it must cost a bomb to maintain the buildings i.e airconds,lights,cleaning.

Think out of the box please..redefine the needs and free up SPACE.Then immediate savings on O&M..

Secondly..can rent out the surplus space.

Its really a crying shame that our leaders can't see the "wasted money" staring them daily..and think of ways to save.

Its not good to say bankrupt and then continue buang duit.Belajar lah jimat cermat sikit.

Tak malu ke asyik makan durian free?

schenker78 7 July 2010 at 20:35  

dato' sak,

sorry to say....Mahathir and all BN ministers are like Angan2 mat jenin.....they always dream and make slogan...when comes to action always fail because mahathir and BN gang busy counting money...

Just talk about Ng Yen yen, tourism minister....they built a malaysian pavilion for World Expo in China as all other countries did there...there are sayings that even building this involved hanky panky, masuk poket and sub standard theme in promoting Malaysia....

Malaysian Expo receiving less than half the target visitors....Azlina Othman prev minister...their plan for a Complex in UK for few hundred million....that is canceled after no approval for local council there....

whats wrong with this cabinet ministers....all are crooks...

Idris Jala maybe naive politically, but at least he is not a crook...He should have stayed in Shell, never should hv joined MAS.....

Anonymous,  7 July 2010 at 20:42  

Govt shld spend on value add investments.But at same time should address the OPEX..that have increased at beyond "GDP growth" rates.Its not only cos of subsidies or interest on loans.

Its just cos we have accepted LUXURY as a norm.

A lot of govt servants travel on first class now.Just 12 years back State Pengarah travels economy.And nowadays,Govt functions are all professionally managed by expensive event managers and held in 5 Star Hotels.Kursus also ada opening big DO and closing even bigger DO.

And,very often I have been to presentations where everyone ada laptops and ada 3 projectors in the room EXCLUDING the big BARCO desolately hanging from the ceiling.

We spend,spend,spend..in the name of productivity improvements and creating the brand for govt.

But we forget to look after the staff...train them,give them job satisfaction..and reward them.

Our leaders too obsessed with living it up i.e SPENDING on the curtains whilst forgetting the rotten floorboards.

Wake me up in 2013.

Hazrul D. Nizam 7 July 2010 at 20:51  

Salam Dato',

How about giving cash directly to the people? Since it's our money, let us decide what to spend the money on. Most people in the low and lower-middle income bracket would spend all the money they have so it will definitely stimulate demand. Harvard economist, Edward Glasaer has written articles on this. I think the Australian government did this to resounding success.

Note: i am no economist, so this could be a bad idea :).

Anonymous,  7 July 2010 at 21:30  

Dear Dato
Bankrupt in 9 Years....Jala Said
But plans to spend the peoples money was already Laid
Kapal tak siap but already Paid
Macam ini Eco-No-Money..WE SURELY DEAD

n wat about de 256 armoured vehicles @RM31.5M each..wheres the threat..or want to use them take back Batu Putih Limbang & Tj Pagar...

Anonymous,  7 July 2010 at 22:06  

Dato,

Talking about spending wisely... heard that the "kapal selam yang tak berapa nak menyelam" is experiencing a lot of problems and it's warranty is expired alledi, so how? There goes our billion of Ringgit! Oh dear.

umar,  7 July 2010 at 23:05  

Tuan,
It is elementary economics that if you spend more than you earn, you are indeed heading to insolvency and ultimately bankrupcy.
How come you are advocating that governments / countries don't go bankrupt ? The recent Greece case would be a constant reminder to all. Of course, we have IMF and World Bank to bailout any sovereign states that may fall into bankcrupcy.
Look flip our daily newspapers. There you would notice hundreds of debtors list for bankrupcy. Who are they ? Ordinary people like us who could not pay up their debts.Simple reason being having not enough surplus cash at the end of the month.They accumulate more from month to month.
Governments borrow by issuing bonds which are rated. Once they default, the ratings drop.They can also print more money. Hence, they don't fall into bankrupcy. No wonder bankrupt nations do carry on.Technically, they are broke but you and me cannot print money while the governments have the sole authority.
You despise Idris Jala for saying the truth. Once our country becomes net importer of crude oil,our economics wouldn't be the same. His comment is based on that assumption. You are totally out of mind to say that deficit spending generates value..!Goodwill is not an asset.

Anonymous,  8 July 2010 at 00:45  

old habits die hard lah dato.The present gov is surely done for if it becomes responsible in terms of spending.The plunder is just too tempting and difficult to resist.

Anonymous,  8 July 2010 at 07:57  

The issue is not whether govt should spend in a recession or looming one but really WHO to trust in spending.

Ideally we should trust a system of govt to check improper spending - a proper check and balance. Firstly, we know the system we have is crap and basically our politicians get away with murder - human and fiscal.

But even with a proper system, govt spending will still be inefficient - its why govt in business fails eventually.

Given that we know govt is inevitably inefficient, it hugely critical important we put people who are not self-serving particularly materially in power. Look at all UMNO leaders - they all are rich beyond their pay check - its just impossible for them to be so if the party have a semblance of checks and balance on corruption.

It is impossible for UMNO to check on corruption. It simply impossible no matter who is in charge. UMNO was never designed to check corruption because it was never envisioned it could be so prevalent. Tunku knew it could be so but that is another story.

The UMNO/BN system is simply not salvageable. Those who are so-called anti-UMNO at the core understand it whatever else they may oppose UMNO for.

While its true that PR is not beyond corruption, a choice have to be made between one that is a step forward, PR or a unsalvageable system - UMNO/BN. Its simply logical to choose PR if you believe waste and corruption is the biggest problem facing this country. Not sentiment.

hishamh 8 July 2010 at 10:38  

@Hazrul,

Actually quite a few countries experimented with cash handouts during the depths of the recesion last year, including Singapore, Taiwan and Japan. Then there's various forms of similar consumption-based policies, including tax cuts, tax credits and the U.S. "cash for clunkers" program.

But in theory, this form of policy will only be effective if you believe that the downturn is cyclical and temporary. Providing fiscal support in this way boosts demand during the period when the economy is down, and dissipates when the economy recovers.

But what we're seeing here is a structural change in the global economy, with the US no longer acting as "consumer of last resort" for world goods. That means that consumption based policies can only provide temporary support, after which the economy will turn down again. The US experience in early 2008 is a good example of the relative failure of tax cuts under this scenario.

What's needed therefore, if further fiscal support is needed at all for Malaysia, is spending that addresses this structural issue - we have to prepare for a permanent loss in external demand (e.g. the stagnation in electronics exports over the last few years), by either pursuing new markets, or by boosting domestic demand capacity.

On the other hand, based on the government's actions last year, I won't be surprised if there is some sleight of hand involved. The fiscal "stimulus" was no stimulus at all, when you factor in the cuts in operational expenditure.

The level of government spending last year almost exactly matched what was originally budgeted in 2009. Which means that whatever stimulus there was largely relied on the "automatic stabilisers" (shortfall in revenue compared to expenditure), and the difference in multiplier effects between public consumption and public investment.

hishamh 8 July 2010 at 10:57  

@umar,

I don't think Dato Sak here is arguing for permanent, irresponsible style fiscal spending a'la Greece or Zimbabwe. For a number of reasons, the government has plenty of room for fiscal spending if and when necessary:

1. Our government debt is denominated in Ringgit, which means money printing is feasible (however undesirable).
2. Our outstanding debt relative to income is still at a comfortable level (<55% of GDP), compared to say Greece (>100%), UK (>80%), and Japan (>200%). In fact the debt/GDP ratio has dropped marginally this year.
3. As long as income growth outstrips debt growth, then the capacity to pay will also increase (via tax receipts).
4. Demand for MGS continues to outstrip supply - indicative yields on long-dated MGS (>5 years) have dropped this whole year. Rates at the short end have risen, but not by very much.

The key to sustainability of debt-financed, private sector neutral spending will depend on two factors - our savings rate, and fiscal spending that is directed towards addressing long term structural issues that we are facing (see my comment to Hazrul above).

Anonymous,  8 July 2010 at 13:11  

hishamh,

get money out into the system..create demand..create jobs..invest in new facilities..create jobs..more money in the market..more demand...more facilities...more jobs..more demand..

never ending utopia...

2019 bankruptcy is a myth

hishamh 8 July 2010 at 14:33  

This isn't a defense of deficits per se, but rather an attack on fiscal austerity. It's still a must read:

http://bilbo.economicoutlook.net/blog/?p=10547

The writer is a "Research Professor in Economics and Director of the Centre of Full Employment and Equity (CofFEE), at the University of Newcastle, NSW Australia".

I find him rather unorthodox, but his thoughts are highly readable (if long-winded).

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