The Malaysian Insider

OCT 27 — Malaysia was created as a federation that guaranteed the rights of member states. However, political and financial power has been increasingly centralised at the federal level. In 1990, federal government revenue was 4.4 times the size of state government revenues. By 2007, that had expanded to 10.4 times.

In addition, federal allocations to states have been shifting from grants to loans. Federal grants to states decreased from 9 per cent of the operating budget in 1975 to 3.5 per cent in 1999. By 2008, the ratio had further declined to 2.9 per cent.

Between 1975 and 1999, outstanding loans from the Federal governments to the states increased to over RM9 billion from RM1.1 billion. We have not been able to obtain more recent data, but it is unlikely that the outstanding loans have fallen given the continuing declines in federal allocations as a percentage of the operating budget.

Currently, the federal Constitution guarantees states only capitation grants and grants to maintain state roads. The capitation amounts have become very small due to the effects of inflation. For example, Selangor received just RM67.7m in capitation grants in 2007, equivalent to about to about RM12.00 per capita per month. This pales in comparison to the RM16bn per year that Selangor residents pay in taxes to the federal government.

The federal government enjoys considerable discretion in its allocations to the state.  This results in odd motivations for the state governments. State politicians have more incentive to curry favour with the federal government than to actively develop their states. This is because the corporate or income tax revenue that results from increased economic activities flows to the federal government. It is then at the federal government’s discretion whether to ‘return’ some of that to the state. The economic benefit to the states is much lower in the form of assessments, quit rents and land conversion premiums.

The other issue is of effectiveness. Countries including China and Indonesia have reduced centralisation of financial and economic-decision making. Greater responsibility has been devolved to local governments in the belief that this increases accountability, economic efficiency and economic growth.

It is accepted that spheres such as foreign affairs and defence be best undertaken by the federal government. There can be debate on other areas, for example education. But most would agree that public transport is best handled at the local government level. Government officials actually living, working and travelling in the area would be best-placed to tailor solutions to local needs. However, in Malaysia, we have the odd situation of the Ministry of Finance running public transport in Penang! Rapid Penang is controlled by Syarikat Prasarana Negara Berhad, a wholly-owned government company under the Ministry of Finance Inc.

Some might consider the Penang example partisan. Fair enough. The same point can also be made in the Barisan-controlled states of Sabah and Sarawak. Is there any need for the prime minister’s department to control RM1 billion of allocations for these states? Are not their respective state governments capable of disbursing that sum more effectively? Is the civil servant in Putrajaya more knowledgeable about development needs in the Bario highlands than the state assemblyman on the ground?

Did you know, the prime minister’s department in 2009 controls RM1 billion of allocations for Sabah and Sarawak? This is in addition to RM5 billion for the development of the five national corridors, including one each in Sabah and Sarawak.

Economists, financial analysts, the mass media and the ordinary public have been fixated on the annual Budget deficit staying within 3-5 per cent of gross domestic product (GDP). Public discussion has focused on the Budget deficit being “manageable” or “prudent” at that level.

Distinguished economists and highly-qualified analysts also highlight this point.

We ignored two things. Firstly, while the deficit was steady at 3-5 percent of GDP, the actual level of government spending was soaring. Windfall gains from high commodity prices and generous Petronas dividends enlarged government coffers.

The government chose to spend rather than save this extra income.

Total government expenditure rose from RM113.5 billion in 2003 to RM196 billion in 2008 and is expected to be about RM220 billion in 2009.  RM220 billion is about double the level just six years ago in 2003. It is equivalent to an average 8 per cent per year increase in spending, well above our population growth rate.

The government is running deficits to fund consumption spending — much like the foolish young man racking up credit card debts and overdrafts to pay for his fancy clothes, luxury watches, flashy car and expensive overseas holidays.

The deficits are paid for by increasing government debt. Federal government debt alone is expected to reach RM414 billion in 2009. RM414 billion is 52 per cent higher than the RM272 billion in 2003 and more than double the RM206 billion level nine years ago in 2000. Put another way, our federal government owes more than half the size of our entire economy today.

Figure: Federal government debt alone is now over RM20,000 for each young Malaysian

Source: IMF Country Report No. 09/253. Malaysia 2009 Article 4 Consultation.

This is a burden that our youth will have to repay. It is equivalent to RM20,700 per person, based on about 20 million young people.

Note that the actual debt burden is actually higher. The number above excludes debt incurred by government-linked corporations (GLCs) such as PLUS Expressways and Tenaga Nasional. Other countries which have not embarked on extensive privatisation programmes incur road construction and electrification costs as part of their national budgets.  PLUS and Tenaga alone among the GLCs have RM33.3 billion of borrowings – equivalent to 8 per cent to the federal government debt. On top of that, there is borrowing by other government-linked entities such as Syarikat Perumahan Nasional Berhad (SPNB), Putrajaya Holdings Sdn Bhd …..

Even more concerning is that we incurred the increasing debt even while we reaped the windfall gains from high oil prices.

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