Thursday, 23 January 2014

Avoiding The Kangkung Ridicule.

The government has suddenly realised that we are in a bad fiscal situation. This news is not very new, actually. Back in 2010, alarm has been raised that Malaysia could face bankruptcy by 2019 if we continue giving handouts and subsidies the way we have been doing for decades.

With the benefit of hindsight, perhaps it would be right to say that the government should have acted as soon as the warning was issued. Unfortunately with 13th general election, politics got in the way of leadership. We saw the government splurging their way into even more mess.

And now, several months after GE13, the government looks set to take some difficult decisions. The Goods and Services Tax (GST) will come into effect soon. And various subsidies will be reduced.

Let us get one thing clear. The government is not increasing prices. Instead, the government is reducing subsidies and removing price controls that have been keeping prices artificially low for many years. Prices should have actually gone up gradually over the years. But government intervention has kept it lower than what it should be, such that when the subsidies and controls are removed, the increase is drastic.

Many people are complaining about rising cost of living. Rightly so. Cost of living is indeed increasing. But some of the complaints are rather misdirected because they call for the government to continue subsidising and controlling prices. This is the wrong demand.

Further subsidies and price controls will only keep us living in a false world, one in which the actual cost of living is masked by interventions by politicians. And the reality is, the interventions are unsustainable anyway.

The fact is, subsidies, handouts and price controls should be removed. The market must be allowed to function efficiently with minimal distortionary interventions. Therefore the government’s decision to stop them, are, in principle, praiseworthy.

I say “in principle” because there is another factor that must be taken into consideration. That is the issue of prioritisation.

Malaysia’s fiscal management is in a sorry state. Every day we hear reports about how our money is wasted on luxury travels, projects that are not needed, corruption and leakages.

So much wastage have been identified in the Auditor General’s Report again and again every year. Similarly, so many people have been complaining about the favourable terms received by the independent power producers (IPP) and concessionaire operators such as those charging tolls on our roads.

If the government wants to save money, they should prioritise reducing the wastage and leakages. They should also prioritise removing subsidies given to big businesses and concessionaires, and recovering money given under scandalous situations. Actions that affect common people should come last on the list.

Unfortunately it is still not clear what is being done to prevent problems already identified by the Auditor General. There is no news about how the government plans to stop subsidising corporate entities and concessionaires. Nobody knows if the billions lost to dubious projects and contractors will ever be recovered.

What we do hear, though, is that the government has decided to prioritise reducing spending on the common men and women. Even worse, a new tax, the GST, will be introduced, asking the people to pay for the government’s failure. With such an upside down sense of priority, of course the public will become angry.

Let me stress again that I completely agree subsidies and handouts must be removed. They have distorted our economy for such a long time, and they are bad for our future economic growth.

But the way these steps are being implemented today makes it impossible to argue for subsidy removal. The government has prioritised the wrong first steps.

Let me add another step that can help save money. Our government spends billions every year in public procurement. IDEAS studied this topic in 2013, and we have released a policy paper on it recently. We calculated that simply by improving the processes of public procurement, we can save up to RM2.3 billion in public procurement alone.

If we add the amount of money spent by the secretive Public Private Partnership Unit (Unit Kerjasama Awam Swasta – UKAS) under the Prime Minister’s Department, the potential saving could be much more. But today, even people in the Treasury do not have control on how UKAS spends public money. UKAS sits under the Prime Minister and not much is known about how they evaluate contract proposals.

Nevertheless, I am glad that Dato’ Paul Low, Minister in Prime Minister’s Department, has managed to persuade various agencies to improve their processes and employ competitive tendering instead of direct negotiation. This is a brilliant first step.

Another step to save money is by reducing the size of the civil service. Why exactly do we need to have such a bloated civil service anyway? Now is a good time to start issuing redundancy notices to as many civil servants as possible. Perhaps they can start with underperforming officers. They should be sacked, not merely transferred to another unit.

An example of government leadership is being shown by another country that is also facing fiscal challenges after decades of government splurge – the United Kingdom. The UK government has committed to cutting administrative staff at their ministry of education by 40 percent, and another 23,000 administrative post in their health services. That is concrete action.

If we see concrete actions with the right priorities, the government will face less ridicule.

Source: by Wan Saiful Wan Jan. A version of this article was published in The Star as “Getting priorities right”, 21 January 2014. Wan Saiful Wan Jan is chief executive of the Institute for Democracy and Economic Affairs (IDEAS).

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