Despite the country’s debt pile, the government chose to boost spending in priority sectors. (NSTP Archive)

KUDOS to the government for tabling a heart-warming budget. Nice one, too, for managing our expectations.

Having been only six months in power, and with a RM1 trillion debt overhang, it must have been a daunting task for the Pakatan Harapan government to deliver a budget that has a cheerier ring to it. Finance Minister Lim Guan Eng’s two-and-a-half-hour speech was spattered with giveaways and tax breaks. It is a far cry from an election-year budget.

PH’s largesse does not spring from a booming economy. The economy is only expected to grow moderately at around 4.9 per cent. This comes on the back of savings from above-board procurement and cancellation of big-ticket infrastructure projects. The government could have pared down more of its debt pile with those savings. Instead, it chose to boost spending in priority sectors — health, education, rural development and digital economy.

On citizen well-being, the budget gives a fillip to the bottom 40 per cent of households with a monthly income of less than RM3,900. And rightly so. Income inequality is on the rise and it is bad for the country. The less well-off spend little and that hurts growth.

The vulnerable group also does not have the requisite talent to command better wages. Inequality breeds more inequality as the less well-off are unable to avail themselves of the economic opportunities as the rich are able to. At 0.399, our Gini coefficient, a measure of inequality, skirts dangerously towards the World Bank mark of 4.0, beyond which a country is considered severely unequal.

Walter Scheidel, a Stanford historian, in his 2017 book, The Great Levelle, argues rather apocalyptically that only violence and catastrophes can eliminate inequality. In contrast to this pseudo-marxist thinking, “non-violent” economists argue that education and an entrepreneurial ecosystem can boost income, especially of the poor. Obviously, having greater faith in its fiscal policies, the government hews to the latter approach.

The Budget has some institutional reform initiatives to make institutions clean and people-centric. The institutions of fiscal management — fiscal law, debt management office, zero-based budgeting, or ZBB, and accrual accounting — are among them. We shall discuss two of them here.

ZBB advocates budgeting from scratch. Each proposed expenditure package that is to become part of the budget will have to demonstrate its potential to deliver better outcomes. In this, ZBB extends the principles of performance-based budgeting that has been in place since the 1970s.

Previous attempts at allocating resources based on performance have had limited success. The overweening focus on the expenditure side of the Budget, given the urgency to table the budget to Parliament on time, is one reason for the apparent disregard of outcomes. The lack of performance data and the inability to forge a hard nexus between a particular expenditure and an outcome are other reasons that have stymied performance budgeting. It is justifiable that every additional expenditure package passes the test of enhancing public services. However, ZBB’s implementation should heed the factors that have caused previous budgeting experiments to fail.

The second budget reform is accrual accounting. After a few false starts since 2014, accrual accounting will be a fiat accompli by 2021. In recording revenues as they are earned, and not when cash streams in, and recording expenditures when incurred and not when cash is paid out, accrual accounting will give a true picture of the fiscal position of the government.

Accrual accounting will also enable the government to think in terms of liabilities and not just debts. For example, non-debt liabilities, such as pension obligations, and contingent liabilities through government guarantees, are a big strain on the country’s long-term fiscal health.

Besides cash, the government has a huge pile of physical assets — land and buildings being the primary ones. Accrual accounting will help the government manage these assets better.

The IMF finds that governments with accrual accounts have lower debts, smaller deficits and better bond yields than those with opaque systems. As it allows its people to dig deeper into its ledgers, the government will invariably face greater pressure to pare down the debt and deficit.

Therefore, it is important to ensure that all stakeholders are schooled in accrual accounting. Otherwise, we may end up with Parliament and the public still debating in cash terms. New Zealand’s public accrual accounts are one of the world’s best. Perhaps, we can learn from it.

The Budget has its blindspots too. It is short on efforts to counter the ever-burgeoning state pension bill, inefficient use of public assets, and declining profitability of government-linked companies.

Although the Budget deficit is expected to narrow in the future, pressure will pile on the government to loosen its purse-strings should the world economy go into a recession. For now, the Budget should merit our favour.

john@ukm.edu.my

The writer, a former public servant, is a principal fellow at the Graduate School of Business, Universiti Kebangsaan Malaysia

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