comment Prime Minister Najib Abdul Razak's decision to introduce the Goods and Services Tax (GST) suggests that he is unable to get his priorities right to act in the rakyat's best interests. Najib's decision to introduce the GST is audacious and premature.

NONE He should first demonstrate to the rakyat that he has the ability to change BN by reigning in fiscal deficits which can be done by plugging gaping leakages and increasing efficiency in public expenditure.

Only after putting his house in order should he consider new taxes after proper consultation with the rakyat.

Since independence, subsequent Alliance and Barisan Nasional (BN) governments have the dubious honour of running continuous fiscal deficits except in 1957, 1960 and from 1993 - 1997.

In other words, Alliance/BN has failed to keep expenditure and revenues balanced for 48 of the 53 years that it has been in power (Lee Soo Ann, 1974; Azali Mohammad, 2000; Narayanan 2004; MoF, various years).

If it were not for Malaysia's windfall gains from fossil fuels and high domestic savings, Malaysia would have joined the ranks of highly indebted nations.

High growth rates

An analysis of BN's fiscal management suggests the following:

  • BN has no fiscal discipline

There are two conventional approaches to fiscal policy: a balanced budget approach - where the government spends only what it earns or a counter-cyclical approach - where the government accumulates surpluses during high growth periods be used as deficit spending during recessionary periods to smoothen the economic cycle. BN has done neither except demonstrate a total lack of fiscal discipline.

NONE Malaysia has recorded high growth rates every year since independence except for 1985, 1998 and 2009. Therefore, with average annual growth rates of approximately 6.5 percent since 1957 (9MP), one would expect Malaysia to record a fiscal surplus over these period. However, the converse is the case. Malaysia's fiscal deficit hit a twenty seven year high in 2009 when it reached 7.4 percent of GDP.

Although federal government revenues have increased from RM235 million in 1957 to a high of RM162 billion in 2009 - an average annual increase of approximately three percent.

Ironically this spectacular rise in revenue was exceeded by an even more spectacular rise in expenditure - reaching a colossal RM220 billion in 2009 even though Malaysia's population growth had tapered down from around 3 percent in the 1960s to 1.7 percent in 2008 (World Development Indicators).

The main reason for Malaysia's continuing deficit which began to balloon after the 1970s is attributed to "financing" the New Economic Policy and the burgeoning patronage system the BN practises. In the 1970s, the government got involved in a big way in the economy through state owned enterprises (SOEs) to promote bumiputera interests. The SOEs were a colossal failure.

budget belanjawan negara mahathir Then, in the 1980s, Mahathir's venture into heavy industries caused a fiscal crisis but the government took austerity measures which resulted in some fiscal discipline and balanced budgets from 1993-1997. However, since the financial crisis of 1997/98, the BN government has been pump priming the Malaysian economy to keep it afloat (refer figure 1 and 2).

What is most worrying is that consecutive BN administrations have set fiscal deficit targets only to ignore it, suggesting that the BN is incapable of fiscal discipline.

  • Highly inefficient and corrupt fiscal management

There are two types of public expenditure - operating expenditure which relates to maintaining existing goods and services (emoluments, subsidies, supplies and services, grants to state governments and statutory bodies, pensions and gratuities, debt service charges, others) while developmental expenditure relates to creating new goods and services that is supposed to enhances the productive capacity of the economy (new infrastructure and services).

The BN government's operating expenditure has consistently come close to wiping out total revenue, despite massive privatisation exercises, which are supposed to ‘reduce' the size of the public sector and public expenditure, leaving very little for development - forcing the government to borrow. More worrying is that while operating expenditure has unacceptably kept pace with increased revenues, development expenditure has not.

Burgeoning public sector

A key reason for the ballooning public expenditure is the burgeoning public sector. Umno, in its attempts to control Malaysia - economically, socially and politically - has used the public sector.

Malaysia boasts the largest public sector in Southeast Asia. Yet, it still faces shortages in critical areas (e.g. doctors, nurses, mathematics and science teachers, etc) suggesting serious misallocation of resources.

Najib, in setting up Pemandu has realised that the public sector is incapable of reforms. Umno's reliance on civil servants as a vote bank has become a double edged sword - as the ‘little Napoleons' behind the public sector has Umno at its mercy.

Because of this, Najib's attempts to reform the public sector are marginal at best and ineffective at worst. There must be a serious reduction in the number of ministries, agencies, statutory bodies and ultimately civil servants in this country. Wages must be linked to productivity as the public sector is trapped in a low-wage, low productivity trap with high income inequality between the lowest and highest ranks.

NONE Another important reason for the ballooning public expenditure is the collusive behaviour among public sector, the BN and private sector - best illustrated by the ongoing Port Klang Free Trade Zone (PKFZ) scandal. All forms of government procurement - tender, open tender, quotations, and direct purchase - are prone to abuse due to this collusive behaviour.

Kickbacks, rigging bids, the use of ‘shell' or ‘front' companies, excess payments, misrepresentation of facts - all seem to be the norm rather than the exception in the government procurement system. A survey of the auditor general's annual report easily confirms this.

The Global Corruption Report 2009 notes that "the revolving door" between the BN, the public and private sector is a key problem leading to corruption.

Pemudah, the government's special task force to facilitate business, citing a World Bank study, estimates that corruption could cost Malaysia approximately RM10 billion a year - almost one percent or two percent of GDP.

NONE Barry Wain, in his book, ‘Malaysian Maverick: Mahathir in Turbulent Times' reported that Mahathir squandered RM100 billion or more through corruption and mismanagement.

The evidence suggests that the BN cannot be trusted with the nation's finances. The reality that increasing revenues have dissipated through an inefficient public sector and corruption, suggests that any introduction of new taxes would also be dissipated and hence, will not solve Malaysia's fiscal problems.

Most importantly, a government that is immune to fiscal discipline will likely continue to raise taxes to meet its unrestrained spending habits.

Najib must therefore focus on putting his house in order before considering implementing the GST or any other new taxes. In discussing fiscal reforms, Najib must reach out to the opposition.

After all it represents half the voting population in Malaysia. Malaysians in turn should not allow the BN administration to implement any new tax until it has demonstrated fiscal restraint, plug leakages and address inefficiencies in the public sector.