It’s a business as usual budget

There's no major shift to lead to a stronger economy and the redress of income and social disparities.

The 2015 Budget tabled yesterday represents a business-as-usual approach with no major strategic shifts that will lead to strong industrial performance, a more sustainable economy, and the redress of disparities in incomes and social positions.

Instead the government has embraced regressive taxation, cut subsidies and increased handouts without tackling sustainable wage increases, and adopted some questionable development economics.

Najib spoke of countries such as South Korea starting with farming then moving to innovation and expertise-driven development. Unfortunately for Malaysian workers, he is failing to follow South Korea’s example. He also seems to think that our manufacturing sector matured before we shifted into services.

In fact, the growth of our manufacturing was stunted by dependence on foreign-direct investment (FDI), and the sector failed to promote widespread innovation, technology development and high wages.

Najib is focusing on gearing our services sector for export with a Services Sector Blueprint. However he has failed to realise that it was the export of manufactured goods that really drove South Korea’s wealth and standard of living.

Services are harder to export than goods because it is far harder to multiply the service capacity of an individual with technology than it is to multiply the production capacity of manufacturing with technology. You will be limited by the quality of human resources, and the problems in our education system and graduate employability have been all too apparent. We will have a tougher time generating value-added with services, and therefore struggle to produce strong wage increases that can cope with the rising cost of living.

Focusing on exporting benefits the economy because export firms invest more in research and development of technology, pursue productivity, and can generate higher wages. Exporting manufactured goods ends up stimulating the growth of services to complement manufacturing. In fact, selling competitive goods abroad allows services to piggyback on those strengths and tap into export markets.

Room to grow

At 55% of GDP in 2013, the services sector is already the largest sector in the Malaysian economy, more than double the size of manufacturing (24.5%). There is room to grow but it requires tougher policies than the government has been willing to adopt.

Budget 2015 is littered with more of the usual entry-level incentive schemes that often lead to questionable spending and little performance discipline on recipients.

Without a strong industrial policy to drive the economy forward we may just barely achieve Najib’s modest aim of entering the lowest end of the World Bank’s “high income” definition. However, most Malaysian families will not enjoy strong wage increases from the existing policies. For that to happen, we need to foster stronger export industries with better value-added prospects.

Families will also be burdened by the government’s tax policy.

Cutting the income tax rate for high earners whilst imposing GST on all income classes continues the regressive direction of BN’s fiscal policies. It will please economic elites because the lower and middle class will bear more of the tax burden.

In contrast, the Pakatan Rakyat budget called for progressive taxation measures such as a Capital Gains Tax and Inheritance Tax to replace GST. Regressive taxation in a context of weak wage improvements will only drag out the problems of inequality Malaysia faces.

The Barisan Nasional may be happy to keep lower income and rural groups in a situation of economic dependency on cash handouts, but this is neither just nor sustainable.

Cutting subsidies whilst increasing the amount and frequency of BR1M payments to three times a year will not provide much relief to very poor families that will have to tighten their belts in the months between BR1M payouts.

Budget 2015 continues the trend of uneven regional development. It offers infrastructure spending on toll highways and mass rail in Klang Valley and other parts of Peninsular Malaysia, but the large, mostly rural regions of Sabah and Sarawak, bigger than the Peninsula, only get a repeat mention of the Pan-Borneo Highway. The cost of the highway appears to have risen from RM22 billion to RM27 billion in Najib’s speech today. What accounts for the extra RM5 billion?

Missed opportunities

While projects such as the Klang Valley toll highways and the Pan-Borneo Highway have been recycled from previous years, the environment and green technology were entirely absent from the budget.

Public transport is one of the great missed opportunities in Budget 2015. With its massive support for toll highways the government is still more committed to private transport than public transport. Despite some measures for inter-city bus services, improvements in crucial inner-city bus linkages were bypassed. MRTs and LRTs need extensive bus networks to really help commuters shift from private vehicles to public transport.

A strong holistic public transport infrastructure would relieve many families from taking on the burden of servicing vehicle loans in order to get to work.

While measures to improve the lot of Sabah and Sarawak are long overdue, the timing of these initiatives appear cynical in light of the Sarawak state elections next year. Despite the massive flooding that occurred in Penampang this week, there were no measures to improve drainage in the region.

In the month in which Germany made all university education free, the BN can only offer a payment discount on PTPTN.

We must be fair and say that it is not all bad news in the budget.

The proposal to supply water and electricity to rural Malaysia is long overdue and welcome. We have concerns about whether this will be done cost effectively and not exclude remote highland communities.

We also hope that the positive sounding measures for women in the workforce will take off.

However, both rural communities and women really need a bold industrial policy that will boost wages. If not, then come 2020, they and the majority of workers may still be struggling to make ends meet.