TigerTalk  |  JANUARY 22, 2016 8:24AM

Govt’s turn to cut expenses

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tiger-talk-logo-redyes-v2In 2015, we Malaysians saved the day by delivering RM17 billion in extra revenue from GST as oil prices collapsed. Now it’s time for the government to deliver by cutting the exorbitantly high supplies and services expenditure as oil prices fall further.

There are two sides to any set of accounts of a self-sustaining operation (hopefully), like the government. One is revenue and the other is expenditure. Essentially revenue must be sufficient to cover the expenditure as well as any debt service charges and repayments.

If there is a shortfall of revenue for that, then there are only three things that can be done — increase revenue, cut expenditure or borrow. A combination of all is also possible. But as we all know when we look at other countries, borrowing is a dangerous route and has to be done with caution.

In the current environment where uncertainty is mounting day by day and risk gets higher and higher as oil prices fall, let’s assume the borrowing option is closed to the government – it isn’t really, as there is still capacity for borrowing but it will affect perception and credit ratings.

The big thing that will cause government revenues to shrink is of course the drop in oil prices. Budget 2016 is based on an average oil price of US$48 a barrel, but the oil price has plunged nearly 40% further to below the US$30 per barrel price level, forcing the government to “recalibrate” the budget next week to accommodate this.

How we saved Malaysia

Smart move this – not recalibrating, but using that term instead of saying cutting the budget because that’s what the government will have to do this time around. “Recalibrating” does not convey the same meaning as “cutting” – it makes it sound so much more sophisticated and sexier, probably invented by one of the government’s PR advisers.

Remember, the introduction of the goods and services tax (GST) in April last year saved the government last year when oil prices fell sharply from over US$100 a barrel to below half that. Just how much did GST help? A helluva lot! Take a look at the table below.

GST Revenue (RM million)_220116

Before the implementation of GST, sales and service tax (SST) collection amounted to RM17.2 billion. But when GST was implemented in April 2015, GST and SST collection more than doubled to RM34.7 billion, giving the government an increase in revenue here of a massive RM17.4 billion, helping to offset the huge fall in oil revenues (see table below).

Petroleum Revenue (RM million)_220116

In 2015, as a result of the steep fall in oil prices, oil revenue plummeted RM21.1 billion. Without the RM17.4 billion in GST and SST increase, the government would have been in serious trouble. But that’s not all – subsidies by the government fell a massive RM13.5 billion in 2015, mainly because of the oil price fall and the new mechanism for setting oil prices aimed at cutting subsidies.

That means the GST and the subsidy cut gave the government a surplus of RM(17.4 + 13.5), or RM30.9 billion, more than offsetting the RM21.1 billion drop in petroleum revenue by RM9.8 billion. The net impact was positive to the government! We Malaysians collectively saved the hide of the government, stumping out more in taxes and forgoing billions in subsidies. Well done! We did it with our money.

Time for the government to save Malaysia

But that’s not enough for this year – 2016. If you look at petroleum revenue in the table above, it’s going to drop by a further RM10.2 billion to RM26.2 billion this year – but that’s at the old price of US$48 a barrel. At US$30 a barrel, analysts estimate the shortfall could be as high as a further RM5 billion, which is the cut that has to be made from the budget.

Now really, that’s not a whole lot for a budget size of RM226 billion – less than 2.5%. And even that may not be necessary considering that subsidies are likely to fall further with the fall in oil prices.

Look at this table below.

Selected Expenditure (RM million)_220116

For 2016, forecasts for subsidies are about unchanged at around RM26 billion but this has to be revised for an oil price about 40% lower at below US$30 a barrel from US$48 a barrel. That would mean a further reduction in subsidies. These mean that a “recalibration” to account for falling revenues from oil may be unnecessary because of lower subsidy payments.

But if a cut in the budget is still necessary, the place to look for is “supplies and services” in the table. It has become the next largest expenditure item after emoluments (salaries) in the government budget and it is where payments are made for all kinds of government supplies and procurement.

We know from successive auditor-general reports that there is a huge amount of wastage here because of corruption and patronage as connected people get huge margins from government contracts and there is profit even after six layers of subcontracting.

If subsidies can be cut 34% in 2015, surely the government can do its part in terms of procurements and cut the massive profit margins of suppliers. For a start, 30% would not be unreasonable. If they can cut 30% on the 2015 figure of RM36.6 billion, that will be RM11 billion saved and, presto, the budget recalibration/cut will no longer be a problem.

The public will be glad that the government is walking the talk too and there will be no need to cut scholarships or put a floor on oil prices or work two jobs to face hard times as some government minister suggested, because good times will be back again.

That is, if the government does its part and cut its spending too. But will it?


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