Saturday, October 18, 2008

If your pay were cut …. Your budget will have to change

Your pay has been cut by 40%. What do you do? First, cut back on non-urgent items. That new mobile phone will have to wait. Next, stretch your remaining ringgit further. Shop around for the best deal on groceries, rent a DVD instead of going to the cinema, have your coffee at the local coffee-shop instead of the fancy chain ….

Simple, basic economics that the Barisan Nasional government is denying. There is no point debating Budget 2009 as presented by the BN government. Its income forecast is hopelessly out-of-date. We need to stop pretending things will be fine and start making the hard decisions.

That Budget assumes oil at US$125/barrel. That Budget was also done at a time when crude palm oil (CPO) was closer to RM3,000/ton. Oil touched US$62 as I wrote this. CPO is at RM1,700 or so – down by nearly half. There will be far less income for Petronas and the government. Corporations will be earning less profit and paying less taxes; lots of people will also be earning less, paying less taxes and spending less.

Unfortunately, government options are limited. The normal response to a slowdown in external demand is to pump-prime, that is to run a Budget deficit, spending more locally to offset the smaller exports. But, Budget 2009, as presented and based on US$125 oil, is already in deficit to the tune of 3.6%. Government cannot spend any more. Quite the reverse. To maintain the deficit at 3.6%, it will have to cut back spending to match its smaller income.

Tough decisions must be made: Which items MUST the government spend on? What can wait? Perhaps we can do without the RM2.3bn helicopters for now. That money just goes straight to foreigners. Spend that RM2.3bn instead on local projects benefiting local businesses and employees. Yes, we should promote tourism. But RM18m to make 100 videos is probably not the most effective way.

Citizens must be informed and brought into the debate. Times will be tougher and money will be hard to come by. But times will be less tough if we can maximise the effectiveness of the limited resources we now have.

PS Next post will be the week of 26 Oct. I currently intend to post weekly, usually on Wed.

6 comments:

kamikaze said...

BN knows it is necessary to revise the budget but they won't do so simply because the idea was put up by the opposition

Anonymous said...

I could not understand fundamentally why the government proposing the budget based on a high-priced commodity. In fact the government should at anytime budget it at fair value.

doinkers said...

mr. Analyst... whats your opinion on the RM5 billon injection into valuecap?

Hasbullah Pit said...

Mr Chang,


Please join economic discussion at my blog
http://hasbullah.pit.my

and also at my friend blog.

http://pakdi.my

http://sosialiskanan.blogspot.com

huatsoon said...

Govt trying to reap benefits of low stock prices these days. We hear Finance Ministry is getting a RM5bn loan from EPF to fund Valuecap's stock purchases. Plenty of values around..Shouldn't the RM5bn be invested by EPF instead? Are contributors being shortchanged?

Anonymous said...

Chi Chang, I came across your article and I thought I would share it with Nuraina. She complimented you and I thought you should know ....


NURAINA A SAMAD said...
anon@10:20am (Chi Chang).

you're doing a good job of it and a far more qualified person to offer ideas.

I go to your blog very frequently!
and i agree, the issue you put forth is urgent...

thanks...

11:47 AM