Budget 2019 – Let’s talk about that RON95 subsidy scheme for a second.

What’s not to like about the RON95 subsidy right? I drive a 1,500cc car, and will be eligible for the subsidy.

Plot twist: I live in a T20 household, and technically, I should not be benefitting from that (although, I will). Now that is the problem.

Let’s relook what Finance Minister actually said last Friday:

The Pakatan Harapan Manifesto has promised to provide targeted fuel subsidy to individual car owners with engine capacity of 1,300cc or less and motorcycle owners of 125cc or less. However, the Government has decided to improve on our promise by expanding the scheme to vehicle owners of 1,500cc and below. Owners with multiple cars will not receive this benefit. The Government has decided that each car and motorcycle owner will enjoy up to 100 litres and 40 litres of RON95 petrol per month with a subsidy of at least RM0.30 per litre, depending on the market price of petrol. As many as 4 million car owners and 2.6 million motorcycle owners will benefit from this targeted subsidy which will cost the Government the sum of RM2 billion for 2019. Non- subsidised vehicles will have to pay pump prices for fuel determined on a weekly basis based on the Automatic Price Mechanism (APM). This scheme is expected to commence in the second quarter of next year. This new scheme will also ensure that leakages arising from fuel price arbitrage and cross-border smuggling will be stopped.

In my opinion, this whole idea of subsidizing RON95 is outdated. Let me give you another example:

Let’s say Mr.X makes RM7,000 per month, drives a BMW on daily basis to get himself to work.

His wife, Ms.J also works and earns RM6,000 per month, and uses the MRT to get herself to work. This means both Mr.X and Mr.J are in the Top-20 income group (Department of Statistics Malaysia’s definition of T20 is a  household income of RM13k per month).

Plot twist: Ms. J actually owns a MyVi. This means she is eligible for the RON95 subsidy scheme. This means from this point, Mr. X will be using his wife’s car to go to work on daily basis.

See the problem now?

To make this program successful, it will require few things. First, it will require the government to establish a new branch, where both Lembaga Hasil Dalam Negeri (LHDN), and Jabatan Pengangkutan Jalan (JPJ) to share information with each other.

Second, if the Government is to issue some kind of a fleet card, it will too costly to monitor. This means every single petrol station in the country needs to have someone (the petrol attendant has to go to each car and check whether that is you and your car are in place), or a technology capability to track each transaction.

Third, it is prone to abuse, and possibly encourage smuggling, since our fuel price is so damn cheap.

Fourth, it might affect people’s decision on selecting car models. Since this is the case, I bet majority of Malaysians now will be choosing car models below 1,500cc to benefit the subsidy

A few years ago, Bank Negara Malaysia came out with a research that fuel subsidy benefits the upper-middle and high-income group. Put it this way, as you get richer, you will buy yourself a bigger car with a bigger fuel tank, and you will benefit more from the subsidy.

Screen Shot 2018-11-04 at 11.21.22 AM.png
Source: Bank Negara Malaysia

See, subsidies are not necessarily a good thing.

UPDATE: According to Domestic Trade and Consumer Affairs Minister Datuk Saifuddin Nasution Ismail, the government will relook at the eligibility criteria. Hopefully, he reads my blog.

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An unconventional way to wipe off government debt

TL;DR – Inflation

Picture this situation. You and your friends went out for a lunch at a chicken wings shop. When you reached the counter, you asked for 10 chicken wings that had cost you $10. That means the price for each chicken wings is $1 per piece.

But then you realized, you forgot to bring your wallet and the only thing you have was a $5 note that you luckily found in your pocket. So, you asked for your friend to pay for the whole 10 chicken wings for you.

After both of you had enjoyed the meal, you had decided to give your friend the $5 that you had in your pocket, and later you took the receipt of the meal and you wrote an IOU note I will repay you back with the number of chicken wings that $5 can get you, the next time we come here.”

Then when you got home, You realized that you would still need the $5 to repay for the 5 chicken wings that you owe to your friend. So, here are a few ways you can do to obtain that $5. For example:

  1. “Increase your revenue” – You can obtain this by working part-time or either “borrow” from your parents.
  2. “Cut spending” – If you find out that you would only have $100 left in your savings account until the point that you and your friend will revisit the chicken wings shop, you can cut your expenses to make sure that you have enough $5 to repay to your friend before both of you visit the chicken wings shop.
  3. “Declare bankruptcy” – You call your friend, and tell him that “Sorry fam, I can’t repay them at all”. Sounds reasonable, but your friendship might end at that point.
  4. “Pay through inflation” – Okay bare with me on this. Remember that the IOU note says that I will repay you back with the number of chicken wings that $5 can get you“. Let’s say that you know that the next time you and your friend visit the chicken wings shop, you would expect that inflation will jump up by 10%. When inflation rate increases, it erodes the value of the IOU note that you gave to your friend. This means, the price of the chicken wings now is $1.10 per piece ($1.00 * 10% = $0.10). Now that you have decided to repay him the other $5, this means your friend will be only able to buy 4 pieces of chicken wings that cost him $4.40.

What I am trying to imply here is those 4 methods can be also be used by the government to wipe out its debt.

The first, second, and third point above are straightforward. But I would like to elaborate the “pay through inflation” method and how the government could benefit from it.

Picture another situation. Let’s say the federal government wants to spend on a development project that will cost them $10 billion. So, what the could do is to issue a $10 thousand worth of debt for the next 10 years, with 3% interest.

This means every year for the next 10 years, the government will owe the investor the $10 thousand of principal, plus the 3% interest.

Now, assuming the current inflation rate is 2%, this means by definition from real interest rates (Fisher equation):

real interest rates = nominal interest rates – inflation

The actual return for the investor is

real interest rates = 3% – 2% = 1%.

Now let’s say that inflation suddenly jumps to 5%, that means

real interest rates = 3% – 5% = -2%

Which is a negative return for the investor since inflation is too high.

This is why inflation forecast matters to investors, especially those who have government and corporate bonds in their portfolio.

Even though paying off debt through inflation sounds great, in my opinion, it is a very dangerous method to use.

Why you may ask? Because inflation is inflation. Prices of goods and services will go up.

Three things need to happen here. For this method to work;

  • Point #1 – Will only work if debt issuance in their own currency. Logically, inflation will only affect the domestic currency.
  • Point #2 – Will work only on long-term debt. Because the longer the debt to mature, the higher the value of debt will be eroded.
  • Point #3 – Will only work in debt holders is foreign investors since they are not within the country to feel the effect of inflation.

Now, what if we use this on Malaysia’s government debt?

In the case of Malaysia, point #1 and #2 increase the temptation to use this method.

Screen Shot 2018-10-04 at 10.07.11 PM
Point #1 – More than 95% of our the government debt issue are in Malaysian Ringgit (domestic currency).
Screen Shot 2018-10-04 at 10.08.16 PM
Point #2 – The share for longer-maturity debt is around 50%.
Screen Shot 2018-10-04 at 10.09.22 PM.png
Point #3 – However, only around 45% of our debt holders are foreigners. Which means, if the inflation method is used, then it will erode the value of those 65% domestic debt holders. Point to note that our largest domestic holders include pension fund like EPF, KWAP, insurance companies, and the banking sector.

Extra point: This will require the central bank to push down interest rate so low, to a point inflation will jump. Playing around with interest rate is not really a good news especially for Malaysia’s households.

In my opinion, this method works, yet unconventional. The success from this method differs from many countries through different periods. The closest one I could think off was few countries in Europe between World War I and II to finance their war.

Data source: Bank Negara Malaysia

The Fed vs EMs – What goes up, will eventually go down.

That is the basic rule of Newton’s law of universal gravitation. Which also applies on the economy.

What we are experiencing right now is normal. The plot sounds exactly the same like what we have seen in 1994-98 (The Mexican Peso Crisis and the Asian Crisis), and in the late 2004 (leading up the the Global Financial Crisis).

So, why does this happen? That is because The Federal Reserve is increasing its interest rates. Throughout history, the Fed had made number of times of normalization, which you can refer to the graph below.

fredgraph

When the Fed increases its interest rates, that means the cost of borrowing has become more expensive. For example, in August 1993, if I were to show up at the Fed and ask for a $100 loan with 3.00% interest, that means after a certain period I will have to return the $100 loans plus $3 interest payment (Total of $103).

In February 1995, if I were to show up at the Fed and ask for another $100 loan with 6.00% interest, that means in the end of the day I will return back the $100 loan plus $6 interest payment (Total of $106).

Now, between $3 to $6 I mentioned above sounds small. Try picturing you are trying to apply for a $50 million loan with 3% interest to build an airport. That will cost you a lot isn’t it?

Now picture another situation, what if in the middle of the project, you suddenly found out that you need another $10 million to build a parking space next to the airport with a 6.00% interest. You will have to reconstruct your accounting all over right?

That is what is happening to the emerging economies (or EMs, which stands for Emerging Markets) nowadays. If we read the IMF’s economic outlook, they used the word “uneven” growth for these EMs, since there is a divergence between the developed countries and the developing countries.

When cost of borrowing has become more expensive because of the Fed’s normalization, it will be a trouble for these countries since they have to refinance, reconstruct, and push back investments, which will affect their growth outlook.

The Giving-Free-Cash-To-The-Poor-Will-Make-Them-Lazy Myth

I would like to clarify one thing here since my previous-previous entry was about Universal Basic Income (UBI). Giving cash to the poor will not make them lazy, or use the money for leisure purposes. As of today, there is no single study is able to prove that giving free cash will discourage people from generating additional economic returns (fancy word for working).

Based from my experience in this subject, when people get free cash, they will do two things. First, they will buy food. Second, they reinvest on themselves such as buying fertilizer for their crop, start a new business, and make sure their children stay in school.

There are numerous of studies here. These are few examples:

Uganda, Kahn Et al, 2015. Cash Transfers to Increase Antenatal Care Utilization in Kisoro, Uganda: A Pilot Study. 

“Cash transfers have been used to incentivize participation in health services. We examined whether modest cash transfers for participation in antenatal care would increase antenatal care attendance and delivery in a health facility.”

Latin America, Ham, 2014. The Impact of Conditional Cash Transfers on Educational Inequality of Opportunity.

“The main results indicate that groups considered vulnerable gain more in terms of access to education and that these interventions help level the playing field. They do not eliminate inequality of opportunity but are certainly a useful complement to equity-enhancing policies.”

Kenya, Kilburn et al, 2016. Effects of a Large-Scale Unconditional Cash Transfer Program on Mental Health Outcomes of Young People in Kenya.

“This study provides evidence that poverty-targeted unconditional cash transfer programs, can improve the mental health of young people in low-income countries.”

Brazil, Glewwe & Lucia Kassouf, 2012. The impact of the Bolsa Escola/Familia conditional cash transfer program on enrollment, dropout rates and grade promotion in Brazil

We examine the impact of Brazil’s Bolsa Escola/Familia program on Brazilian children’s education outcomes. Bolsa provides cash payments to poor households if their children (ages 6 to 15) are enrolled in school. Using school census data to compare changes in enrollment, dropping out and grade promotion across schools that adopted Bolsa at different times, we estimate that the program has: increased enrollment by about 5.5% (6.5%) in grades 1–4 (grades 5–8); lowered dropout rates by 0.5%.

It is the same for Malaysia as well. According to a study made by Kamaruddin et al, 2013, half of the money given from BR1M (Malaysia’s cash transfer program) was spent on basic necessities such as food, transportation and clothing.

In nominal terms, if the person is given RM500, I would say around RM340 will be spent on these items. Also based on their findings, around RM55 is spent on education, investment, and starting a business, and only RM20 is spent on “recreation”.

HH Expenditure 2016

Source: Department of Statistics Malaysia

If we look this from a bigger context, their findings correlate with the latest Household Expenditure Survey released last year. As we can see from the graph, those in the B40 (RM3,000 and less) group spend around 30% of its whole expenditure on food. You could also see that as income group goes higher, the proportion of expenditure on food decreases, while “restaurants and hotels” goes up. One explanation is, as your income goes higher, you substitute food from home to buying food from restaurants instead.

So, the argument of giving cash to the poor will make them lazy so far hasn’t been proven (yet).

Food prices in Malaysia was/is going down.

This is a reply to an article few days ago regarding food prices went down by 30-50%. It is true that food prices are going down, but this has nothing to do with the government zero-rising the GST.

The truth is, food prices have been moderating all over the world. Looking at the graph below, we can see that food prices in few developed and developing countries including the US, the UK, China and India are moderating since the beginning of the year.

Food Inflation

There is a explanation to all of these. Let me show you the trend of world food prices. (You can find the data compiled by Food and Agriculture Organization, United Nations).

World Food Price.png

From the graph above, we could see that world food prices have been growing around less than 1%. This is much lower compare to last year with 8.1%. The explanation is, there are some food products the world is overproducing, such as oil and sugar. Some food products can’t meet the current demand, such as rice, and meat.

Simple supply and demand tells us, that if you are producing an item too much, you will push down its prices, ceteris paribus.

Let me explain each one of these.

Rice (or Cereal)

Rice - Production and Consumption

First of all, we are producing less rice compare to few decades ago. Looking back at the latest data, growth in production was only 0.2%.

I had a look at the data from USDA, and only production in the US and Thailand had a slight improvement. But overall global production was declining by -0.4% compare to last year.

This is why, rice (or cereal in general) prices is increasing at a certain extent. Demand exceeds supply.

Oil

Oil - Production and Consumption

Oil - Production and Consumption - By Level

Growth in oil production is slowing down too if we compare to the past 10 years trend. But if we look this by level, production is actually exceeds consumption since 2015.

This explains why prices for oil is declining; Supply exceeds demand.

Sugar

Sugar - Production and Consumption

Production of sugar is cyclical. Every 3 years, there is a jump in production. And at this moment, we are at its peak.

But also pay attention to the red line (human consumption). This tells that we are consuming less sugar comparing to few decades ago. Again, supply exceeds demand; pushing down the price.

You might ask, what does world food prices have to do with Malaysia’s food prices?

First, this graph below tells us that we import more than we export our food.

Malaysia _ Volume Index - Imports_Exports

Looking into details, these are the top 5 food items we are importing. (Source: Trade Map)

Oil – 12.7% of overall food imports.
Cereal (also rice) – 11.3%
Sugar – 8.4%
Meat – 7.4%
Vegetables – 7.4%

Now, if I break down each food components, almost all of food prices are moderating since late last year.

The only exception was price of vegetables, which is declining since Apr-18.

Malaysia Inflation - Food.png
The conclusion is, world food prices in general had been moderating since the beginning of the year, because there are few food items, such as sugar and oil are being overproduced.

This has nothing to do with zero-rising the GST.

Sources:

  • Department of Statistics Malaysia
  • Food and Agriculture Organization of the United Nations
  • Trade Map
  • United States Department of Agriculture

World Cup Related – Brazil Won’t Win the World Cup

Ok, so this will be slightly outside of economics. Found few articles predicting the possible World Cup winners. Two common names came out; Brazil and Germany. You can refer the articles under the appendix below.

To be honest, I do not think Brazil is going that far this year because of their ageing defence. Looking at the current roster, their average age of their defenders is 29.4. FYI, Thiago Silva, the most experienced defender in the team, is already 33 years old.

Here’s my reasoning why I think Brazil (and possibly Germany) will not win the World Cup. Since 1930, the average age of the winning team was 26.4. The youngest team ever won the World Cup was Brazil 1958, with the average age of 24.4. The oldest was Italy 2006, with 28.2 (outlier reasons since Peruzzi was 36, Inzaghi, Materazzi, and Cannavaro were 32).

Screen Shot 2018-06-11 at 12.20.41 AM

So, if that is the case, who do I think is going to win the World Cup?

I would put my money either between France, England (not going to happen if Gareth Southgate keeps changing the formation), Tunisia, or Serbia. To be fair, I won’t rule out Germany since they are still within the range.

Screen Shot 2018-06-10 at 11.39.35 PM

Source: The Telegraph

But hey, this is football we are talking about. If Paul the Octopus is still alive, I rather seeing him predicting the possible winner.

Appendix

World Cup Forecast Battle Heats Up With Danske Defying Commerzbank

Germany Will Win the World Cup, UBS Says After 10,000 Simulations

World Cup 2018 Special: Forecasting the Russian economy and 2018 World Cup

Malaysia, it is time to talk about Universal Basic Income

This is a response to Tun Daim’s comment on basic income. I have been waiting for a year for a Malaysian politician to publicly voice this one out, and it is about damn time we should discuss about this seriously.

I am going to take this to a broader perspective. Let’s expand this to a more ‘universal’ point of view. So this post is about Universal Basic Income, or UBI.

What is UBI?
The idea of UBI is the government (or in few case studies, private entity) hands you a certain amount of cash each month, and you are allowed to do anything you want with the money.

Yes, whatever you want.

The idea of UBI is not new. As matter of fact, it was introduced way back in the 17th century by Thomas Paine’s Agrarian Justice, where he proposed a system where everyone would receive an equal capital grant (or basic income) given by the government.

Former US President Richard Nixon was so close getting the UBI program going. But the plan was killed down by the Senate.

In 2016, Hillary Clinton was thinking about including UBI into her agenda as well.

So, here is my argument why UBI might be necessary? Automation and poverty.

The increasing interest on UBI was due to jobs being automated. In an article written by Straubhaar, he wrote:

“Jobs will be lost and it remains uncertain how many new jobs will be created to replace them. Thus, concerns are rising about the future of employment, the viability of social welfare and the financial stability of social security systems.”

When Finland ran its UBI program, their youth unemployment was 19% (Malaysia’s was around 10%). Decent jobs now are limited. This means, if could provide some cash for these group, it will encourage entrepreneurship. This explains why Mark Zuckerberg, Elon Muck, and Richard Branson are supporting this program. This is because if the work they are trying to do does not work out, at least UBI will be able to provide a safety net for the person.

Another reason why UBI will be necessary is that it will reduce poverty. When cash is given to an individual, he or she will be able to escape from living under poverty. You can study the outcome of every cash transfer program in this world, and more people were able to leave poverty thanks to the program.

Why choose UBI?
These are the pros of UBI. First, it provides a better social economic welfare. When Namibia ran a pilot test between 2008 and 2009, they found there was a drop in the number of malnourished children, a decreased poverty rate, increased income, and a lower crime rate.

Second reason, UBI could substitute or at least complement the existing welfare programs. The idea of UBI is to give out cash to everyone. Other program such as food stamps or targeted cash transfers will not work in my opinion. This is because targeted cash transfer will cost more (efficiency reason, you have to ask the person if he is eligible or not), and food stamps will not be effective to push down poverty (because food stamps ain’t paying the bills).

The case of “against” UBI.
The question arises when free money is given out, that the person who receives it might have less incentive to work. But every basic income programs that were held up until today, studies found that people who receive it work more than they were supposed to.

I understand that those who oppose UBI argue that UBI will be very expensive, and raise the question of how a UBI will be funded. This was the main reason why the Swiss voted against a proposed UBI back in 2016.

Many calculations out there were focusing on the UBI’s price tag itself (even OECD made this mistake), not on its net transfer.

The math behind UBI
Let me explain how UBI works (using Scott Santens’ calculation, since it is simpler to understand)

Screen Shot 2018-06-11 at 8.38.25 PM

Let’s say in Malaysia, there are 5 income groups, ranging between RM0 to RM2,000, RM2,001 to RM4,000, as shown above.

Assuming each group contributes 8% of their income, that means the RM2,000 income group will contribute RM160. The RM4,000 income group will contribute RM320, and the list goes on. That means, in the end of this process, the money collected will be RM2,400.

If we want to equally distribute to all of these group, that means each and every single of them will get RM480. Sounds fair right?

That means, the net gain for the RM2,000 group is RM320. This is because initially, he had contribute RM160 into the pool. So, when he gets the RM480 basic income, his final amount will be:

RM2,000 (initial money in pocket) – RM160 (contribution) + RM480 (basic income) = RM2,320.

Confused? Let’s take the RM8,000 group as another example. So initially, he has RM8,000 in his pocket. Now he will contribute 8% (or RM640) of his income into the pool.

In this example, everyone gets a RM480 basic income. That means, in the end of the day, his final amount will be:

RM8,000 (initial money in pocket) – RM640 (contribution) + RM480 (basic income) = RM7,840.

Hold on. He actually lost RM160! Yes that is correct. That is the whole point of this program. A progressive income tax will work efficient in this case, and it is more socially fair for those in the higher income tier to contribute more.

How this will work for Malaysia?
If you are paying attention to my calculation, you must have realized that the income distribution was RM480. This is because Malaysia’s poverty line is RM800. The rule of thumb of UBI is 60% of the poverty line. So that explains how I got RM480 in the first place.

So, if we calculate this using Malaysia Household Expenditure Survey 2016 provided by DOS. Using the same methodology like what I had calculated above, here are my findings:

  1. If we would like to distribute RM480 to everyone, that means everyone needs to contribute 6.7% of their monthly income.
  2. The breakeven point (the midpoint between net gain versus net loss) is between those who earn RM7,000 and above. This is reasonable since the median income for the whole income group is around RM4,000.

Screen Shot 2018-10-07 at 9.36.22 PM.png

In the case of Malaysia, I personally think that we are not ready for a full scale basic income program (yet). This means a smaller program will work better at this moment. If I have to choose, I prefer to give it out to the poorer states first such as Kedah, Kelantan, or Perak.

These are some evidence of successful UBI experiments

Screen Shot 2018-06-11 at 7.50.35 PM

These are few cities/countries are implementing the UBI program

Screen Shot 2018-06-11 at 7.53.51 PMScreen Shot 2018-06-11 at 7.54.03 PM

And these are the few still considering UBI in the future

Screen Shot 2018-06-11 at 7.52.29 PM

Note: Update on Oct 7, due to some calculation error.

Replying to what the MoF said last week

Here’s what the Ministry of Finance said last week that made me ponder:

Zero-rating GST on the 1 June 2018 and re-introducing the Sales and Services Tax (SST) on 1 September 2018. This will“return” approximately RM17 billion back to ordinary Malaysians for the rest of the year.

The stabilization of the price of RON95 at RM2.20 per litre and diesel at RM2.18 per liter. This will save Malaysians RM3 billion

A RM700 million Hari Raya special assistance to civil servants (Grade 41 and below) and pensioners.

These 3 measures amounting to RM20.7 billion will provide a significant boost to consumer spending in Malaysia and lead to improved consumer optimism and business profits.

Question 1: Can giving back cash to the people push purchasing power/growth?

All of those numbers provided by the MoF looks huge. But that is just the headline. The reality is, not all of those RM20.7 will be pumped in into the economy. This is because our marginal propensity to consume.

Marginal propensity to consume (MPC) measures the proportion of extra income that is spent on consumption. In the case of Malaysia, our MPC is 0.47. This means that if you get another RM1 as your income, you will only spend RM0.47.

For Malaysia, the MPC for those in the B40 group is much higher compare to M40 and T20. There is no surprise on this, since those in the B40 group usually has limited access to credit. Which is why when they get additional cash, they will spend more.

Let’s do some mathematics here. So if RM20.7 billion is being returned back to the people, multiply that to 0.47.

RM20.7 billion * 0.47 = RM9.4 billion.

This means, only RM9.4bn will be spent.

And how big is RM9.4 billion?

Not that much, it is only 0.72% of our overall GDP, and 1.06% of overall expenditure.

There is still a question on how the SST will be implemented. My view is, price could go higher if they set it back at 10%. This is because manufacturer will push the cost to retailers, and retailers will push the cost to consumers. Unlike GST, both manufacturer and retailer can claim them back. If this happens, it could erode purchasing power.

Question 2: Can RON95 really stay at RM2.20 per litre for the whole year?

Probably no.

First thing first, this “giving cash back to the people” will not sustain in the future.

If the exchange rate stays RM3.96 per US Dollar, and the Brent price stays around $70 per barrel, that means the actual RON95 price should be at RM2.40 per litre. Which means the government is subsidizing 20 cents, or a total of RM540 million of subsidized petrol for the next 6 months.

The government’s fiscal will be under pressure if RON95 stays at RM2.20 throughout the year (because they have to keep subsidizing it).

Government Debt – Of Surplus and Deficit

Somehow, the debate regarding government debt is heating up since last week. No surprise there.

The best part of this whole story is, there is a petition, asking for people to ‘crowdfunding’, in order to pay off government debt. The intention is nice. But in reality, it is similar to asking some money from your father to buy a present for his father’s day.

First, let me introduce by how government financing works. For the government to spend, there are few ways:

  1. Through revenue collection – This is straight forward. The government collects money through income taxes, consumption taxes (such as GST), petroleum taxes, and etc. With the money collected, they will use it to spend.
  2. Through debt financing – So the government issues bonds, and banks/corporations/retirement agencies buy those bonds.
  3. Through loans – Similar to how you apply for a housing loans. You go the bank, and apply for that loans. In the end of the day, you will pay the loans, plus interest.

Now. Logically speaking, you would say “we should only spend when you have the money.” I would agree on that statement on certain extent. The reality is, the government financing doesn’t really work that way. The government should keep spending to make sure the economy is functioning. (Read Keynesian Economics).

The next question is, should the government run a fiscal surplus (where they save more than they spend), or fiscal deficit (where they spend more than they save). That goes back to my previous point where the government ‘should keep spending’ to keep the economy running.

In the case of Malaysia, the only time when we had a fiscal surplus was back in the 1994-1998. This was because the country’s economic growth was booming at 9% per annum in the early 1990s. So the need to save more than you consume at this moment is fine, in order to cool down the economy.

Malaysia Government Surplus_DeficitScreen Shot 2018-05-27 at 11.14.13 PM

Theoretically speaking, having a fiscal surplus means the government is holding on to their money, instead of pumping them in into the economy. There are other macro effects on this:

  1. For the government to reach to a fiscal surplus, there are two ways: (i) Higher taxes, or/and (ii) lower spending.
  2. Lower spending – When the government decided to run a fiscal surplus, this could mean the government will hold on to investing in the public segment (trains, highways).
  3. This could dampen growth numbers. If the government doesn’t spend, the economy will slow down.

Having a fiscal surplus is not really a bad situation to be in. Singapore’s fiscal management is good example, where they accumulate surpluses for few years, and then spend it later. This is why I think Singapore’s fiscal spending policy is probably the best system to practice, but I doubt we will use that framework in the future.

One common mistake is that, people feel it is a bad idea for government to borrow. To be frank, government debt is not the same as household debt. Government borrow to fund its investments (which will benefit the economy in the future). Households borrow to fund mortgages, car loans. These are two separate concepts.