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The economic priorities for the new government

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The first economic priority for the new government is to present a budget within a very tight timeline.

Fortunately Budget 2023 can be scrapped along with the excessive and inflationary pre-election spending hikes and the failed “vote-winning” hand-outs.

Such populist measures must be abandoned in favour of a clear, credible budget focused on sustainable growth and price stability that avoids creating inflation and higher interest rates that would follow.

Fiscal consolidation does not mean austerity and the overall budget could be about the same as 2022 increased by inflation to around RM345 billion. This would still be a record breaking budget.

Revenue should also match 2022, around RM285 billion and the government should try to maintain RM50 billion in oil royalties if possible depending on oil prices.

This would mean a deficit of only around RM60 billion, compared to RM100 billion in Budget 2023, which will ease pressure on inflation and interest rates.

Sound budgeting will also benefit from smaller Covid-19 emergency packages and lower subsidies, although subsidy reform must be handled carefully. Subsidy costs will be lower due to falling oil prices but so will oil revenues. If subsidies are removed too quickly prices will rise and hit incomes again. So this is a delicate balance.

There should also be some review of taxation but this is more complicated and could be part of a full taxation and revenue review later.

Once the basic income and spending amounts are settled the details can follow the manifestos.

It would be interesting to combine suggestions from across the parties. For example Barisan Nasional’s (BN) assistive basic income and Pakatan Harapan’s (PH) humane economy agendas can all be accommodated within existing budgets. Perikatan Nasional’s incentives for flexible working would also be interesting.

Both BN and PH had a similar direction of travel on reform of student loans and on improving competitiveness, opening markets and reforming cartels, monopolies and government-linked companies (GLCs).

Above all it is important that the new budget is sound and credible. So the PH idea to establish a parliamentary budget office must also be introduced.

Malaysia’s economic fundamentals took a big hit due to the lockdowns and the economic policies that followed since 2020. There is a lot of structural scarring and damage.

We have seen a decline in incomes and savings, a rise in inequality and low-paying jobs, structural underemployment, companies shutting down, pensions wiped out, very limited social protection, structural problems in higher education funding, low productivity in SMEs, low domestic and foreign investment, under-performing stocks on Bursa Malaysia, corruption, cartels and monopolies and a foreign worker shortage to name a few issues.

There are some quick-wins but these are mainly long-term problems and we need new solutions. There must be policy review councils for pensions and social protection, higher education funding, economic development, healthcare reform, SME and business development, investment competitiveness, tax reform and of course the parliamentary budget office.

The general theme should be to maintain a stable fiscal environment, supporting independent monetary policy set by Bank Negara Malaysia while promoting supply-side reforms to free-up markets, promote private domestic and foreign investment, encourage business growth and reduce government involvement in business and commercial activity.

This should enable the government to focus on a more social agenda and structural reforms for the long-term based on creating a more agile, competitive, innovative and creative economic and social environment for everyone.

Financial markets will tread cautiously in the coming week but when the government and Cabinet is settled, the markets will move on. The ringgit is already stronger than it was before the election. Anyway policy should never be set by equity and financial markets.

 

The views expressed are those of the writer and do not necessarily reflect those of FMT.

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