Friday, October 21, 2016

Budget 2017 proved that the Government is not only running out of cash, but the situation will only deteriorate further, making 2017 possibly one of the worst years for ordinary Malaysians

Federal Government failed to meet 2016 revenue targets

Last year, Dato’ Seri Najib Razak announced in his budget that the Government expected to collect RM225.7 billion of revenue for 2016. However, the 2016 revenue has now been revised to RM212.6 billion based on the latest estimates.  That represents a very substantial 5.8% or RM13.1 billion shortfall for 2016.

To put things into perspective, and to highlight the severity of situation, more often than not in the past, the Government will collect more than they projected. 

The shortfall has in turn caused lower than projected operating and development expenditure.  The Government now estimates 2016 operating expenditure to drop from RM215.2 billion to RM207.1 billion, while development expenditure will drop from RM50 billion to only RM45 billion.

For example, this is the reason why we are seeing a substantial shortfall in health expenditure, resulting in shortages of reagents for conducting critical blood tests as well as increase in cost of medication for the man on the street.

The ability of the Federal Government to allocate the already limited operating expenditure budget is further constricted by Emoluments and Debt Servicing

In fact, it will only get worse in 2017 as the sins of the past catch up with the Government of the day.

The increasing size of the civil service has ensured that the “Emolument” payments for 2016 has increased by RM3.8 billion to RM73.9 billion despite the RM8 billion decline in operating expenses.  For 2017, the Government has further projected that emoluments will increase further by at least RM3.6 billion.  In the meantime, pension contributions, or “Retirement Charges” will also increase substantially from RM19.0 billion in 2016 to RM21.8 billion in 2017.

In addition, the annual “Debt Service Charges” – the instalments and repayments the Government has to pay for loans taken in the past – has increased significantly.  For 2016, it is estimated at RM26.6 billion or a RM2.36 billion hike from 2015.  For the next year in 2017, the amount would further increase to RM28.9 billion.  This is as a result of the Government’s reckless ramping up of Federal Government debt over the past decade on the back of high oil prices.

The twin increases in emoluments & retirement charges and debt service charges in the context of constricted revenue and operating expenditure would only mean less funds for other crucial expenses.

“Subsidies and social assistance” has already been reduced from RM39.7 billion in 2014 to RM27.3 billion (2015) to an estimated RM24.6 billion (2016).  It will be further reduced to RM22.4 billion in 2017.

There will also be less money for medicine supplies, housing, scholarships and other forms of educational support.

Federal Government is overly optimistic on its 2017 revenue projections

Finally, the only reason the Government was still able to project a “moderate” 3% budget deficit for 2017 was by giving an optimistic projection in its tax revenues.  Despite a significant drop in the estimated Petroleum Income Tax (PITA) from RM11.6 billion in 2015 to RM8.5 billion in 2016, the Government is assuming higher oil prices and demand for 2017 to collect RM10.6 billion.

The Government also assumes an increase in Corporate Income Tax (CITA) despite no corresponding assumption in a higher economic growth rate. CITA actually declined marginally in 2016 to RM63.2 billion from RM63.7 billion in 2015.  However in 2017, the Government has inextricably projected that it would receive RM69.2 billion.

Similarly, despite a declining trend of Goods and Services Tax (GST) collection in the recent quarters, the Government is still projecting an increase in collections of GST from RM38.5 billion in 2016 to RM40 billion in 2017.

All the above goes to prove that the Government is running out of cash very quickly and is struggling to balance its revenue and expenses.  The Government’s excesses of the past – including increasing the civil service hires to reduce graduate unemployment, excessive borrowings to finance inefficiency, corruption and wastages have severely constricted the Government’s ability to allocate expenditure today.  

Hence when the overly optimistic projections in government revenue collection fail to materialise, we can expect 2017 to be a very painful year for ordinary Malaysians. 
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