“It’s the Economy Stupid” – Part III

A Revised Budget, more realistic and less myopic, thats the call from the Opposition Bench to the new Finance Minister Datuk Seri Najib Razak. Indeed this will be his first acid test as the new Minister of Finance i.e. to take corrective measures to shield the country from the world’s worst economic crisis in 80 years.

Article below by Lim Kit Siang

Tomorrow when Parliament reconvenes to start the 2009 Budget debate is the first parliamentary test of Datuk Seri Najib Razak as Finance Minister – whether he has a revised 2009 Budget to take corrective measures to shield the country from the world’s worst economic crisis in 80 years so as to enhance competitiveness, boost growth and tamp down inflation.

The first thing Malaysians want to hear from Najib are not platitudes like Malaysia enjoying strong economic fundamentals, financial markets and infrastructure and immunity from external shocks but how the country could be shielded from the worst fallouts of the looming world economic crisis.

Secondly, how Najib proposes to tamp down inflation which had hit a 27-year high largely because of the sharp and unconscionable 41% increase in petrol pump prices in early June.

The price of crude oil has now plunged by almost 50 per cent since striking record high levels above US$147 per barrel on July 11.

The price dropped US$5.61 to US$77.05 a barrel on London’s ICE (Intercontinental Exchange) Futures exchange on Friday.

Energy experts believe prices could go even lower, going down to the US$60 a barrel range.

As Najib has been Finance Minister for 25 days, there is no reason why he is unable to announce a revised 2009 Budget in Parliament tomorrow taking fully into account the sharpest drop of the price of oil in 13 months by lowering the pump prices of petrol.

Furthermore, Malaysians want to know what proactive policy would be pursued in a revised 2009 budget to tamp down inflation to ensure that the lowest price of world crude oil in 13 months is felt and translated into the daily lives of ordinary Malaysians – or as one commentator on my blog put it:

“Does this mean that I wil be able to ask my children’s school van operator to lower the fare from RM100 down to the RM80 previously. Or does this translate to paying RM3.50 for chicken rice from the current RM4.00?”

Or will the 5pack Curry Flavour Maggie Mee which increased from RM2.59 at the end of 2007 to RM2.89 in January 2008 and now costs RM3.99 come down in prices?

If Najib has no revised 2009 Budget for Parliament tomorrow, he would have failed his first test as Finance Minister after more than three weeks since Sept. 17

Read Tony Pua’s excellent analysis on why the 2009 budget needs to be revised below:

Budget Deficit Target Under Threat

The Government’s 2009 financial budget which had been highly aggressive with a record RM207.9 billion expenditure and overly optimistic in its revenue projection of RM176.2 billion will only lead the Government to fail to meet its budget deficit target for the 2nd year in a row.

For 2008, despite having projected a decline in budget deficit from 3.2% in 2007 to 3.1% in 2008, the Prime Minister has announced that the Government has failed to keep a lid on the deficit, which will balloon to 4.8% this year. This increase in deficit was despite an RM14.5 billion increase in revenue from the earlier projected RM147.1 billion, thanks largely to the substantial increase in oil prices in 2007/8.

For 2009, the Government has projected a 3.6% budget deficit. However, in the light of the global economic crisis triggered by the financial markets turmoil in the United States, it will no longer be possible for the deficit target to the maintained.

In the 2009 Budget, the Government has projected a substantial revenue contribution from the petroluem sector of RM75 billion, which will comprise 46.4% of the Government’s total revenue. This record contribution from the sector is based solely on the assumption that the global crude oil prices remaining sky high, and the Malaysian crude, the Tapis blend will average US$125 per barrel for 2009.



Table: Revenue Contribution of petroluem sector
to the Government relative to price and output 2004-2009

(1)2008 budget estimate presented in 9/2007
(2)2008 revised budget estimated presented in 8/2008
Sources: Malaysia 2008/9, 2007/8 Economic Reports; Petronas Annual Report 2007/8

However, with the global recession and curtailed economic demand, global oil prices have fallen dramatically, with the Tapis blend now costing under US$100 per barrel. With nearly all analyst agreeing with a bleak 2009, it is now anticipated that oil prices may fall further.

The more than 20% fall in crude oil prices will have a major impact on the Government’s revenue. We anticipate that at US$100 per barrel of Tapis blend, the Government will lose an estimated RM14 billion in expected revenue from the sector.

Without a any reduction in the Government’s planned record expenditure, this will mean a massive increase in the Government’s budget deficit to a precarious 5.4%, from its projected 3.6%.

Aside from the Petroluem income tax, the Government has also projected a RM3.3 billion or a 6.7% increase in personal, cooperatives and corporate income tax revenues despite a cut in corporate tax rate by 1%, adjustments to lower personal income taxes as well as the global economic slowdown. The government has also estimated the crude palm oil (CPO) price to average RM3,000 per barrel in 2009 although it has already dropped to less than RM1,800 today. This will only mean substantially lower profits for the Malaysian plantation companies. Any threat to these tax collections will hence further undermine the Government’s ability to maintain its fiscal prudence.

As the Parliament will commence its debate on the 2009 Financial Budget from Monday next week onwards, the new Minister of Finance, Datuk Seri Najib Abdul Razak should table a new, revised and improved financial budget in parliament. This is especially required in the significant events which had occurred since the former Finance Minister had presented it in Parliament on 29th August, including the collapse of the global financial markets as well as commodity prices.

As part of the “new” budget, the new Minister, as his first task in Parliament to slash operational expenditure which has exploded in recent years under Abdullah Ahmad Badawi’s administration, from RM80.5 billion in 2004 to RM154.2 billion in 2009, or by 91.6%.

In the light of the volatile economic circumstances, Datuk Seri Najib must not only spew rhetoric about Malaysia’s sound economic fundamentals and be in denial about the economic fallout which is about to hit us very hard, but instead take action and demonstrate his ability to soundly managing the country’s financials to reassure investors and return the loss of confidence in Malaysia’s economy.

Otherwise, the failure to even defend the budget deficit in his first year as the Minister of Finance will seriously erase any credibility he may have in managing Malaysia’s economy.

“It’s the economy, stupid” was a phrase used by Bill Clinton’s in his successful 1992 presidential campaign against George H.W. Bush and would be quite appropriate for all those politicians indulging in the current political elections and drama, oblivious to the negative impact the financial meltdown will bring upon Malaysians. This will be the title of a series of compilations, comments and dire warning on the current economic and financial meltdown that’s going to hit Malaysia like a falling asteroid.


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