Wednesday, 18 March 2020

Economics of a Change in Government

Australia has an exceptional ability in changing PMs and governments. Malaysia is still seen as a novice.

But what does it mean economically? Conventional wisdom may suggest a complete overhaul of all that the previous government had planned to do. So if the previous government was prudent, reduced spending and deferred project implementation; the new government could be liberal, increase spending limits and implement large-scale projects. With Covid-19, the new government has a rationale to do so.

First on the negatives: increased government expenditures funded by increased government borrowings means higher interest expense and a breach of the statutory limit of 55% of GDP.

Then there could be a little higher inflation, which may drive consumption and growth. Too much inflation is, of course, a regressive tax on everyone. That only leads to social unrest.

Now to the positives: government expenditure boosts economic growth. That is Keynesian 101. The Malaysian economy is on a decline with growth forecast at 3.2% or thereabouts. It just points to an economy that is below capacity and weakening. So if Federal, State and Local governments increase expenditures, we have higher capacity utilisation, lower unemployment and an uptick and vibrancy in consumer sales. But spending has to be targeted well – those projects that impact most on the economy.

Large infrastructure projects may take some time to get off the ground, so it may be good to look at industries/sectors directly impacted by Covid-19 – tourism, hotels, theme parks, airlines, transportation and the like. And tailor programs to meet their needs.

In addition, renewable energy and I.R.4.0 should be another area to pursue. At State level, we could do with more public-private affordable housing. In other words, get private developers into affordable housing with subsidies or assured purchases. Public sector housing agencies have a dismal record. At the local government level, it is more of road repairs, lighting, improvements to flats and the like. The potential of RM20 million injection per local government or district is tremendous.

Businesses need help in retaining staff in a downturn, so salary subsidy or tax relief will be welcome. And consumers look toward lowering of costs for tolls fares, food and shelter. There is tremendous scope to improve lives of the B40 and M40.

The Finance Minister and the Economics Minister may have several good ideas and these need to be “tested” with a group of economists in government and the private sector. Time is of the essence. And we look forward to new initiatives.

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