Development expenditure and that RM12 billion for PMO, explained

The tabling of the federal budget is an annual affair where Putrajaya puts forwards its plans for the coming financial year. To a certain degree, it also reveals how the country performed financially but most Malaysians follow it for the perks.

Budget 2018 was unveiled on October 27 to much fanfare – it is the final budget before the 14th general election – and the entire event was an entertaining spectacle replete with trolls, grandstanding and nitpicking, such as the opposition questioning the government over RM12.24 billion in development expenditure allocated to the Prime Minister’s Office.

The Health Ministry only got RM1.8 billion for development purposes and education only got RM1.4 billion. What is the prime minister spending RM12 billion on?
— Wong Chen, Kelana Jaya MP

Public spending is divided into two categories.

  1. Operating expenditure is defined as spending for activities that are recurrent such as emoluments or salaries, pensions, grants to states, office rental and the purchase of assets and fuel.
  2. Development expenditure, on the other hand, is a budget approved to implement development projects usually under the five-year Malaysian Plan. This is a capital and non-recurrent expenditure and it is more of an investment in nature. Examples include construction of hospitals, roads, clinics, schools, and police stations, among others. IT/computer systems also fall under this category.

The Prime Minister’s Office has had the lion’s share since 2014

The department may not rank no.1 overall when it comes to expenditure (operations and development). Even in Budget 2018, the department ranks fourth behind Education, Health, Higher Education and the Treasury, in terms of receiving the bulk of increase in spending.

But in terms of development expenditure, the Prime Minister’s Office has continually received the majority of the overall allocation.

One plausible reason for this is the country has grown substantially and its economy is more complex today than it was, say, in the 1980s. So the cost of governance as well as administration is costlier; there’s also complicated economic hurdles such as the drop in oil prices, for example.

However there are agencies under the purview of the Prime Minister’s Office that are tasked to do just that: improving efficiency. For example, the Malaysian Administrative Modernisation and Management Planning Unit (Mampu) that is set up to improve the quality of public service.

A significant concentration of power in the hands of the prime minister

That’s the first impression one gets after scrutinising the development expenditure, where some divisions and projects could easily have been under the jurisdiction of other ministries.

For example, the two most-expensive development expenditures for next year under the department is the Facilitation Fund and the Pan-Borneo Highway, at RM3.28 billion and RM2 billion respectively.

The Pan-Borneo project was born out of the Barisan Nasional manifesto during the 13th general election and later formalised in Budget 2015. This item could have easily been under the Works Ministry’s expenditure sheet.

The Facilitation Fund was introduced as part of the Economic Stimulus Package in the Ninth Malaysia Plan (9MP) to spur private sector participation in projects, which falls under the purview of a handful of ministries since its has overlapping objectives.

Other big ticket items include the 1Malaysia People’s Housing Programme (PR1MA) which is not under the Housing and Local Government Ministry, and the Eastern Sabah Security Command (Esscom), which should be under the jurisdiction of the Defence Ministry. Of course, there's Felda, too. 

Even the way ministries receive their budget signifies how centralised power is in Putrajaya. For example, all ministries will have two components under their development expenditure.

 Source: Treasury

Source: Treasury

While direct spending works by way of the government allocating a set amount for development, the borrowings or “pinjaman” component works like this: the ministry submits a request to the Treasury who would then weigh the viability of the project before proposing it to the Economic Planning Unit. The unit then reviews and approves the development project if it is aligned with the respective Malaysia Plan.

The Treasury comes under the jurisdiction of the Finance Ministry while the Economic Planning Unit is under the Prime Minister's Office. Najib Razak is prime minister and finance minister. If the government was a company, he is technically the chief financial officer and chief executive officer. 

However this trend began when Dr Mahathir Mohamad sacked Anwar Ibrahim as deputy prime minister and finance minister back in 1998. The former held both portfolios, a tradition carried forward by both his successors, Abdullah Badawi and Najib. 

The need for an itemised expenditure sheet

The entire expenditure sheet breaks down the vision, mission and objectives of the Prime Minister’s Office. These are great but there is zero about what exactly will these funds do or where the money will specifically go towards.

For best practice, Singapore has a practical approach to providing more information about key components on its development expenditure:

 Source: Singapore Budget 2017

Source: Singapore Budget 2017

There are also very vague items in expenditure sheet too such as special projects, "mesra rakyat" or people-friendly projects, and socio-economic restructuring programme.

As an aside, what the development expenditure excels to a certain degree is to provide a timeline for a certain project. For example, the recent RM50 million allocated for the Indians next year as part of an affirmative action programme.

A quick look at the expenditure sheet tells that RM500 million has already been allocated for this project and roughly RM57 million has been allocated for 2017. This programme is a continuation rather than something new.

Now, the existence of such ambiguous projects play into the narrative of Pakatan Harapan who believe that these obscure categories are for Najib’s “slush fund”. While that’s typical opposition rhetoric, the lack of a thorough breakdown and some of the inconsistencies present in the development expenditure does point to that.

But the development expenditure is the fiscal deficit

In its Economy Report 2018, the Treasury said federal government debt comprising cumulative federal government borrowings stood at RM685 billion as at end-June 2017. Since Malaysia has a current account surplus, meaning it is a net lender to the rest of the world, the rise in debt is to finance development expenditure.

On debt composition, 96.7% of the papers are denominated in ringgit while the balance was from offshore borrowing. The bulk of offshore borrowing is denominated in US dollar. The good news here is that most of the money will flow back to Malaysians.

fed-gov-debt-sshot.png

As for ballooning levels of debt, Malaysia has a self-imposed limit of 55% of GDP. As at end-June 2017, Putrajaya's debt as percentage of GDP stood at 50.9%. Also it takes a significantly higher fiscal debt to cause a slowdown in economic growth in the long-term, somewhere around 90 to 100% of GDP.

In fact, the country has had worse. Between 1986 and 1987, the debt to GDP ratio peaked at about 100%. After the Asian financial crisis, debt to GDP ratio was close to 54.8%, just a hair’s width away from the self-imposed limit of 55%.

One economist recently called for a review of government spending to address the imbalance between the development expenditure and operating expenditure in Budget 2018. Since the ‘70s, development has always been lesser than operations.

There was an increase in 2010 to RM52 billion but from 2013 onward, the development expenditure has been lower to ensure the fiscal deficit declined to 3% of GDP and below. This is simply because development expenditure is a long-term game and requires borrowing of huge capital to kick start projects.

Also one paper has argued that development expenditure for education, defense and healthcare do not significantly contribute to economic growth. It found that the growth rate of real GDP is enhanced by prudent fiscal spending.

Trimming the development expenditure, however, will not solve the problem

This is coming from the opposition camp where Harapan wants the Prime Minister’s Office budget reduced from RM20.8 billion to RM8.40 billion.

According to Wong Chen, the budget for development is way too big at RM12.2 billion. Najib’s operations spending of RM5 billion should cover all reasonable expenses of his scope of work.

The politician then cited Dr. Mahathir Mohamad who in his last year as prime minister in 2003 put out a budget of RM5 billion (operations and development), which in the time value calculation is worth RM8.5 billion in 2017.

“So how did a strong leader like Mahathir ‘make do’ with RM8.5 billion as prime minister. The question we have to ask is why Najib needs RM17 billion?”

It is not that simple. First off, if by trimming what the coalition intends on doing is decentralising the department, then there’s no savings at all. It’s moving a project from one department to another.

Also the comparison with previous prime ministers have to be scrutinised. While Dr Mahathir may have been able to govern with a lean expenditure, the ratio of operations to development expenditure in 1988 was the same as 2016 at 84:16.

In fact, in 1986 and 1987, the government’s revenue was not enough to cover the costs for federal operations. It had to borrow to pay the salaries of staff as well as pensions, debt and other miscellaneous items.

When Abdullah Badawi took over the reins from Dr Mahathir, he inherited a budget deficit for 2003 of 5.5% of the GDP. Malaysia’s current budget deficit is around 3.1%.

It is not a bloated civil service or a large edifice for a Prime Minister's Office that's the problem. It's fiscal consolidation and tackling ineffective policies such as PR1MA which has been having a hard time hitting its target. A simple optimisation of functions and roles is not going to cut it. 


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