Government Surplus May Not Be A Good Sign

Last week, the Penang Chief Minister announced the State Government’s 2016 Budget in the prestigious State Assembly. He proudly claimed that under his administration since the year 2008, they have managed to achieve an annual surplus for seven years consecutively. Politically, the idea is to show the people how effective and efficient the State Government has been running Penang. Surplus or earnings in the financial papers of the Government has a strong political appeal, because the people in general dislike the idea of “deficits” or “debt”. Nobody likes the feeling of being in debt.

But what does the economist and professionals says about government financial surpluses, or maybe what does the history shows about it?

Let us begin with a simple understanding of budgets and the economy. The definition of a budget surplus is a situation where the income is more than the expenditure. The term is commonly used in governments and businesses; while the same situation that happens to individuals means “savings”. The opposite of surplus; budget deficit is a status of financial health in which the expenditure is more than the income.

To make us understand about the impacts of budget surpluses or deficits easier, let us put the calculations in a simpler way. At the level of the economy in general, when one sector spends more than its income, another necessarily spends less than its income for the simple reason that, total spending equals to total income. Let us, explain the economy into three sectors to determine the implications of government surpluses for the other sectors.  First, we consolidate all levels of the government as “Public” sector; while we combine households and businesses as “Private” sector. To balance it, we must also add a foreign sector, which means every other part of the world who took part in our economy. Generally, the spending of all three sectors combined must equal the income received by the three sectors. It is clear that if the public sector is spending less than its income; which means it is running a surplus, this must imply that at least one other sector is spending more than its income; which means running a deficit.

In short, if a Government is having a budget surplus means that the private sector, which includes the businesses and household, is facing a budget deficit.

Now using the logic, how does a Government achieve its financial surplus? Usually a Government has to increase taxes, collect more fees, and find more ways to generate revenue or cut spending to ensure a surplus.

When the Government takes steps to increase taxes or cut spending to meet a budget surplus, it could have an adverse effect on the rate of economic growth; unless when the economy is booming which isn’t happening now.

Some argued that a budget surplus allows us to save for the future. They believed that a surplus can be ‘saved’ for the future, or ‘used’ to finance tax cuts or spending increases. But that is probably only beneficial to make the financial papers look good. We have to remember that a surplus exists only as a deduction from private sector’s income.

History has shown that when a Government meets budget surpluses, it causes downfall of the economy as well with the collapse of household savings rate, the increase of household debts.

During the 1920’s in the US, also called as the Roaring Twenties, the economy is booming. The US Federal Government achieves budget surpluses but in 1929, the Great Depression happened.

President Bill Clinton was known for his budget balance when he was running the country. He brought the Government’s deficit to a surplus in his administration. But in the middle of his tenure, the figures started falling around the year 2001 and as the history wrote, US suffered from a recession in the early millennium.

Not far away from us in the East Asia, Japan ran a budget surplus in the year right before its economy went into terminal decline in the 90’s.

Our nation’s history has proven itself as well, in the year 1996-1997, our economy was booming and the Government achieved a budget surplus. We have also known that at the end of 1997, we suffered from the economic crisis.

What worries me is that Penang Government has met a budget surplus for seven consecutive years; what is really coming ahead of us? There have already been some movements in the manufacturing sector, Penang main shapers of the economy.

An accountant may probably make the financial papers looks good, balanced and presentable. But it takes more vision and leadership to manage an economy.

We may not be able to avoid the downturn in an economic cycle; but the Government has to take actions to minimise the damage.

This article has been published in Mandarin in Kwong Wah Yit Poh dated 20th November 2015.

The Contrast of an Audience and a Referee

Two weeks ago, I was feeling very lucky to be invited to the inaugural Global Transformation Forum, organised by BFR Institute and Pemandu led by Dato’ Sri Idris Jala. I was lucky because all the delegates get to hear from prominent speakers ranging from former head of different nations; Olympic record breakers; academicians; famous football referee Pierluigi Collina; AirAsia founder Tan Sri Tony Fernandes; Starbucks founder Zev Siegl, even the Terminator, Arnold Schwarzenegger and many other Malaysian leaders as well.

The two days robust dialogue is generally on global transformation, focusing on the ‘HOW’ to deliver tangible results. Even though the topics discussed in the forum is on a macro scale, the contents can be implemented in a micro scale too. Every individual has a role to play in a transformation process.

One of the speakers that attracted the crowd was Pierluigi Collina as he uses football as an analogy in his speech. He talks about being decisive and the immense pressure that a referee has to sustain in any football match; facing the football managers, players and tens of thousands of supporters.

Without a doubt, there are many football fans among the delegates in the forum. In part of his speech, Pierluigi Collina showed a real-life football scenario in a video and the delegates were asked to judge whether it should be a penalty shoot or not. There is no replay of the video and we were required to make the decision immediately as what a real life referee encounters in a match. Both players fell in the video and it was a very controversial tackle. Nobody dares or manage to answer. It has silenced the arm-chair critics of football that has always shouted “referee kayu”. This shows a huge difference when we are just an audience compared to being a referee or a player on the field. It reminds me of a general public and the Government.

Many have criticized the Federal Government for its failure to lead the country. I do agree with the issues that have to be dealt at the national level such as education issues, political funding issues; transportation and many more. Sometimes we tend to focus and criticize on the problems so much, that we forgot to really look into what the Government has done.

As the forum that we attended is organised by Pemandu, we manage to listen from Dato’ Sri Idris Jala and get an insight of how the Federal Government is performing. It is indeed an improvement annually since the Government Transformation Programme (GTP) was launched with its seven National Key Results Area (NKRA).

Some of the more significant achievements in the year 2014 alone are raising the living standards of low-income households with 90% of them managed to increase their income. 485km of roads were built to enhance rural connectivity. Overall crime rate were reduced by 40% from 2009 to 2014. In the public service delivery, the transformation managed to reduce the average waiting time from 115 minutes to 62 minutes. Malaysia managed to move from 53rd spot to 50th spot in the Corruption Perception Index in year 2014.

These are some of the achievements made by the Federal Government, and of course there is still a whole book of it which can be downloaded at the Pemandu website, www.pemandu.gov.my. We can never deny that there will be never-ending problems and issues that the Government should address, as the nation needs to keep on competing to be developed. But if we are expecting a complete transformation in a few days, weeks or years; then we are surely naïve. Similar like what Carl Lewis has told us in his speech; he did not become an Olympic record holder when he just started running. He has to first learn to crawl, walk and subsequently run. In fact, when he was in high school, he was trained to be a long jumper, not a runner. As he realised his strength, he transformed by running in high school, at the state level, then the national level and now an Olympic gold medallist. The transformation has to be done stage by stage.

To really adhere to the moderation principles is not only tolerate with each other’s ethnics, but also to know how to judge people, organization and Government at a moderate way. We must know how to read both pros and cons.

As Pierlugi Collina ended his speech in the forum he quoted a Spanish proverb, “It is not the same to talk of bulls, than being in a bullfight.” It literally means, many people can give a lot of comments and suggestions on how to fight in a bullfight; but when we are the one who is in the bullring, it is totally different.

But we have to remember that as a general public, we are not just an audience. We are players representing our own country, each one of us contributing on how we transform the nation to a higher stage, to a developed status.

This article has been published in Mandarin in Kwong Wah Yit Poh dated 6th November 2015.