Wednesday, September 26, 2012

Budgeting For Inflation

When rampant inflation sets in, everybody is under siege - it is as if smog has descended and blanket the whole scenery and we all cannot see clearly.

The government, just like everybody else, now has problems trying to balance its budget. Higher prices and costs mean that the same money now buy fewer things - or that if the government wants to do the same number of things with the same number of people as before, then it needs more money. Worse, there is further escalation in costs as the workers working for the government and elsewhere in the economy also want to have more money to maintain the same standard of living as before - failing which they will have to live with less, and those on the margin will have to suffer physically.

It is no surprise that the first tenet in economics is to control inflation. It is a cardinal sin of the policy makers today, especially monetary authorities to have abrogated their duties and go with the flow for the sake of political expediency. This sin has created a new problem - of whether to continue with the circus or to bring down the tent. There appears to be no halfway house - and keeping up with the act may be yet again the most expedient way to go forward; the show must go on.

The government cannot use this budget to raise revenue to make up for its shortfall - the deficit cannot be closed in the foreseeable future. The internal problem of the government's finance department must be how the government can continue to maintain its market rating so that its borrowing does not before unduly more expensive. But the real problem of the government is that it cannot make sure that its deficit-funded projects will be productive and multiplier-expansive - there has been a far greater emphasis on creating big immediate impact rather than consistent and permanent impacts over the immediate and longer run. The disciples have not understood the words of the master well enough.

If the government's aim is to spend so that the people can benefit but that it does not now know to do it properly, it is then better that the government reduces its imposition on the poor people who have to pay tax even though the people are struggling to make ends meet. The government should introduce tax measures that will unburden. One way of unburdening itself from the people is for the government to reduce its tax on the ordinary individual taxpayers by an increase in their tax allowances as well as adjusting its tax brackets for inflation.

Since prices have at least doubled for many things that ordinary households use, the most simplest thing that the government can do in the budget for the people is to double its tax allowances: tax allowance for self and dependent from RM9,000 to RM18,000, books etc from RM1,000 to RM2,000, children from RM1,000 and RM4,000 to RM3,000 and RM8,000, medical for parents from RM5,000 to RM10,000, for example.

The new tax schedule is proposed as follows:
Taxable income (RM)
First 50,000 - 0%
Next 50,000 - 5%
Next 50,000 - 7%
Next 50,000 - 9%
Next 50,000 - 11%
Next 50,000 - 13%
Exceeding 300,000 - 15%.

An important impact of unburdening the ordinary professional worker is that you do not want the worker who has supposedly a decent job with a decent training and a decent family to be scrounging around for deals and outside projects just because of rampant inflation which has hit his or her family's daily household expenses and pushed his or her income into the higher bracket.

It is fair to say that 5,000 a month in KL is insufficient and 10,000 a month may just allow one to live without undue financial worries and without undue luxury as well. For now, I think this is where everything starts. If the government wants to think about GST after the elections, it is not to early in this budget to prepare the background for a fair taxation system for the individual taxpayers. The government has squandered its tax resources on foreign companies which have used our precious scarce natural resources for their global profits. It is time that our government makes the local environment conducive for home-grown players of the economic game in a serious and significant fashion.


walla said...

If tomorrow shows it's an election budget, inflation will grow and spread, breaking the tenet of inflation containment that is the foundation of national financial planning.

Like adding fuel to fire, the feel-better factor will soon evaporate as recipients start to realize the more they get, the less they have, which is rather odd, come to think of it. The saving grace is few people where it matters have time to think these days.

One may consider it strange that politics should intrude in the crafting of any annual budget. If something is to be done, it should be done at the right time and manner otherwise effect will not synchronize in a sustained chain with cause.

In our case, the things that must be done haven't which explains the horse-trading measures taken each and every year as if to avoid taking the bull by the horns. Thus, our annual budget exercises falter because the wrong animal is paraded.

This is particularly worrisome because the approach is inchoate and does not seriously address the systemic defects of our revenue-generation ecosystem.

Our domestic market is too small for anything significant to match inflation with higher revenues from value creation.

If manufacturing is hollowing out, services cannot replace it in tandem with population growth. Each year, new workers and graduates enter the market looking for jobs. How much service can be rendered export-oriented to compensate for the lacuna in domestic job or work openings? Even the tourism minister has lamented that our inbound tourists are not exactly big spenders.

Agriculture is not something people in cities can jump into, especially when many are already locked in homes and cars mortgages.

And looking at how they are trying to squeeze the last drop of oil from present fields, mining raises the specter of sun setting.

Maybe that's why the focus remains construction but it's rather strange no one asks after a building is up, what will the occupants be doing inside them that will pay for the sunk cost while making enough to sustain a better living after deducting for tax.

If we seriously stare at the things presently done in offices and so on, do not surprise yourself if you finally conclude ninety percent of what is being done can be dispensed off without affecting desired output; in fact bottom-lines may even be raised. So, it's all kinda puffed up, inflated, artificial. No?

walla said...

Someone noticed that olympians get to improve in their prime as they break their last records but corporations don't. He argued that the former have something called experiential learning which the latter don't because in trying to keep up with trends and changes, they destroy the means to capture their learning experiences. In short, they destroy their wisdom capital.

Therefore can we say we have wisdom capital? Given all signs, signals and countervailing developments and denudation so far, hardly has a ring of truth to it.

Which may explain why we have had to consider von Mises' Sozialistischen Gemeinwesen when delving into national wealth.

Perhaps true national wealth comes from building capability before capacity.

In our case, it seems even capability building has been politicized and sacrificed in order to advance irregular interests in capacity building.

The effect can be subterranean. We say city folks need to earn say rm7,500 per month to get by, especially with the cost of shelter, transport, food and ancillaries these days. Not many will have that luck. And it is subterranean because the EPF has reported that:

"Figures as at end-2011 showed that only 7.37% (461,479) of the active contributors had savings of more than RM150,000 each, whereas active contributors with between RM50,000 and RM150,000 in savings accounted for 21.74% (1,361,325), and those with less than RM50,000 in their savings made up the bulk at 70.89% or 4,440,028 persons.

Furthermore, the fund has 13 million contributors but only about half of them, or 6,262,832 are active members.

And a total of 62,358 contributors who turn 55 this year have only about RM150,000 each with EPF so that based on the average life expectancy of 75 years, it means many of these retirees will only have RM625 a month at their disposal for the last 20 years of their lives."

Well out of the rm5,000-10,000 range, isn't it?

One must also note funeral costs have gone up.

The real sufferings of most are unknown to the people who can do something about it. A tragedy of the so-called fast-pace modern-day era of digitized society, wired economy and hyper-spun government.

walla said...

walla said...

last link reposted:

kiran nabar said...
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pooja nabar said...

i remember Reserve Bank Governor D Subbarao in TOI cited some days before his receding hairline and the high rates for his hair cut to make a point on inflation. He said he used to pay Rs 25 for a haircut 20 years ago which went up much higher even as his hair thinned...inflation affects poor & elite both but it realy hurts poor very badly, it is very rightly stated in this post, that government should redisign it's tax policy in this inflation era