On the last Friday of October every year, it has become a tradition in Malaysia for the finance minister to present the government's budget for the following calendar year. This year, the 2003 Budget will be presented earlier on Friday, Sept 20. Thus, the 2003 Budget will also contain development allocations for 2004. It will be the first time the budget will make fiscal commitments for the following two years.

According to Dr Mahathir Mohamad, he will step down as prime minister and finance minister in October 2003. This means that the 2004 Budget will also be announced by him, which will also affect spending in 2005. Thus, the future of the budget and the country will be determined by Mahathir for two years after he steps down in October 2003.

Thus far, most people do not closely follow the budget. For them, what is important are new taxes imposed on them, whether directly or indirectly. They also want to know if existing taxes are reduced or scrapped.

Less attention goes to government allocations for future spending. Part of this is current or operating expenditure which is generally difficult to avoid or reduce. Development expenditure referred to as capital expenditure elsewhere are one-time investments which are not recurrent or regular.

In reality, development expenditure does not necessarily advance development, for example, if spent on buying submarines or mega building or luxury projects which are not needed; instead, these burden the state, and ultimately, the people.

Bakun

For example, last month, it was announced that the Bakun Dam project had been awarded to a consortium led by a small company with a joint-venture with Sime Darby which has no experience in dam building and a foreign company.

In fact, the Bakun Dam project has been criticised in terms of its engineering as well as its environmental and economic implications. Recently, it was found that the Bakun Dam's water volume will be much greater than previously anticipated, perhaps due to logging in the dam's vicinity.

In fact, Mahathir previously cancelled it in 1990, citing environmental considerations. Then Deputy Minister and Finance Minister Anwar Ibrahim cancelled it for a second time for its economic impact besides other considerations. Now, this mega-project has been revived, imposing a huge, heavy and useless burden on the Malaysian economy and people who will have to bear this burden for years to come.

The electricity to be generated by the Bakun Dam will be too much to sell in Sarawak and Sabah. Hence, electricity will be sold at a price much cheaper than cost to a bauxite smelter a highly polluting industry rarely found in developed countries, and usually sited in backward countries desperate for industry regardless of its adverse consequences.

The people will bear all the costs and effects of this general Malaysian government attitude to cronies and foreign investors. The residents of the dam area have been relocated on 1.2ha per family, which they have to pay for miserable compensation even condemned by Human Rights Commission of Malaysia (Suhakam) recently. As the Malay saying goes, while the forest monkey is suckled, projects for the ordinary people cannot secure funding.

Pirates

The Terengganu public have lost billions because the previous state government invested in the Perwaja project which lost well over RM10 billion. First Silicon with Sarawak government investment of RM6 billion now only has 15 workers, down from 150 last year!

Previously, before the 1997-8 economic and political crisis, some large projects such as the Bakun Dam were supposedly privatised. However, now, it is clear that only profits and profitable assets are being privatised at discounted prices, especially to cronies. It cannot be denied that many more people were given some shares in privatised enterprises at discounted prices to disguise the favouritism taking place.

After the 1997-8 crisis began, public money has been used to finance Danaharta and Danamodal to the tune of almost RM50 billion in order to bail out the financial system, especially some banks and finance companies which had lent on dubious grounds as politically directed or due to corrupt bank managements.

Besides that, the recently closed CDRC Corporate Debt Restructuring Committee was abused in order to bail out several crony conglomerates using government and people's funds, not only at present, but also by reducing future government revenues. It is clear that pirates within and outside the government intend to privatise profits while asking the government to take over debts and losses to be borne by the government and public.

Government revenue includes both taxes and other income, mainly from state-owned enterprises such as Petronas, which is internationally acknowledged as having been well managed.

Petronas

Unfortunately, although Petronas' net income to date exceeds RM400 billion, it appears that Petronas now only has about RM50 billion in reserves. Part of the rest has been invested in projects within and outside the country which should provide a net income stream. However, a considerable amount has also been used to cover huge losses by other government owned enterprises, or to finance projects which no one else will finance by other means.

Several billion ringgit has been wasted to bail out Bank Bumiputera several times over, before it was sold at a discounted price to Bank of Commerce, owned by the Renong group controlled by Umno top leaders. Petronas has been directed to finance the building of Dayabumi, KLCC and Putrajaya (RM20 billion). Petronas also had to finance Malaysia's F1 track and the Sauber F1 team, besides taking over Konsortium Perkapalan (previously owned by Mirzan Mahathir) and Proton.

Currently, royalties due under the Petroleum Development Act of 1974 are not paid to the Terengganu state government since it was taken over by PAS, but have instead become a political instrument of the Umno leadership. Such abuse of power threatens the spirit of the federal constitution and the Petroleum Development Act, and has raised doubts about the authorities' real attitude to the rule of law. To reduce the further abuse of Petronas, it should be answerable to Parliament, and not just the Prime Minister.

The Prime Minister cum Finance Minister has announced his intention to abolish petrol and other fuel subsidies. It cannot be denied that such subsidies have been greatly abused. For example, the diesel subsidy was ostensibly introduced to help poor fishermen. However, most diesel was bought for factories, lorries, buses and taxis, while only big boats use diesel engines.

Energy conservation and environmental protection should be encouraged with appropriate public policies, but there are few serious indications that the current government has such intentions and priorities. Higher taxes on luxury cars, for example, can reduce the importation of expensive cars and the waste of petrol by large fuel-inefficient engines, besides reducing environmental pollution, which has reached dangerous levels, especially in the Klang Valley.

Inter-state inequalities

Furthermore, it is clear that, to date, the federal government has not seriously tried to reduce inter-state inequalities. Hence, although Terengganu has the second highest GDP per capita in the country, it has also had the second highest poverty rate in the peninsula before PAS recaptured the state government in late 1999.

Fiscal allocations by the federal government to the states have not sought to reduce inter-state inequalities. There are no additional allocations for the poor states (as measured by state GDP per capita), or to states with high poverty rates, or to large states (such as Pahang, Sabah and Sarawak).

Only Kedah has clearly benefited under Dr Mahathir's administration, though this has not greatly benefited the ordinary people of the state, half of whom rejected the BN in the 1999 general election.

The people in the states which voted in opposition governments such as Sabah before, Kelantan and Terengganu have been scapegoated. According to central government propaganda, high poverty in these states has been blamed on opposition party rule, though poverty rates were higher while the BN ruled and government expenditure in these states have had to be cut under opposition rule due to reduced federal government financing.

Taxes

Federal government injustice can also be seen in other regards. The Budget involves two aspects, namely revenue and spending. The main source of government revenue is taxes. A blind economist has shown what the sighted have not seen. According to Dr Ismail Muhd Salleh, post-tax income inequality was greater than pre-tax inequality, while the tax structure became more regressive over the 1970s.

Unfortunately, this regressive impact has worsened since the mid-1980s, after the then finance minister began reducing the income tax and estate duty rates on companies and the rich. Both these taxes are progressive. Hence, direct taxes now are less progressive than before. Thus, the overall tax structure is even more regressive today compared with the 1970s, when it was already regressive.

Now, almost half of government revenue comes from direct taxes, whereas indirect taxes account for only 27 percent. The current government's intention to balance the contribution of both types of taxes by 2010 will make the overall tax impact even more regressive.

There is a big possibility that the income tax rate on companies and individuals will be further reduced this year, with further regressive consequences. While taxes on those with moderate incomes have been reduced slightly, especially before elections, the tax rate on the rich has been reduced far more.

Malaysians are unfortunate. As the Malay saying goes, after falling down, the ladder has fallen on them. The budget is also regressive in terms of spending as well, and has favoured those other than the ordinary people, let alone the poor.

Arms bazaar

Government expenditure is usually divided into three sectors economic, social and security. Besides the salaries of the military and police, which need to be improved, most other security expenditure flows abroad to arms and equipment suppliers and their agents, usually from among the ranks of the cronies, as recently exposed in the case of arms purchases from France through a company controlled by the defence minister's aide.

According to The arms bazaar , by Anthony Sampson, illicit payments in the arms trade range between 15 percent and 40 percent. Some years ago, Malaysia bought Hawk fighter jets at twice the unit price paid by Indonesia, then considered one of the most corrupt countries in the world! While there were some different specifications for the Malaysian Hawks compared with the Indonesian ones, surely such differences cannot justify paying twice the price paid by that corrupt government! Malaysia boleh!

The recent two-year jail conviction of Mohd Ezam Mohd Nor clearly shows once again how the Official Secrets Act and discretionary powers of prosecution have been used to cover up abuses by ministers and chief ministers. Those who expose corruption and abuses are jailed and disqualified from standing in elections after release, while those who have clearly done wrong remain free, safe and rich.

Privatisation, nationalisation

Economic sector spending has mainly enriched cronies given lucrative contracts for infrastructure construction. And if there is the possibility of securing large profits by operating it, the project will be privatised. But if it does not realise profits, the government will nationalise it, as in the case of the LRT companies (Putra, Star), IWK and MAS, involving billions of ringgit of public money.

MAS was supposedly bought back by the government at its 1994 sale price, i.e. RM8 per share, when in fact, MAS's current debt is, by now, far greater, while its net worth is much less.

MAS's catering department which should be quite profitable has been quietly sold at a discounted price to a company controlled by family members of the deputy prime minister.

Although security and economic sector spending are more likely to benefit the rich, especially the cronies, many people believe that the government's social spending is progressive, reducing inequality and mainly benefiting ordinary people.

The share of social spending has declined relatively after the 1970s, especially in the 1990s. For example, security spending first exceeded education spending in the 1990s, curiously, after the end of the anti-communist counter-insurgency with the 1989 Hadyai Peace Treaty and the end of the Cold War.

Education

Education spending favours the children of the well-to-do more than others. Although much is spent on education with the people's money, the spending is clearly less than efficient, beneficial and progressive. Very little is allocated for pre-school education or for education outside of the government's schooling systems, although human resource development is very important for raising productivity.

Only 8 percent of those of university age attend university, while about 7 percent more attend post-secondary level courses. This ratio is less than in Thailand, let alone Japan, South Korea, Taiwan, Singapore, or even the Philippines.

Spending per student at the tertiary level is five times spending at the secondary level and 8.5 times spending at the primary level compared with ratios of 1.8 and 2.1 for Australia, and 2.6 and 4.4 for Singapore respectively.

Many have to pay high fees for private tertiary education, which is not closely monitored to protect the interests of the students and their families. In fact, education, especially tertiary education, is widely considered to be a sort of business or investment opportunity, rather than for the pursuit of knowledge for social progress.

Education policy should be conceived and implemented wisely, not impulsively. For example, while most Malaysians agree with efforts to improve the quality of English language education, there is no international consensus among educationists that primary school teaching in English of Science and Mathematics constitute a better step to improve command of English, Science or Mathematics.

Efforts to improve the quality of teaching, especially for the English language, should be seriously implemented, including rehiring experienced retired teachers and improving the quality of television programming.

To introduce successful reforms, careful preparations are necessary. Otherwise, the introduction of change will be arbitrary, and ultimately doomed. Allocations to improve students' command of languages, science and mathematics should be increased to overcome existing weaknesses.

Health

Government health spending has been praised internationally. Although the government does not spend much on health, compared with education, spending for prevention, primary care, hospital services and cheap medicines have been achievements of the government's health services since the 1960s.

However, several developments since the mid-1980s in the direction of privatisation, increased patient fees, market prices for medicines and the like are undermining primary health care, which should be further improved, besides privatizing segments to enrich certain cronies. For example, RM140 million was spent annually on hospital support services until 1994, compared with over RM440 million per year after 1995, after being privatised or contracted out to three companies with close links to the country's top political leaders.

The main danger in this regard has been plans by certain elements to further privatise health services and introduce a new health financing system. Several insurance companies and foreign health maintenance organisations (MHOs) have already begun to offer profitable services. The now well-known deceit and abuses by HMOs in the US have been ignored by the Malaysian authorities. Although the government denies wanting to ape the West, in fact, its model for emulation includes the worst, wasteful and unfair aspects of the US health financing system.

The government seems to be allowing the health services to continue to deteriorate so that those who can afford it will turn to the private sector. However, ordinary Malaysians and other concerned about this big threat have begun to prepare alternatives to protect and advance the people's interests.

Part II tomorrow

Dr KS JOMO is a professor in the Faculty of Economics and Administration, Universiti Malaya.