The Harvard Business School Alumni Club of Malaysia: The People and The Budget, Kuala Lumpur 18 October 1994
One of the great things about the Malaysian Budget is that it is the result of consultations. The series of pre-Budget dialogues is now almost institutionalized, to enable various sectors of the economy to submit their proposals for consideration while we prepare the Budget. Unfortunately, except for economists who address broad macro issues, most of the views presented are often narrow, representing the interests of particular organizations or sectors. More often than not, they are a rehash of the previous year's unsuccessful lobby. It is for this reason that, in the last few years, participation in the dialogue has been widened to include groups and interests which for many years have been neglected. They include the various NGOs -- non-governmental organizations -- and cultural organizations. They indeed provide alternative interpretations, more cautionary, than the generally bullish views of economists.
Many eyebrows were raised when I insisted on the participation of writers, artists and cultural organizations in the pre-Budget dialogues. We believe that the budget must reflect our concept of development, which is holistic. Development cannot be one dimensional or reduced to purely economic components. Development must follow from our vision of life and society that encompasses the life of the intellect and the appreciation of cultural expressions. Malaysia has done extremely well in stimulating commerce and industry, and it has thus become increasingly urgent that we do something to enrich our intellectual and cultural experience.
Nonetheless the core of our Budget must address the pressing economic issues of the day. In our case the strength of macroeconomic fundamentals cannot be compromised. We have to sustain and even improve the investment climate, for foreign direct investments, especially in high technology industries and re-investment from existing establishments, as well as for domestic investments. To sustain the vitality of growth, a continuous flow of investments must be guaranteed.
Malaysia certainly offers an attractive investment climate, otherwise we would not have been able to attract continuous and even increasing investment, despite stiff competition for global capital. Political stability is the bedrock of that attraction, and then because we are fast emerging as a leading profit centre in the region.
Whenever foreign companies plan to invest, they will look at our tax rates. Thus, to some people, all they want to know about the Budget is the tax package. It is a tragedy that I cannot tell you anything about the taxes tonight. Of course you can read my lips, but that doesn't mean that there's going to be no new taxes.
There are many ways of raising tax money but there are two famous ones. One is the way of Robin Hood and the other is the way of the Sheriff of Nottingham. The method of Robin Hood is to rob the rich and then redistribute the spoils to the poor. Today this method is practiced under the name of progressive taxation. The method of the Sheriff of Nottingham is to milk the poor to the last penny to enrich the king, that is the state's coffers. Everybody hates this method, so it is called regressive taxation. I am neither Robin Hood nor the Sheriff of Nottingham.
No government can function without taxes, and unfortunately it is the function of the Finance Minister to raise revenue. With apologies to Shakespeare:
But given the choice, I would love, and would seize every opportunity, to reduce taxes, except on cigarettes and alcohol.
Last year I was accused by a foreign journalist of practicing what he termed "fiscal sorcery." The Budget presented reduced taxes, increased expenditure but still managed to balance the books. To be honest, I am no sorcerer. In the last few years we have progressively reduced our corporate tax rate, yet our tax revenues have not declined. On the contrary they have increased. There is nothing new in this. It has been observed some 500 years ago by a great Muslim thinker and a precursor of many modern economic ideas, Abdul Rahman Ibn Khaldun. In his magnum opus called the Mukaddimah or Introduction to History, Ibn Khaldun wrote: "When taxes upon subjects are low, the latter have the energy and desire to do things. Enterprises grow amd increase, because the low taxes bring satisfaction. When enterprises grow, the tax revenue increases. However when the taxes increase beyond the limits of equity, the result is that the interest of the subjects in enterprises disappear, since when they compare expenditures and taxes with their income and gain and see the little profit they make, they lose hope. Therefore, many of them refrain from all economic and cultural activity. The result is that the total tax revenue goes down. Today this inverse relationship between tax rates and tax revenue is in economic theory known as the Laffer Curve.
President Reagan was certainly fascinated with this view of Ibn Khaldun. In fact he cited his name when he unveiled his own tax cut proposals. Unfortunately Mr. Reagan ended up with the biggest deficit ever in American history. Reduction in tax rates will not do any good without fiscal discipline. Thus a balanced Budget should now be the prominent feature of our fiscal policy.
One of the greatest deceptions in our time is that reckless spending, sheer waste and extravagance is justified in the name of social responsibility; and deficit financing made respectable by Keynesian orthodoxy. Bureaucracy, originally meant to fulfill a few specific functions, acquired a life of its own. New functions have to be created for them to justify their continued presence. Fortunately we have exposed this myth: the implementation of the special RM700 million ASB scheme for the hardcore poor and the massive RM2.1 billion low cost housing projects do not incur any additional staffing and administrative expenditure is kept to the barest minimum.
The Malaysian economy is currently in its seventh fat year. In these years, growth had exceeded 8 per cent, and naturally inflationary pressure is being felt. Inflation would have spiralled had we not suppressed prices by a combination of monetary and fiscal measures. We are doing quite well already. But we are not content with the present situation. And if our battle against inflation is to be made effective, the attack must be focused in sectors where the pressure is the strongest. In most cases, the pressure is caused by supply bottlenecks, which are in turn due to rampant monopolistic practices or inefficient distribution systems. In these cases there is no solution to it but to undertake trade liberalization measures: to introduce greater competition in the markets and to modernize the distribution system to reduce the price differential between towns and regions.
Malaysian economic policies are pro business. This is one of the reasons why we have been able to sustain a high level of economic growth despite uncertainty in the international situation. In the coming budget we plan to introduce further liberalization measures that will strengthen economic fundamentals and enhance the climate for business and investment. We will do everything to promote growth. With growth we can embark on policies to realize distributive justice. Growth without distribution is unjust; but distribution without growth can only mean one thing: the distribution of poverty.
Our vision of growth and development must always be comprehensive to manifest the depth and richness of human experience. As such, there will be additional fiscal incentives to promote learning, research, sports, the arts and culture. We will also address the need of our youth. They are great people with tremendous energy. Our failure, if we can say so, is to allow them to drift along aimlessly. They have been the target of too many patronizing remarks, but what is missing is effective and diverse programmes to tap their potentials and to channel their energies.
Finally, the unique feature of the Malaysian budget is that its process of formulation is truly participatory. In the pre-budget dialogue we have representations from such diverse groups -- from the tycoons to the physically handicapped. In fact one of the most remarkable submissions in our recent dialogue came from a representative of the blind or visually impaired community. He presented the case of his community with great persuasion yet with great appreciation of manifold constraints of the Treasury. I was in fact very moved by his presentation, because the blind can see more of our predicament than others are able to. Some of the greatest lessons and inspirations in our life come from people we expect the least, if only we have the humility to listen.