Unused funds not enough to cushion global slowdown effect

KUALA LUMPUR: Unutilised government funds in 2011 as a result of its expenditure still being below budget in the first half may cushion the impact of the weaker global economic environment but only to a small extent.

Economists say the unspent money by the Government, on its own, would not be enough to ward off any slowdown in GDP growth and that the flow of private investments would be crucial to withstand external pressures. In recent weeks, growth estimates for full year 2011 have been cut by pundits due to the worrying economic situation in the United States and Europe.

Credit Suisse economist Wu Kun Lung said the budget deficit as at first half of the year represented only 10% of the total budget deficit for 2011. In a recent report, Wu pointed out that a bulk of the funds that had been allocated as per Budget 2011 but yet to be spent involved development expenditure.

“Instead of running a much smaller than budgeted fiscal deficit, we expect the Government to ramp up spending significantly in the second half of 2011 to meet the spending target,” he said in the report.

Credit Suisse noted that for 2011 the estimated budget deficit was RM45bil or 5.4% of GDP but so far in the first half only RM4.5bil had been spent.

Total expenditure for the first half increased by 7% in the first half of 2011 compared with the corresponding period last year while revenue collection was higher than projected, which was normally the case during a period of economic growth.

The Government collected RM89bil in the first six months of 2011 a 26% increase in revenue from RM71bil previously which Credit Suisse attributed to higher oil prices which led to an increase in petroleum tax and the change in tax assessment from the previous year to the current year which added RM3bil to the coffers.

A hike in service tax from 5% to 6% and securitisation of government employees' housing loans of some RM4.2bil also led to the higher revenue.

Credit Suisse said it was normal that money had not been fully spent yet on development expenditure as this was the first year of the 10th Malaysian Plan which is about when the Government sorts out administrative procedures such as dealing with tender documents, land acquisitions and details of project designs before money is actually channelled into identified projects.

The research house pointed out that development expenditure was lower by 24% in the first half of this year while operating expenditure was up 15%.

“We believe the Government is likely to boost spending on basic infrastructure (water supply and electrification projects) in rural areas, urban transport and high-speed broadband. Sectors under the Economic Transformation Programme (ETP) such as agriculture, tourism and energy should also see a spending boost. The Government is likely to increase spending on education and healthcare,” said Credit Suisse.

Should the Government's spending ratchet upwards in the second half, the fiscal deficit was not expected to go beyond official estimates as revenue was also projected to increase over the period, said Credit Suisse.

MIDF Amanah Investment Bank Bhd chief economist Anthony Dass said any left-over funds that would be spent in the second half of this year would not be enough to offset the expected external-driven slowdown in the economy.

“The lag effect will be too long,” he said, indicating that the time it takes for the money to work through the economy might not be felt this year.

Dass said implementation of projects had been a sore issue for long but added that programmes under the ETP would act as a buffer against the downside of the economy.

Private investment has emerged as an important kicker to the economy's composition of domestic demand and Affin Investment Bank Bhd economist Alan Tan believes that should domestic demand, which constituted investment and consumption by the Government and the private sector, remain strong then it could offset the slowdown in exports as the global economy slows.