by Wan Saiful Wan Jan. First published as “How our money is spent” in The Star 14 October 2014

The Prime Minister delivered his Budget Speech last Friday. The speech started very well. I like Dato Sri Najib Razak’s admission that “The biggest challenge I face in administering Malaysia … is how to balance between policies that are populist in nature as compared to those policies based on economic and financial imperatives.”

This is the reality of politics. Politicians must be and must remain popular. Someone who does not worry about popularity shouldn’t even think about entering politics. Acknowledging that shows that Najib is a realistic politician, unlike some others who are extremely populist but always deny it.

The challenge however, as Najib rightly pointed out, is to find the right balance between populism and doing the right thing.

In his Budget Speech, Najib started by outlining some key principles that are imperative if Malaysia wants to move forward. He said we must prioritise human capital development and enhance our national competitiveness and resilience.

He also stated that we must reduce our fiscal deficit, encourage entrepreneurship, reform the taxation system, reduce leakages, and rationalise subsidies.

Almost everything that he said in the first half of his speech would make any good economist happy. But he very quickly contradicted himself when he reaches the second half of the speech.

The second half focused almost completely on populist handouts and giveaways. Those who wrote the speech clearly tried very hard to include everything under the sun.

At least some money has been allocated to a very wide range of recipients, from those living in Perlis to teachers, police officers, people with debt, youths, nuclear medicine, airport runway, books, mangosteen, train services, to even padi bukit in Sabah.

I am disappointed with the second part of the speech. Najib missed the opportunity to educate the rakyat about austerity. He mentioned the need to make “difficult decisions” but in the second part of the speech it was as if he has made no difficult decisions at all. It was all spend, spend, spend.

Following the speech, there was a frenzy to either support or condemn the government. But not many asked the most critical question – who is actually paying for all the allocations announced last Friday?

The common understanding seems to be that the government pays. But this is wrong. The government is not a productive entity for it does not generate income for itself. The government does not have any money of its own.

Hence the concept of “government money” and the idea that “the government will pay” are simply wrong.

The actual money will come from you. Every single one of you will be paying for the expenditure that was announced last Friday.

That is the nature of any government in this world. In every country, including Malaysia, the government takes money from its citizens.

To appreciate this fact, we need to understand the concept of taxation. If you read economics, taxation may take up several books to understand. But it really can be explained in plain non-technical language.

Every government will impose taxes on citizens. There are many types of taxes – income tax, corporate tax, sales tax, services tax, excise duty, import and export duties, foreign worker levy, stamp duty, GST, inheritance tax, assessment tax, and many more.

There are so many types of taxes that can be imposed such that it is often said that there are two things no one can run away from – death and taxes. We will certainly die one day. And we always pay tax whether we realise or not.

When it comes to taxes, you do not have a choice but to pay. Tax evaders can be punished by imprisonment. In fact, in China, up to recently you could be punished by death for tax evasion. Taxes are something we are coerced to pay.

To make a very crude analogy, under normal circumstances, if a stranger coerces you to give your money to them, we usually call it theft or robbery. But when it is legitimised through an act of parliament, the coercion becomes taxation and that stranger suddenly evolved into the Inland Revenue Service.

You may not realise that you are being coerced. But ask yourself, do you pay taxes because you want to or because you have to?

Thus if you go back to the most basic understanding of economic or taxation principle, and to use a non-technical explanation, what is commonly called “government’s money” is actually money that have collected from every single of us through coercion.

There is nothing to celebrate when the government announces funds for certain initiatives, gives money to selected groups, or subsidises this and that.

Once again let me make a most crude analogy. Would you celebrate theft if the thief gives the money to you? I hope the answer is no.

The difference between theft and taxation is the existence of an act of parliament to legitimise the latter. Both remain coercive in nature.

Nevertheless I don’t want readers to assume that I am calling for the abolishment of all taxes. That might be ideal, but it is also utterly unrealistic. I accept that paying taxes is a must.

What is necessary, instead, is we should acknowledge that taxes and redistribution are by nature morally questionable. Therefore the best approach is to look at all types of government redistribution with great scepticism, and stop praising politicians for their “generousity”.

Generousity is when you give your personal money. If I come into your house, take your money, and give it to someone else (after taking a cut for myself), am I really being generous?

Admittedly this article raises another question, which is how do we as a country help the needy? Answering that requires at least another full article and I will come to it later.

For now, I just want to make it clear that every single allocation announced last Friday will not be paid by using the government’s money for they have none. You will pay every single sen.

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Wan Saiful Wan Jan is the Chief Executive of IDEAS

Image credit: The News Straits Times

2 Comments

  • Derek Law 2014 Oct 14 / 16:19

    Totally agree with what you said. This is the reason why we need GST, to expand the tax bracket to a wider segment of the population.

    All citizens consume “Government Resources such as Education, Healthcare, Safety (Police, Arms, etc), even the lower income segment. Hence, all citizens must contribute to this Fund, not just the Middle and Upper Income segment of society through personal income tax.

    Of course, the Government needs to be prudent in its spending and plug leakages such as RM300 for a screwdriver, etc.

  • Freddie Cheong 2014 Oct 15 / 00:04

    This article makes sense.

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