KL Budget

The patronage system in Malaysia is in full swing amidst the major political crisis. Prime Minister Abdullah Ahmad Badawi yesterday unveiled a populist budget with a hefty increase in funds for development projects, which are expected to be dished out by the government to Umno loyalists. Check out his budget speech and the 2007 Economic Report on the website of The Star.

As pointed out by newspapers, Mr Abdullah, who is also finance minister, presented a record RM159.4 billion budget for 2007. Of the amount, RM112.9 billion -- or 70 per cent -- is earmarked for operating expenditure.

What grabbed attention was the RM46.5 billion set aside for development spending -- a hefty 31 per cent jump from the 2006 amount. The development spending, or government contracts, will definitely come in handy for the premier to win over more Malay support ahead of the Umno meeting in November.

Another surprise was the cut in corporate tax rate from 28 per cent to 27 per cent in 2007 and 26 per cent in 2008. A move in the right direction to help narrow the gap with other competing economies such as Singapore (20 per cent) and Hong Kong (17.5 per cent).

Malaysian rates are still on the high side but the government could still provide a lot of other incentives to woo foreign investors. Another question: Is this a signal that the KL government will also cut personal income tax as part of the overall plan to switch to a Value-Added Tax regime?

Please see The Star's infographics for synopsis of other budget measures.

Well, everything sounds like business as usual in Malaysia but it ain't. The budget and other government steps now are taken with the view of blunting the blistering attacks by former premier Dr Mahathir Mohamad.

As noted by a KL-based journalist, Badawi ended his speech with some advise for Dr M:

Life on this earth is too short for unnecessary bickering.

Despite the expansionary budget, Dr M is not going to sing praises about Badawi amidst their current political fight. But the growth in the Malaysian economy is not expected to be derailed by the political drama, as argued in a recent editorial in Singapore's BT:

EDITORIAL
Umno troubles won't hit M'sian economy
Jun 27, 2006

THE war of words between former Malaysian premier Mahathir Mohamad and the administration of his successor Abdullah Ahmad Badawi has understandably attracted much attention. The former prime minister's persistent attacks on Mr Abdullah's decisions to reverse some key policies and projects, especially the proposed bridge to replace the Causeway linking Singapore, have raised the political temperature within Umno, the dominant partner in the ruling coalition.

Members of Umno's Supreme Council have rallied to voice their support for Mr Abdullah and his deputy Najib Razak. But there are signs that some others in the three-million strong ruling party may not share the same sentiment. In fact, there is even concern on whether Dr Mahathir's criticisms will split Umno.

But too much can be made of political wrangling within the party. In his time, Dr Mahathir too was roundly criticised by his predecessors for some of his policies, without creating too many problems. Certainly it may affect some government policies but, as in the past, it is not likely to hit the economy as a whole.

Again, when the party was rocked by Dr Mahathir's sacking of his previous chosen successor Anwar Ibrahim during the financial crisis of 1998, Dr Mahathir did not lose grip of the economic machinery. In fact, the removal of Mr Anwar enabled Dr Mahathir to pursue a series of radical steps - capital controls, the pegging of the currency, halting the trading of Malaysian shares on Singapore's Clob International, massive pump-priming measures and the restructuring of government-linked companies - some of which may have helped the Malaysian economy ride out the storm.

Similarly, Mr Abdullah is not likely to lose sight of the economic agenda despite the views of his former boss. The country's economic institutions and policies are in place following the restructuring in the last eight years. Capital controls have been rolled back and the ringgit has been re-floated. The economy is expected to expand at an average annual rate of 6 per cent over the next five years, compared with 4.5 per cent from 2001 to 2005.

Despite the political drama, Mr Abdullah has repeatedly voiced his resolve to implement projects under the Ninth Malaysia Plan. In any event, the premier's decision to step up spending under the latest five-year spending plan may help win support from people who depend on government patronage, and thus draw support away from Dr Mahathir.

More importantly, the domestic political fight is not likely to result in a change of the political leadership in the immediate future. Umno elections are not due until the middle of next year, although there is increasing talk that they could be shelved to help avert a tussle. And the government has until 2009 to stage the next general elections.

Foreign investors, who have seen political paralysis in neighbouring Thailand and who may think Malaysia may be similarly hit, would do well to recall that none of the previous fallouts within the party have affected Malaysia's economic and political continuity.