States of Reform — November 14, 2011

What’s in the budget for state governments?

Illustration: Figtree Design

Nowhere is the excessive centralisation of Malaysian politics more obvious than in how the National Budget is controlled and conceived. For example, the Prime Minister’s Department uses up 5.8% of the whole, with a volume that is 10 times the budget of the richest state, Selangor; and 15 times that of Penang’s.

By Tricia Yeoh

Prime Minister Najib Abdul Razak tabled the 2012 Budget amidst great fanfare, announcing a slew of benefits for almost every possible layer of society. One common criticism is that his administration was heavy on welfare handouts, despite the fact its Performance Management and Delivery Unit (Pemandu) chief had earlier warned of the country’s bankruptcy should our deficit be allowed to continue. Malaysia, as a result, is in its 15th consecutive year of a budget deficit, and although the government expects this budget deficit to be reduced to 4.7% in 2012 from 5.7% last year, this will be achieved only given a five to six per cent economic growth —something economists, including those from the Malaysian Institute of Economic Research, have expressed serious doubts over.

So the budget’s ballooning size did not come as a great surprise, especially for political pundits whose every second sentence over the last few months has been to speculate when the 13th General Elections will be called. If this is truly an election budget – and the stakes are extremely high at both state and national levels – how exactly will this budget affect state administrations? This is a particularly necessary question to explore given political competition for state governments between the Barisan Nasional (BN) and Pakatan Rakyat (Pakatan) coalitions.

There are several forms of financial contributions made by the federal government to all the 13 state governments in Malaysia. They are categorised into the following: population size grant, state road-maintenance grant, local and municipal council grant, service payments, grant under the concurrent list (of the Federal Constitution), local and municipal council grant for street lights, road slope maintenance grant and a grant based on development of the economy, infrastructure and prosperity levels.

All 13 states receive some form of allocation under each of these categories. In 2010, Kedah, Selangor, Sabah and Sarawak were also given additional “Annual special grants”, whilst Perlis and Kelantan were given grants due to operational account deficits. Finally, Sabah and Sarawak were given RM120mil each in relation to their petroleum resources.

In the year 2010, Penang received a total contribution of RM144.28mil from the federal government; Selangor received RM589.8mil, Kedah RM296.79mil and Kelantan RM287.8mil. In total, the federal government distributed RM4.75bil to all 13 states in 2010 (Source: Actual Grants to State Governments in 2010, Estimates of Federal Government Expenditure, 2012 Budget, Treasury). This represented 2.48% of the RM191.5bil budget for 2010.

The 2012 budget documents, however, unfortunately do not provide a breakdown of how much the federal government allocated to each of the state governments in the coming year. This is because the budget document (as downloaded on the Treasury website) lists expenditures categorised into respective ministries – no other format is provided. Of course, it would have been possible for the office in charge to extract the values of grants allocated to each state to facilitate detailed analysis.

This is an issue that Parliamentarians perhaps will be raising during the Budget Debates. Only then will researchers have access to estimated financial allocations to states like Penang and Selangor.

Until then, all we have are hints at how the state governments are expected to benefit from the 2012 budget through programmes run by federal-level ministries. What are some of these “benefits” under the budget? The list below is representative of all departments and ministries that explicitly state “State Government” as being a target “customer” of a particular programme.

  • The Auditor-General’s Department will spend RM59.8mil to audit all state governments’ accounts;
  • The Public Service Commission will service the state governments of Penang, Negeri Sembilan, Malacca and Perlis; and act as mediator between the Sabah state government and federal government under the Sabah Secretary Office;
  • The Attorney-General’s Office has representatives in all Legal Advisor Offices of the respective state governments and will spend RM34.65mil in total (RM3.68mil in Penang, RM3.38mil in Selangor, RM2.13mil in Kelantan and RM2.85mil in Kedah);
  • The Treasury will spend RM6mil to process loan applications from state governments (and other loan management duties in relation to development projects);
  • The Ministry of Natural Resources and Environment (MONRE) will spend RM28.64mil to assist state governments in Peninsular Malaysia to settle their land management arrears and other duties (federal government land acquisition operations, and implementing an information and communications technology [ICT]-based land management system); and
  • The Ministry of Housing and Local Government deals largely with local government issues, but one programme specifically listed as “Local government” or Pihak Berkuasa Tempatan has as its objective to assist, coach and encourage socioeconomic development programmes and services, for which RM331.3mil will be allocated. (The total ministry’s budget is RM1.63bil, where other entries on the list include solid waste management, town and country planning, landscaping, housing, policy, management and the fire department). This entry is also included here since local and municipal councils fall under the jurisdiction of state governments.

This list may not be exhaustively representative of other intrinsic benefits that may accrue to state and/or local governments (for example, agriculture departments which are federal offices seconded to state governments, amongst others). However, the total sum of these items which have been explicitly tagged as benefiting state governments come up to a paltry RM460mil, a tiny fraction of the total budget’s RM232.8bil.

This should not be too surprising, nevertheless, given the extremely centralised manner in which budget and policy-making have become (a point I have belaboured in past columns in this magazine). The budget for the Prime Minister’s Department, for example, has grown from RM11.9bil in 2010 to RM15.9bil in 2011. In 2012, this seems to take a slight cut down to RM13.5bil, a positive sign, but the point is that the Prime Minister’s Department alone takes up 5.8% of the total national budget.

It is clear that as long as Putrajaya intends to micromanage policy and execution, the purse strings will be held tightly at the top of the food chain.

Compare this to the Selangor state government budget (one of the larger state budgets in Malaysia), which totals RM1.3bil annually. And the significance is even starker when compared to the smaller state government budgets in Penang (RM900.35mil) and Kelantan (RM53.24mil).

In answering the question of just how much the state governments benefit from the 2012 national budget, one is brought back to the issue of the federal-state structure of government administration. The fact that the figures show minimal direct contributions by the federal government to state and local governments is merely a reflection of the ways in which policies are set and implemented. Macroeconomic and social policies are still largely governed by the centralised federal government, and hence that is where the money lies.

Decentralisation of government policy would encourage greater local participation in the decision-making process. Under the BN coalition, this trend is nowhere near taking place in Malaysia. It is clear that as long as Putrajaya intends to micromanage policy and execution (even of issues that can be much better managed at the local constituency levels, like community public transport and solid waste management), the purse strings will be held tightly at the top of the food chain.

As the general elections approach, some state governments may raise this as an issue of contention. After all, it is extremely difficult to demonstrate to an electorate the changes in a state if its government is not in fact in control of factors affecting their livelihood. Control of funds is tied directly to control of one’s resources: the election issues of, for example, management of water resources and payment of oil royalty (in Kelantan, Terengganu, Sabah and Sarawak) will therefore be recurring themes. For now, state governments will have to be satisfied with a top-heavy budget, taking whatever remains that do trickle down to them.

Tricia Yeoh has previously worked with the Selangor state government and is now attached to a market research consultancy.

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