The Malaysian economy in 2018 played a role in Malaysia’s historic regime change, but not through any sensational economic disruption. The UMNO-led, Barisan Nasional (BN) coalition had ruled continuously since the country’s Independence. This BN coalition lost in the 14th General Elections (GE14) but it wasn’t an election waged on grounds of economic collapse. There was no economic crisis to speak of, unlike in 1997-98, and the ringgit was not plummeting.

The growth rate dropped to 4.2% in 2016 from a safer 6% in 2014. But the economy was on the mend, in so far as the GDP was rising after 2016. Annual growth rates were increasing after the 2008 crisis, peaking in 2014. The months leading to the elections did see the growth rate slipping, but it was probably not at the root of the dissatisfaction.

Other gnawing issues troubled the people. Some of these included the festering 1MDB scandal, the rising cost of living, high household debt, and the high rate of public debt.

There was a deep sense of disillusionment because people felt they were not participating in the country’s growth. While Malaysia’s growth was satisfactory, the country’s prosperity was not felt by the people.

A wide range of annoying issues abounded: former prime minister Najib Razak’s wife’s spending on handbags and diamond rings angered the public; there was a widely-held perception that Malaysia was being sold out to China, and the 1MDB scandal was consuming the patience of the people, what with scathing reports from the United States Department of Justice (DOJ) and related arrests in other jurisdictions.Ultimately, these issues helped Barisan Nasional lose GE14.

Having won the elections, the new Pakatan Harapan (PH) government led by the nonagenarian Dr Mahathir Mohamad has before it the onerous task of meeting the people’s aspirations.

It’s probably unfair to judge the present government on its economic management. A new government taking over from its predecessor after 60 years cannot be evaluated on what it has, or has not, done in six months.

Still, some provisional comments can be made on the decisions of recent months.

The star of 2018’s economic landscape is Finance Minister Lim Guan Eng. He has been daring, willing to grab the bull by its horns, and keen on trying to bring new ideas to a staid job. He can be credited in revealing the excesses and ineptness of the previous government in its investments. The rampant accumulation of debt was thrown open for all to see.

There is the huge debt burden the country has to carry. The finance minister deviated from international guidelines in reporting by redefining national debt to include federal government debt, contingent liabilities, and lease payments for public-private projects. Not all international organisations adopt the same approach. With this accounting approach, Malaysia was found to have debts in excess of RM1 trillion (A$350 billion). It is debateable if a redefinition was necessary and if it gives a more accurate picture of the nation’s economic position.

Generally, the argument is that contingent liabilities are contingent upon the projects failing. As long as they don’t wind up, and have adequate assets to draw upon, they remain contingent liabilities. When the projects fail, and the projects have inadequate assets at that material time, the liabilities crystalise into debts. Contingent liabilities are not debts, but they can become debts. There is a difference between being and becoming.

If this difference was ignored by the new government, there may have been two possible reasons. First, the PH government anticipates the collapse of the projects that the previous government had guaranteed. Two, the PH government wants to ramp up a sense of urgency and signal the onset of a more austere policy-making environment.

The unnecessary debts the new government has inherited has had its effects on foreign policy too. One of the first moves that Dr Mahathir made was to reverse the decision on a few huge infrastructure items. Two projects were cancelled: the RM55 billion (A$19 billion) East Coast Rail Link and the RM9 billion (A$3.03 billion) Multi-Product Pipeline and Trans-Sabah Gas Pipeline. One was undertaken by China Communications and Construction Company and the other by China Petroleum Pipeline Bureau. The High Speed Rail that was supposed to have connected Kuala Lumpur and Singapore was put on hold until 2020.

Dr Mahathir sought the cooperation of China in reversing earlier decisions that were clearly not judiciously thought through. This will have foreign policy implications, but that is another story.

The pullback was a bold but necessary act in view of the inflated price that Malaysia would have otherwise been saddled with. The withdrawal of these projects meant a loss of the resulting multiplier effects. To take such a view would have been short-termist. It would have made bad economic sense too when weighed against the massive interest payments that would have been due.

Another abrupt policy intervention was the retraction of the goods and services tax (GST), and having it replaced with the sales and service tax (SST). This decision was prompted by the desire to honour PH’s election manifesto which included the promise to do away with the GST.

As a policy instrument, the GST has been warmly received in most of the countries around the world. There are valid conceptual reasons why the GST is a good form of taxation. However, the GST was thought to have been the cause of Malaysia’s high cost of living. This need not have been true. What was probably at the root was the manner of implementation of the GST and the exercise of anti-competitive forces during the previous regime. These are the factors that may have led to price increases.

The removal of the GST left Malaysia’s economy grappling with another problem: how would the government deal with the shortfall in such revenue, which was estimated at RM20 billion (A$6.73 billion)?

The question of insufficient tax revenue sources plagued analysts prior to the announcement of the Budget 2019, the PH government’s first budget. With the high public debt and the constraint on tax revenues, there was speculation that the government would go on a tax collection rampage. There were fears that taxes on inheritances and capital gains would be introduced.

But Budget 2019 cleverly side-stepped slipping down the steep slope which would have come about by imposing undue fiscal burden on the people. The budget turned out, largely, to be a sensible one. It surely got the bigger picture right.

It’s necessary to raise adequate government revenue. At the same time the following constraints have to be taken into account: a weakening external environment, the need to boost domestic consumption, and the people’s expectations in regime change.

This mix demanded a more flexible budget – one that is at least mildly expansionary, and one that takes into account the stark reality of the coming year. The Ministry of Finance deftly executed a budget that suited the bill. It went in for a budget with a deficit of 3.7% of gross domestic product. It also retained the scheme of cash grants for the underprivileged with some modifications.

In essence, the Ministry of Finance did not want an austere budget that would bring the economy to a grinding slowdown, since a gloomy external environment is expected next year.

There had to be sufficient support to boost domestic demand, and Budget 2019 addresses that in several ways. There’s mention of attending to infrastructure and public amenities. The needs of the disadvantaged are not ignored; there are cash grants for them. Households earning a monthly income of RM2,000 and less will receive RM1,000. This will benefit about four million households.

Another useful measure was the proposed fuel subsidy. Viewed from the private sector perspective, too, it’s a satisfactory budget since it provides some incentives for the small and medium-sized enterprise sector.

Some of the incentives in the budget are of token value, like the one-off payment of RM500 for pensioners receiving less than RM1,000. The measures for healthcare do not seem to be comprehensive, at first glance. The details regarding coverage are unclear. It has yet to be spelt out how the insurance companies will participate in this programme. In any case, the M40 (the middle 40% of the population) is also in dire need of health coverage. The budget is a reminder that a public health financing scheme, long overdue, is urgently needed.

In at least one respect, the budget has attempted to be innovative, that is, in the initiative to build affordable housing. The budget proposes that this be done through crowdfunding. The proposed scheme requires first-time house buyers pay only 20% of the cost of a house, with the remaining cost borne by investors using a P2P framework. Several questions come to mind. First, if a buyer can produce 20%, generally, it should not be too difficult to obtain a loan from a bank. This begs the question, why then crowdfunding? Second, it is not obvious what aspect of the home ownership problem the crowdfunding mechanism is trying to solve. Crowdfunding works well when the supply of capital is limited and more sources need to be tapped. In Malaysia, the constraint lies more with the consumer, with affordability, than with the supply of credit.

Further, the crowdfunding project is being launched, in a manner of speaking, on an experimental basis. The scheme would be open to first-home buyers for homes within the RM300,000 – 500,000 range before being extended in scope. One would expect the government to be a guardian of conservatism in the use of financial instruments, preferring to use what has been tried and tested, than to play the role of a behavioural economist.

Dr Mahathir has been reserved in his judgment, commenting that he wants to see “the house, the owner and the investor.” He added cryptically that “the proof of the pudding is in the eating,” implying that he would not be convinced until he saw evidence of the scheme’s success. Daim Zainuddin, former finance minister and head of the Council of Eminent Persons, has been equally cautious, calling it a well-intentioned initiative in which studies will have to be carried out.

The current government has its hands full in dealing with the enormous financial mismanagement of the previous BN government. This in itself is a good first step to establish a culture of good governance. But firms steps will have to be taken to ensure that there are enough institutional processes to block any such recurrence. At the moment, it does not appear that there has been a thorough revamp of all such processes, vital as they will be to avoid discriminatory practices, corruption, and cronyism.

There are areas where the government has taken firm action and there are others where it has been tentative. The Budget 2019, for instance, has been a balance of attempts at innovativeness and sensibility. But the economic direction for the next few years is not yet clear. Maybe it’s a reflection of the fact that the new government knows what should not be done, but is still finding its way around what should be done.

It’s also possibly grappling with the challenge of doing things differently to the previous regime. How, for instance, will Malaysia define its trade or industrial policy? What will the new sources of growth and tax revenue be? These are questions that the PH government will have to discuss and decide upon. One expects the ‘New Malaysia’ economy to be based on firm ethical and institutional foundations, as well as clear economic thinking, in determining the country’s direction.