The true meaningless cost

Forecasts give hostages to fortune. Consequently, their underlying assumptions should be made public. That was not the case with the proposals to stimulate the economy made by the Opposition Leader in his budget speech reply, nor with the government's initial efforts to shoot the proposals down.

The result beggars belief. The government estimated that the four MLP proposals would cost the government Lm115 million annually in foregone income. The MLP accused the government of scare-mongering with falsehoods, claiming its proposals would cost only Lm15 million a year.

The Prime Minister stuck to the Lm115 million forecast, notwithstanding that fellow Nationalists suggested it may be rather inflated.

I hold that both figures are far from correct. Assuming that we are measuring today's reality I work out that the Labour proposals would cost about Lm32 million to implement, ignoring any claw-back the government would make from VAT receipts on stimulated private expenditure.

The most controversial estimate concerned Labour's proposal to exempt overtime from tax, irrespective of the discrimination against other types of earned income.

In the budget speech, the Prime Minister had said it appeared "that from declared income of Lm12 million about Lm1.5 million is still caught in the 25 per cent tax bracket". The reference to declared income from overtime work was clear enough. Then, in winding up the budget motion debate on October 22, the Prime Minister clarified - without specifically admitting his error - that he had been referring to Lm12 million tax revenue and not declared income.

A Department of Information release on November 22 attempted to fudge the error further with a brazenly incorrect claim that the Prime Minister had originally referred to Lm12 million tax revenue. In a presentation last Thursday, the Parliamentary Secretary at the Finance Ministry went on to give different figures!

Be that as it may, we now know from the Parliamentary Secretary and the National Statistics Office (The Sunday Times, yesterday) that income from overtime can be reasonably forecast at about Lm50 million in 2008. Taxed at 15 per cent that would yield Lm7.5 million (and not the Lm2 million or Lm12 million claimed by the MLP and the government respectively).

The government also claims that abuse will cost another Lm18 million in tax income lost to the government. That subjective hypothesis can be ignored; the estimate should relate to the direct cost of the Labour proposals.

The government initially said that adding back to annual leave public holidays that fall on a weekend would cost Lm5 million. The Parliamentary Secretary at the Finance Ministry has now upped that! Labour says it would cost the government nothing.

In reality, the direct cost to the government would be whatever it has to pay out in overtime and substitution allowances during the restored public holidays. Put that at a roughly Lm1 million annually.

The government also gave Lm60 million as the yearly cost of subsidising house loans by one per cent if the Central Bank rate went above 4.5 per cent. That would only be the case were the subsidy to go to all borrowers who have house loans (of up to Lm50,000). Labour - ignoring the implied socio-economic discrimination, which will surely cause a backlash from borrowers - has specified the subsidy would only go to first-time borrowers, presumably new ones. Say 2,000 of them each year will take a house loan of up to Lm50,000 - the subsidy, in the set circumstances, would cost Lm1 million annually, rising cumulatively if interest rates stay up.

As for the surcharge at the present price of crude oil, halving it would cost a Labour government about Lm22 million. That brings the initial total direct cost of implementing Labour's proposals in today's circumstances to Lm31.5 million - hence my Lm32 million above.

So? So nothing - circumstances change.

And, in any event, both the government and the opposition are wrong to want to stimulate the economy by fuelling consumption.

The first objective should be to increase export-oriented direct investment. The heat about the true cost of Labour's proposals - strikingly close to the injection proposed by the government in the budget speech through tax cuts and social benefit increases - does nothing for such investment.