Recently, the Finance Ministry unveiled that there are more than 900,000 applications for the Bantuan Sara Hidup (BSH) since the registration started on 1 February 2019.
BSH was originated from Bantuan Rakyat 1Malaysia (BR1M) under the previous administration. It was first introduced in 2012 to provide direct cash aid to low-income households.
Certain quarters had once strongly criticised the scheme and labelled it as a bribe to buy votes from the public. But the incumbent government has maintained the cash handout scheme after the historic win in 14thGeneral Election.
Our Prime Minister Tun Dr. Mahathir subsequently announced that the cash handout will be phased-out gradually before a complete abolishment.
In November 2018, Pakatan Harapan tabled its first-ever national budget which includes an allocation of RM5 billion for BSH. It targets to benefit at least 4.1 million low-income households albeit a sum lower than the previous scheme.
Unfortunately, it excluded certain low-income single individuals that were entitled to BR1M payouts previously.
Interestingly, just two weeks ago the government announced that BSH will now expand to low-income single individuals with an additional allocation of RM300 million.
Why the flip-flop on decision-making again?
Perhaps, the cash handout is more than just providing financial assistance to the needy ones.
The Economic Factor
The government provides cash aid to the public directly is also known as a transfer payment in economic terms.
The government uses different spending and revenue tools as part of its fiscal policy to meet macroeconomic goals. And transfer payment such as BSH is a great example of the government’s use of spending to redistribute wealth.
For example, the wealthy people pay more taxes and then the government transfers these monies to the low-income households via BSH.
When the government’s expenditure is more than its revenue (taxes), it results in a budget deficit.
So, what’s the relevance of BSH?
The Impact of BSH on Malaysia’s Economy
Well, the answer lies in the impact of BSH on Malaysia’s overall economy. When the government dish out RM5 billion to low-income households, it poses a magnifying effect on economic activity. Because once the BSH recipients spend the money, those who earn it will spend on other things as well.
The multiplier effect depends on the tax rate and the extent of income someone would spend as opposed to saving it, which is also known as the marginal propensity to consume (MPC).
Let’s say Ali spends 90% of the money to buy groceries from Ahmad after receiving RM1,000 cash. Ahmad would earn RM900 as income. He will be left with RM720 after paying 20% tax. Again, Ahmad then spends 90% of his disposable income to buy something else (90% * RM720). The wheel keeps turning until it reaches a limit.
Mathematically, the fiscal multiplier is calculated as follows:
Fiscal multiplier = 1 / [1 – MPC (1-tax rate)]
With RM5.3 billion allocation for the entire BSH scheme, the money circulates in Malaysia’s economy is approximately RM19 billion assuming an average tax rate of 20% and a 90% MPC.
Why 90% MPC but not 80% or 70%? It’s subjective but the concept is that the less you earn, the higher the proportion of income you will spend. Make sense isn’t it?
Heck! Imagine the amount of money spent to boost the economic activity along with the multiplier effect since the introduction of BR1m in 2012.
The Social Economic Factor
I supposed any Tom, Dick and Harry on the street wouldn’t bother about how much BSH could impact the economy.
But it will be gut-wrenching if those eligible individuals do not see the money appears on their bank statements.
The topic about whether transfer payment is a boon or bane has long been debated. Many argued that transfer payment is essential to provide a minimum standard of living for those vulnerable ones.
In my humble opinion, the real issue lurking beneath the transfer payment mechanism is often underrated. Not only such payment doesn’t produce real economic output (in exchange for good or service), it also impedes the labour productivity in Malaysia. As a result, it would adversely impact the potential growth of the economy in the long run.
Last year our prime minister announced that the government will abolish such cash handout eventually as it promotes work disincentive among our community. In other words, free money is spoiling the people.
Though the idea appears unpopular among the recipients, I thought it’s really a good start to gain a toehold in our country’s new economy.
Until the recent announcement on the expansion of BSH’s coverage to include certain low-income individuals…
The Political Factor
Why am I not surprised?
It seems that there are other agendas pertaining to the use of fiscal policy other than ensuring a stable economy.
Obviously, the cash handout has contributed to Malaysia’s gross domestic product (GDP) to a certain extent. Especially when the cash payout kept increasing astronomically over the years from RM1.8 billion in 2012 to RM6.8 billion in 2018.
Malaysia achieved a 4.7% GDP growth in 2018 as compared to a 5.9% growth in the preceding year. It’s actually not too bad in view of the global economic challenges mainly due to the trade tensions between the U.S. and China.
Since the historic win by Pakatan Harapan in the 14thGeneral Election, a slew of quagmires and conundrums have been swirling around the government-linked companies and government agencies. Coupled with the news of our national debt hitting 1 trillion ringgit, it looks like our new government has a lot to prove.
No doubt GDP is one of the most important measures of an economy’s size. The tricky part is that it’s also a performance indicator to assess the effectiveness of the government’s economic policies.
Our government indeed has more pressure than ever to improve our country’s financials.
Though the effect of BSH contributing to the overall GDP may seem trivial, it does rationalise the new government’s move to maintain the scheme. Transfer payment such as BSH is reflected as part of consumer spending to derive the GDP numbers.
GDP = consumer spending + business investment + government spending + exports – imports
Is it a Coincident?
Laughably, our government announced the good news about revising BSH just a few weeks before the Semenyih by-election.
Is it really a coincident?
Imagine your employer has been rewarding you free lunch every week. How would you feel if your employer takes away your privilege out of sudden? Ahem…keep your thoughts.
After piecing the puzzles together, I supposed now you have a better idea on the objectives of having a cash handout scheme like BSH.
It’s definitely not wrong to maintain a direct cash aid scheme. But the government should carry out thorough reviews to implement it effectively with its well-intended objectives.
While populist policies appear to be the bellwether of the political trends especially in the emerging markets, over-reliance on such policies is a manifestation of policy makers’ myopia.
In other words, it’s still crucial to have proper structural reforms to ensure the healthy growth of Malaysia’s economy in the long term.
Cash handout is free candy or toxic, what are your thoughts?