Analyzing Malaysia's Budget 2016: Assessing Feasibility Via Economic Models (Essay).

Overview of Malaysia's Budget 2016

Question:

Analyse the budget of Malaysia for 2016.
 

The article that has been taken up for analysis is one that highlights the budget of Malaysia for 2016. The article takes into account the speech by Najib Razak, the one which discussed the budget that highlights the government’s plans to narrow its budget deficit and address the issue of the rising cost of living. The plans included the budget allocation along with the scheme for taxes, government expenditures, subsidies and handouts, Development, Oil project, Minimum wage and Macroeconomic highlights. Although the plans for each of these issues have been thoroughly created, the analysis of the issues of monetary policy and fiscal policy needs to be carried out. The analysis can be carried out with the help of two of the most widely accepted models. The classical economic model and the production possibility frontier model are the two models which can be utilized to efficiently evaluate the issues. The two models are to be used in conjunction with the issues in order to scale their feasibilities in the system of Malaysia. The two models are ones that do not provide a fixed number but instead put things on a comparative scale on the basis of the need to perform and the degree to which it is being performed. In such a case, these economic models are the perfect scales to measure the feasibility of a budget of a country.  

Definition of the Classical Economic Model

The classical economic model is a model of assessment through assessing the demand and supply where the practicality of any action or step is measured by directly comparing it with the need for performing that particular course of action(Abel and Bernanke, 2001). For example, the classical model is used in the factor of demand and supply. In such a case, the law of demand states that with all other factors remaining unchanged, the quantity of a product or service that is demanded will increase when the price has decreased. The law of supply states, with all other factors remaining unchanged, an increase in price will result in an increase in the quantity of the product or service that is supplied to the market(Basu and Kronsjo, 2009). The laws of supply and demand are one of the most important factors in identifying the degree of success that the ideas could experience.

The production possibility economic model is more of a graph based model which takes into account the productivity likelihood for the products. However, the products must possess a specific set of inputs which include technology, labor and capital(Blanchard, 2006). In such a case, the model is mainly used for commercial products. However, the model is also used to a certain degree in the analysis of the budget. The factor of tax schemes can be assessed via this model as the tax models are essentially products that are supposed to deliver certain results(Gärtner, 2003). The results of the tax schemes can be considered to be products of some kind as it is something that has an effect on the budget as a whole. The effect on the budget is a factor that can be measured via a graph of this nature which measures the likelihood of the success of the initiative.

Classical Economic Model

The two theories that have just been mentioned should be used in a combination to analyze the issues of the monetary policies which include tax schemes and minimum wage. First of all, the tax schemes can be evaluated via the classical economic model and the production possibility frontier model. The tax scheme puts forth the system of levying higher taxes on income and products. However, this process can impact the overall monetary system of the government. According to the tax scheme, the income tax is to be increased to 26 percent from the earlier 25 percent(Hubbard and O'Brien, 2006). However, the tax on certain goods has also been increased. Although some tax benefit has been provided to the middle income population this process cannot be very useful as a decrease in income would severely affect the sales of goods that have higher taxes levied on them. The classical economic model thus comes to play in this scenario. The government has made the essential needs tax free. However, the taxes on certain goods and services have been increased(Krugman and Wells, 2009). This means that those goods and services would not be availed to a higher extent. Although the middle income group has been offered some tax benefits, the higher prices of goods on which taxes have been levied would act as a deterrent for the middle class. However, the majority of the government revenue generation comes from that particular class. The government has planned an allocation of RM 267.2 billion from an earlier 260.7 billion. However, with the presence of such a structure, the monetary policy of this field is supposed to take a hit. The production possibility frontier model analyzes the productivity of this scheme. The scheme is created with a view to generating greater revenue for the government. Although the government would be able to gain a significant amount of revenue out of the income tax, the higher amount of tax that is generated from the sales and services would be significantly lost.

The issue of minimum wage can also provide us with an idea of the fiscal policy. According to the budget, the minimum wage is to be increased from RM900 per month to RM1000 in peninsular Malaysia. however, it is very clear that the increase is not enough in this case(McKenzie, 2002). The classical economic model can be used in this scenario in order to measure the effectiveness of this measure. While the process does not bring about any significant change with it, this practice is set to bring about huge changes in the market prices of goods and services(Salvadori, 2003). While the increase of just RM 100 is extremely less to bring about any change in the lives of the workers, it is supposed to drive up the production costs in every sector. With such a high production cost, it is only natural that the prices of all the associated goods and services would increase. However, the increase in prices to such an extent would only create more problems for the economy(Tabb, 2004). The consumption would be cut down by the middle class earners. In such a case, the revenue generation of the government would go down to a significant extent.

Production Possibility Frontier Model

The production possibility frontier is again useful in this matter. It can be used to measure the possibility of such a step bringing about any measurable change(Urai, 2010). The model again finds out that the step would just be a waste of resources as the step would not bring about any change in the overall system. The fiscal policy of the government itself is measurable through the production possibility of frontier. While the system gives us an idea of how to handle the resources, the fiscal policy can also be decided on the basis of how much output the scheme provides. 

Conclusions and recommendations

The Malaysian budget came at a time when it was much needed. The various issues of tax schemes, expenditures, subsidiaries and handouts, development, oil projects and minimum wage have all been put into separate categories in order to ensure a system that takes into account all the proper application of the schemes into the various sectors. The plans for tax schemes and minimum wage are two of the most important issues to take into notice for the further development. While the tax schemes have been changed to a slight exchange, the problem that lies here are the problems in revenue generation for the government. The solution to this lies in a slight change in the tax schemes. First of all, the taxes need not be increased for the middle income groups. As for the taxes on goods and services, the amount of tax that has been increased can be extremely less on each thing. In such a case, the slight increase in prices would not be a problem for the people. In the case of a slight increase, the people could consider availing those goods and services as a slight increase in the prices would not be much of a problem for the people. Also, the taxes might be increased for the higher income groups but the middle income groups would be at a disadvantage if the taxes are increased. In such a case, the taxes for the middle income groups can remain the same. In the case of daily wages, the slight increase of the daily wages is not going to provide much of an advantage to the working class population. While the increase in wages is a welcome step, the fact remains that such a low increase is more of a disadvantage than advantage. It is because of the slight increase that traders get a reason to drive up the prices. If the minimum wage is to be increased, the wages need to be increased by a significant amount. Also, the prices for certain essentials need to be bound by laws to a fixed amount.  

References

Abel, A. and Bernanke, B. (2001). Macroeconomics. Boston: Addison-Wesley.

Basu, D. and Kronsjo, T. (2009). Economic models. Hackensack, NJ: World Scientific.

Blanchard, O. (2006). Macroeconomics. Upper Saddle River, N.J.: Pearson Prentice Hall.

Gärtner, M. (2003). Macroeconomics. Harlow, England: Financial Times/Prentice Hall.

Hubbard, R. and O'Brien, A. (2006). Macroeconomics. Upper Saddle River, N.J.: Pearson Prentice Hall.

Krugman, P. and Wells, R. (2009). Macroeconomics. New York, NY: Worth Publishers.

McKenzie, L. (2002). Classical general equilibrium theory. Cambridge, Mass.: MIT Press.

Salvadori, N. (2003). The theory of economic growth. Cheltenham, U.K.: Edward Elgar.

Tabb, W. (2004). Economic governance in the age of globalization. New York: Columbia University Press.

Urai, K. (2010). Fixed points and economic equilibria. Singapore: World Scientific.

Williamson, S. (2005). Macroeconomics. Boston: Pearson Addison Wesley.