Budget 2024 Needs To Revisit State Allocations

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From Doris Liew
Malaysia’s budget historically mirrors the centralisation of government authority at the federal level. In 2021, the actual allocation to state governments amounted to a mere 2.4% of the total government expenditure in Malaysia.
Even with such a small pie, the distribution of funds to state governments is largely uneven. States that are among the highest economic contributors consistently receive a lower proportion of federal funding year after year.
Notably, Selangor, Johor, and Penang emerged as the three largest contributors to Malaysia’s GDP in 2021, collectively generating RM574 million, or 63% of the national GDP. However, their cumulative federal allocation amounts to just RM2 million, or 38% of the funds disbursed to states.
Selangor faces the greatest loss – even when contributing to almost one-third of Malaysia’s GDP at RM344 billion, it only gets back RM836 million in state allocation, or 0.2% of the GDP contribution, and one-tenth of the federal disbursement to states.
Johor and Penang, the second and third-largest contributors to Malaysia’s economy, also received less, in proportion, from the federal government.
On the other hand, traditionally less-developed and low growth states such as Kelantan, Terengganu, and Perak, benefitted the most. Despite jointly contributing only around 12% of the country’s GDP, they received 20% back from the federal government.
Closing the development gap?
The allocation gap is justified with the argument that we need to levelise economic development across Malaysia, so that we close the gap between top-performing states like Selangor and Penang, with that of Kelantan and Terengganu. As a result, the federal government’s state allocation budget is always skewed towards the less-developed states.
But is it true that the development gap has been closing? States like Selangor and Penang had the highest economic growth rate in history, at an average of 6.19% and 5.87%, respectively, from 2011 to 2021. The less developed states appear to also grow at a much slower rate compared to the rest of the country. It seems that the unequal state allocation does not help these low economy, low growth states to reach the development of the more productive ones.
In fact, the small and unequal allocation concentrated largely in the federal government – states usually could not craft policies that are more relevant in the context of their respective local conditions. Instead, they have to follow a standard, centralised approach, which might work in favour or against their development goals.
For instance, policies related to healthcare and education are centrally determined, but the number and type of schools, and the unique needs of the local community, were not taken into account – as long as the federal government determines that the policy works the best nationwide. But centrally run organisations are often mired in inefficiencies due to a lack of oversight by central committees, who are either too preoccupied or too ignorant to respond to local plights.
Unjust policy dilemma
Besides that, states often have to grapple with low funding to effectively run their government. Penang is expected to rake in a RM467.12 million deficit in 2023 due to its revenue-expenditure gap amid low allocation from the federal government. Penang also owed a total of RM41.11 million to the federal government in 2022, which is atrocious considering that the central government has been benefitting from the economic gains from the state.
The unfair disbursement to the states is entirely unjust and does not serve the intended purpose of closing developmental divides between states. The hardworking and efficient states of Selangor and Penang essentially subsidised the federal government’s spending as well as the less efficient states. This is completely unjust to the taxpayers in the more developed states, since it means that they get less welfare and infrastructure gain.
More importantly, the entire situation holds the state governments less accountable to good governance. Political leaders in less-developed states have no interest in elevating economic growth but perform populist and politically favourable policies to ensure they remain electable in the next election.
The development divide between states continues to grow, since the more productive states produce more over the years, and the less developed states continue the loop of inefficiency and lack of desire for growth.
This creates a dependency and a moral hazard system, where the state government can often point fingers at the federal government for a lack of funding and good policy, instead of taking up the tasks itself.
Linking federal funding to progress
We need to tie federal-state funding to state development, in particular the real GDP. This means that if the state contributes 10% to the country’s GDP, they get back 10% of total state allocation from the federal government.
This also mitigates the need to adjust for land size or population, since it is expected that states with more lands or population will produce more than the smaller states like Perlis. The economic size itself should also account for other nuances, such as the number of roads and public buildings in the state.
States with better economic development make more effective use of the allocation and are more likely to spend on high-growth sectors, benefitting not only the state but the whole of Malaysia.
We need to move away from the mindset of focusing on redistributing from our small economic pie. Instead, we should think about how to grow that pie so that we can benefit more as a nation in the long run.
Giving money to states to run themselves more effectively is one of the most effective ways to enlarge that pie, which essentially benefits not only the more developed states, but also the least developed ones. A smaller slice from a big economy is still larger than a bigger slice from a small economy.
Another important fact is that the rethinking of state funding essentially removes the culture of dependency on subsidies, which have traditionally hampered motivation for states to partake in economic development. Doing so will incentivise all states to work towards economic development, even in the least developed states, since that’s the only channel they can use to increase the local budget.
Eventually, voters are more likely to vote for a competent government, rather than a government based on sentiments and populism. In the case where voters chose incompetent government at the state level, they should be given what they chose, in the spirit of democracy and justice. It is unfair to states that elect effective government to subsidise states that don’t. - FMT
Doris Liew is an FMT reader.
The views expressed are those of the writer and do not necessarily reflect those of MMKtT.

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