Financing Social Welfare

I read with interest of a government minister’s statement a month ago that in the 9th Malaysian Plan, there will be welfare payment for the elderly, the sick and the poor. While there is a plan and the desire to help the people in need, the bill still has to be passed in parliament and passed into law. Late in a question and answer session in parliament, Deputy Minister Chew Mei Fun said that there are help available for single mothers in the form of micro loans. I still cannot figure out how much are these welfare payment, in ringgit terms, and how will the help reach to those in need? Do we expect the old people and the single mothers to find their way to the offices of Jabatan Kebajikan Masyarakat, filled up pages of forms and counter signed by ketua kampung? Well, that is my expectation of how things work in Malaysia. I would suggest that officers of JKM to be more proactive, visit villages and find out who are we missing out. After all some of these people have difficulty going to town. I would also suggest that the welfare payment depends how the needs of the household concerned; how many children or dependants in the household and what kind of expenses they incur.

The big question remains, how are we going to finance this plan without going into large fiscal deficit?
Simple, and it can be summarized into three words; taxes, surcharge and/or monetary expansion. In Malaysia’s situation, where any increase in taxes or imposition of surcharge is unpalatable to the voters, printing money has always been the solution taken by the government. Different country has their own way of financing their social welfare.

New Zealand, Australia and Britain – direct from taxes; income and corporate taxes are raised to a level that covers the financial obligation of the country. Depending on the total number of the pensioners, single parents, sickness beneficiaries and unemployed, welfare portion of national budget could be as high as 20%.
USA – surcharge on income taxes; a form of social insurance whereby those who work pay a portion of their income in addition to income tax.
Iran – monetary expansion, put it simply, by printing money. This would normally be the case of countries without large tax base.
Japan – investment income; savings from previous decades are salted away and invested to earn income. These incomes are used to finance social welfare payment.

It would not be advisable these days to print money at a rate more than natural economic growth rate of the country lest inflation would become unmanageable. When you see a country with very high inflation rate, there is a sure tell tale sign of large budget deficit being covered by printing money.
In case of Malaysia, where the tax base is not so large, and investment income is still low, the only responsible way of financing social welfare would be by money from taxes. There may not necessarily be any increase in taxes, if government income exceeds spending by a wide margin – budget surplus. In the next few years there could be budget surpluses after consumption taxes (sales tax, value added tax (VAT) or a form of goods and services tax) being phased in 2007.