Govt should focus on controlling inflation

In the past week, I have been in contact with several of my close relatives in Malaysia. Apart from exchanging family news, wishing each other Selamat Hari Raya and enquiring the experiences of Ramadan, we also talk about each others’ lives.
This year, they all complained of one thing; grocery items are becoming more expensive, their incomes static or becoming less. Inflation is running rampant, and it’s affecting ordinary folk more than ever. Prices of goods are rising fast, which indicates demand for goods outstrip supply.
While its okay to blame the causes of inflation as largely imported, (rising fuel prices, and the emergence of China and India as consumer society) some of our policies also contribute to this problem.
For the past few years, government has been using monetary and fiscal policy to get us out of economic slowdown. Meaning we have been printing money, encourage spending and consumption as well as awarding large infrastructure projects in the name of national development and increasing income. (Keynesian)
There is nothing wrong with monetary expansion during recession. It lowers interest rate, encourage investment and subsequently create jobs – but continuing monetary policy after a few years of economic growth and in the environment of accelerating inflation will only stoke inflation further, thus undoing the prosperity gains of the previous years.
This year, the government budget is still in deficit, with stated policy of continuing with monetary policy (print more money). This simply means the government is postponing the increase in taxes for high and medium income earners, hoping that with expanding economy, next year there will be more income, which would be enough to cover the deficit, thus negating the need to increase taxes to plug the deficit.
This may avoid government from making unpopular move of increase taxes, but insidiously imposing inflation tax for general population. (Inflation is a form of tax – government get the revenue by printing money)
No doubt large numbers of Malaysians benefits from the economic growth of the pasr few years. We can see the evidence from expanding new suburbia outside Klang Valley, Johor Bahru and Sg. Petani as well as the choked roads and motorways full of cars. People who benefit most are the well-connected and the street smart. Low interest rate from expansionary monetary policy enables them to borrow money at cheap rates to buy assets and set up businesses that won the government and business contracts large and small.
Now that they earn more, have more money to splash about and consume more. These are the people that government should tax more – the high and medium income earners.
It has been reported in the news media that since Abdullah Badawi took over, government projects has dried up. In other words, government spends less. In economic terms, this is fiscal tightening with the benefit of lowering interest rate. More funds are now available for businesses for their expansion and investment.
I have no scruples with the government giving more incentives to businesses to invest more, as this would create more jobs and income, increasing supply of goods in the market. Supply side economics if started now, would contribute to reduce shortages in two to three years time.
More drastic action has to be taken now, by taking steps to curb demand. Inflation tends to feed on itself, a round of price increases will stoke more and more price increases in other sector of the economy.
The real losers are the people who are on fixed or low income – their money worth less. Ahh, don’t suggest that enforcement officers should check prices at vegetable markets, that will only exacerbates the scarcity, as traders will sell less of controlled and unprofitable goods. Those officers would be better off employed to grow vegetables and other foods at least that will increase supply.