Low cost housing allocations have been greatly cut since the mid-1980s. The government scrapped its low cost housing programme, ostensibly because the private sector would build low cost houses more efficiently. However, the government has continued to fail to achieve its greatly reduced revised targets.

Prime Minister Dr Mahathir Mohamad himself has betrayed the late Tun Abdul Razak's promise of a 'house-owning democracy'. For Mahathir, the people could choose between house or share ownership, when most low income families can afford neither.

In Malaysia, the average ratio of house prices to annual income is around 8 to 10, compared to 4 to 5 in the US, ie the economic burden is twice as heavy for inferior housing in Malaysia.

For a long time, subsidised housing has been allocated through Barisan Nasional parties, notably Umno and the MIC, as a political bait or bribe to attract members, especially in the cities.

Some Umno and MIC leaders now own several low cost houses, while many low-income families still cannot get their own houses except in squatter areas.

Recently, the smallest ministry, the welfare ministry, was divided between two woman ministers. Thus, the government gives the impression that it is concerned about the plight of women and other less fortunate groups.

In fact, however, allocations for the two ministries remain very modest, and should be significantly increased to finance needed programs. The tax system can also be used to ensure that living allowances are paid by fathers to their children and wives or ex-wives.

Until now, the government has yet to implement the 1967 cabinet committee proposals for a more comprehensive social security system, and not just compensation for industrial accidents.

The present system serves to absolve negligent and irresponsible managements from responsibility for workers' safety and welfare. A more complete and comprehensive system should be developed to care for the unfortunate, such as those who lose their incomes due to economic downturns or the illness or death of a husband or father.

Although several types of social expenditure provide benefits to most people, on the whole, social expenditure has failed to reduce inequalities. Therefore, like taxation, public expenditure too is biased and unfair.

Increased inequality

The impact of the tax system has increased inequality, while government spending is biased to the rich, especially cronies, though there maybe some trickle down to others. As the Malay saying goes, while the cronies enjoy the meat and fat, the common folk only get bones and feathers.

Recently, there has been considerable economic analyses that clearly shows that excessive inequality inhibits economic growth. As emphasised by the late Prof Ishak Shari, economic development in Southeast Asia has been far more modest than the earlier economic success of Northeast Asia as inequality in Taiwan, South Korea and Japan has been much lower than in this region, including Malaysia.

Hence, an alternative budget strategy should have two objectives. First, fiscal strategy should counter economic cycles. During economic booms, there should be budget surpluses, as in the mid-1990s. Conversely, when the economy is in decline, fiscal means should be used to increase the growth rate and stimulate the economy with budget deficits.

However, efforts to increase spending should be targeted. Increased spending in the last four years has been mainly aimed at bailing out influential corporate interests, i.e. crony businesses. The alternative approach must instead privilege the common people's interests.

Progressive measures

Hence, the second objective of the alternative budget strategy should ensure that fiscal measures are progressive, and not regressive, as they are now. Progressive efforts should include both aspects of budgetary policy, i.e. taxation and spending. Both are currently regressive and should be made progressive, i.e. fiscal policy should reduce not increase existing economic injustice.

Since the early 1970s, the government has published its annual economic report when the budget is announced. The annual economic report as well as the five-year plans and the mid-term reviews should also include more comprehensive economic indicators, including items making up the human development index published by the UNDP and many other countries.

Malaysia is not capable of competing only by offering lowly paid workers. To avoid excessive wage increases due to excessive labour demand, the government encouraged the entry of foreign workers, which later added to problems with neighbouring countries and inhumane policies which have adversely affected our image internationally.

Now, certain sectors such as plantations, construction, domestic help and other such services once again need foreign workers.

An alternative development strategy should move the economy from this vicious cycle with low skills, productivity and incomes to a virtuous cycle with high skills, productivity and incomes.

If we do not get out of this situation, it is certain that we will not be able to compete with lower wages in China, India, Indonesia, Bangladesh and Indonesia.

The way out is clear, and the government should prepare a policy, incentives and support to take Malaysia in this direction. Hence, the third objective of this alternative budget strategy would be to accelerate the transition to high value development with able skills and human resources.

The big challenge then is how to achieve these three objectives counter the cycle, fight injustice, ensure progress at once. The budget should address these challenges with bold measures.

Most of the additional income to the low income group will be spent, mainly on Malaysian goods and services, which will stimulate economic recovery based on increased domestic demand, as is sorely needed.

Other efforts are also needed to increase consumer spending from 47 percent of the GDP currently, compared to 53 percent in the early 1990s. Since the income tax rate was reduced last year, the government should increase tax allowances, reliefs, rebates and other breaks for the taxable brackets, especially for the vast majority of middle-income taxpayers.

Personal exemptions should be raised from RM8000 to RM9000, while exemptions for dependents such as children and aged parents should also be increased as a budgetary means to strengthen family ties and responsibilities.

The government should introduce a progressive corporate income tax structure with the first RM20,000 taxed only 20 percent of the usual rate, while the next RM80,000 should be taxed only 50 percent of the regular rate. Such a structure will benefit small and medium enterprises, and encourage them not to evade paying income tax. Currently, many small and medium enterprises do not want to get involve with government programs because they fear paying the fixed corporate income tax rate.

Although the corporate income tax rate has begun to be reduced in Singapore, the government should study the tax structure carefully to provide tax breaks and other incentives to companies to invest in priority sectors for development. There is no advantage for Malaysia to get caught in a vicious cycle of competitive tax cuts tantamount to beggaring thy neighbour. A one percent reduction in the corporate income tax rate will reduce government revenue by about RM600 million.

Encourage healthy behaviour

The tax system should be used to encourage healthy behaviour, and to discourage unhealthy conduct. Hence, high taxes should be imposed on tobacco, liquor and gambling. Taxes on liquor and places serving alcohol should be raised, especially in view of the continuing increase in traffic accidents due to drunken drivers.

It is well known that all gaming companies in Malaysia are controlled by cronies of the BN leadership. The practice of BN parties and their leaders to accept gifts in various forms from gaming companies and other cronies should be investigated by the Anti-Corruption Agency with a view to prosecution as soon as possible. Taxes on certain types of gaming, which were reduced by the BN government in Sept 2001, should be restored at once, while all gaming tax rates should be raised for revenue purposes and to discourage such socially undesirable behaviour.

To raise domestic demand and reduce income inequality in the Malaysian economy, also found in the public sector, a uniform wage increase of RM100 monthly for all public sector employees is proposed over two years (2003 and 2004). Current expenditure will consequently rise by almost half a billion ringgit each year over the next two years.

Such a wage increase succeeded in reviving the economy, with less inequality in Europe after the Great Depression of the early 1930s. A uniform increase for all will reduce inequality or the gap between the high and low income in the public sector.

Since the government is the largest employer, this measure will have impacts throughout the economy. If the government pays its lowly paid employees more, this will influence the private sector, which also needs workers.

EPF needs reform

The Employee Provident Fund needs to be reformed with respect to its management, investment policy and annual rates of return in order to prioritise workers' welfare. Since the mid-1980s, and especially since the 1997-8 crisis, EPF funds have been misused several times at the behest of the authorities (e.g. Makuwasa), e.g. to save crony companies (e.g. Time dotcom) at great loss, which ultimately have to be borne by EPF depositors.

Productivity gains must also be achieved through major and comprehensive public sector reform. The public sector must be reformed to raise worker morale, productivity and output besides wiping out corruption and abuses of power. The government should be more transparent and accountable. Unfortunately, public sector reform has long been rejected by this government, ostensibly because privatization policy would resolve existing problems. It is now clear that the privatization policy has been a great failure, whereas public sector reform remains very necessary.

All government schools should become single session schools within the next decade. Allocations to increase educational facilities, teacher training and teacher remuneration must be increased significantly. The education system must be restructured to increase skilled, capable and productive human resources.

Many more teachers are needed, teachers' salaries, working conditions and morale must be improved, schools and their facilities should become the centre of community life, life-long learning facilities need to be developed, pre-school facilities increased, tertiary education access increased and much more done to ensure Malaysia does not continue to fall back in terms of economic progress, knowledge and ethics.

A new health care financing system is needed. The new system must at least guarantee the Malaysian people's previous health rights. The health system should be principally financed by the government's revenue. Much effort is needed to raise the quality of government health services, both in terms of facilities and medicines, or the morale of doctors, nurses and other stag. Other changes should only be imposed to discourage abuses of freely available services, not to burden those who cannot afford to pay.

Preventive measures must be increased and financed by the government. For example, the incidence of dengue fever has risen recently because urban residents do not want to pay more than property rates for preventive measures after the municipal authorities stopped performing their responsibilities.

Affordable housing for all

The government's housing policy should guarantee affordable housing for all, with subsidies for the poorest. A careful strategy consistent with this goal needs to be prepared for at least 70 percent of urban families to have their own houses by the year 2020.

The neglect of peasant or smallholder agriculture in the last two decades must be replaced by serious efforts to promote new agricultural technologies with credit support, equipment, instruction and other needed help.

Fisheries policy should also be reformed to improve the lot of the fisherfolk and ensure adequate, cheap and uncontaminated as fish remains the main source of animal protein for the people.

Small and medium sized enterprises also need similar support appropriate to their different needs.

The government's mega-projects which do not obtain economic returns such as the Bakun Dam should be scrapped at once, and, if appropriate, replaced by other projects with much more benefit, especially for ordinary people.

On the other hand, other needed infrastructure and projects such as efforts to ensure adequate and safe water supply should be emphasised. After Indah Water Konsortium's failure and fraud, the government has to invest in improvement of the long neglected sewerage system.

Services which save or ensure high net foreign exchange earnings such as higher education, medicine, tourism, regional transportation, information and communications technology (ICT) and the professions should be encouraged with tax incentives, infrastructure provision and other needed facilities as well as reduced regulations and bureaucracy other than efforts to protect the interest of consumers, workers, society and morality.

MSC status for perks

While efforts to make a success of the MSC must be continued, since so much investment has been made, the government should not only concentrate on one source of new growth while neglecting other sectors such as agriculture. Many investors seek MSC status for its various perks including tax exemption and other privileges. But the MSC's real success is far from assured, and its actual success should be compared against government subsidies and other spending.

The government should encourage new dynamic industries, especially capital-intensive ones using advanced technology to achieve high productivity and value-addition. Appropriate incentives should be developed as part of an industrialisation strategy accepted by the people. Although the government has prepared two Industrial Master Plans, implementation has been inconsistent and little reviewed, let alone revised, eg after the 1997-8 crisis, or after new awareness of problems after the 2001 recession.

Technology policy in Malaysia has been less then effective. Technology policy should be conceived on the basis of Malaysian realities. The government has claimed many things, but actual progress is unsatisfactory, in fact, rather pathetic.

Since the government has relied heavily on foreign investment thus far, any government is obliged to work hard to retain and attract foreign investment, especially to secure sophisticated technology and foreign market access. Many studies have shown that foreign investors follow domestic investors into other kinds of industries. Hence, domestic investors should be given far more attention than in the past.

Preparing a budget is a major responsibility. It is easy to promise the world, to give tax breaks and spend in certain areas for short-term political advantage.

The budget strategy we have proposed, however, is a serious effort to address various problems Malaysia has inherited after years of maladministration and its many consequences.

In particular, we need to not only revive the economy after no real growth in 2001, but also create the conditions for more just and sustainable development thereafter. The choice for the people of Malaysia should be clear.

Dr KS JOMO is a professor in the Faculty of Economics and Administration, Universiti Malaya.