Q&A Budget 2002 will be unveiled in Parliament by Prime Minister Dr Mahathir Mohamad tomorrow. In the light of the current economic and political situation and also the after effects of the Sept 11 terrorist attacks, Universiti Malaya's political economist Prof K S Jomo shares his views with malaysiakini.

Malaysiakini: What do you think the budget for 2002 will be like given the current economic and political climate?

Jomo: We can all expect yet another counter-cyclical reflationary budget for a number of rather obvious reasons. First, one should note that the annual budget has become less significant in recent years as major fiscal commitments have been made between budgets.

This may be a good thing if it only implied the flexibility and responsiveness of government budgetary policy, but we have also seen two other causes for concern.

First, major policy announcements requiring legislative approval have been made outside of parliament, and sometimes, without even bothering to secure legislative approval. This is perceived as reflecting the growing concentration of powers and arrogance of the executive and the parallel marginalisation and irrelevance of the legislature, that is, including the huge majority of Barisan Nasional members of parliament, and arguably, even the ministers with relevant responsibility and jurisdiction.

Second, while there has been some improvement in holding some of the so-called budget agencies or non-financial public enterprises more accountable, there has been a huge increase in off-budget activities, initially mainly financed by Petronas, but also with the Employee Provident Fund and Khazanah Nasional, a company under the finance ministry.

The supposed rationale for off-budget activities is that it is necessary to keep economic activities and to safeguard national pride by salvaging national projects. What is your comment?

While Petronas should have over RM350 billion by now, it seems to have less than RM50 billion left. Petronas has been used - or rather abused - for so many things we the Malaysian public hardly know anything about, including Dayabumi and the Kuala Lumpur City Centre twin towers, repeatedly bailing out Bank Bumiputera, Konsortium Perkapalan, MISC (Malaysian International Shipping Corporation), Proton, financing the new administrative capital Putra Jaya, and god knows what else.

Then, we have the clever, and sometimes non-transparent financing and criteria of Danaharta, Danasaham and the Corporate Debt Restructuring Committee (CDRC) 'bailouts'. Most troubling about these bailouts, of course, is the fact that 'cronies' seem to have been bailed out far more than others, and usually far more generously than necessary to keep economic activities going, which is the supposed rationale.

Do you think the premier's budget this year will be any different from the 1999 budget when he was last finance minister?

The increasing ad-hocism of fiscal policy is worrying because it implies that overall policy balance and coherence is not considered important.

Mahathir's 1999 budget when he was last finance minister was a deficit budget justified to reflate the economy. With the economic slowdown this year and his various pronouncements in response, even before he became finance minister again, one can expect the same this time.

The initial RM3 billion budgetary stimulus announced earlier this year - as the slowdown became painfully obvious - has since been acknowledged to have failed, suggesting that it was poorly conceived in the first place.

What problems do you foresee with the new budget? In your opinion, do you think that reflating the economy is desirable in our current situation?

One problem, of course, is that we have been running massive budgetary deficits since 1998, that is even when the economy was recovering strongly during 1999 and 2000, when one would have expected the budgetary deficits to have been reduced.

While we agree that budgetary or fiscal policy should be counter-cyclical, this means that deficits should be cut when the economy is growing rapidly as in the last two years.

When you insist on maintaining huge deficits when the economy is doing well, you can no longer credibly claim that your budgetary strategy is counter-cyclical. Instead, the impression created will be that you are fiscally irresponsible by being more or less permanently committed to budgetary deficits rather than trying to balance your budget over the business cycle - and not every year, which is the other inflexible extremist position of the neo-liberals.

Nonetheless, one has to agree that reflating the economy is desirable in the present circumstances, but the 'devil will be in the details'. So the key question will be how the government is going to spend money, and this is where one has to be concerned.

How do you think we should spend our money?

The public financing of mega-projects is being justified as part of the effort to increase domestic demand (remember that thanks to our very open economy, external demand accounts for more than 40 percent of total demand in our economy).

But you can be sure that most of these mega-projects will involve importation of materials from abroad, for example, for the twice-revived Bakun Dam project, which will only worsen our current account deficit, which can only further undermine confidence in our economy and currency.

Instead, I would favour committing far more resources to, say, accelerating the programme to ensuring only single-session schools within the next five years and to adequately computerise all secondary schools besides drastically increasing urban low -cost housing provision with creche, day-care and kindergarten facilities in all rural and urban communities.

Also, we have the troubling 're-nationalisation' of previously privatised enterprises - or more accurately, of their debt and other liabilities. This basically implies the privatisation of profits and lucrative assets and the socialisation of private debt and liabilities. While Mahathir has not been as generous as Daim with some of Daim's associates (remember, there have been five major bailout efforts for the UEM-Renong group before the recent takeover by Khazanah's Danasaham), there has not been any real break with past policies.

Mahathir said in parliament recently that the new budget would be based on the deteriorating American economy and the after effects of the Sept 11 terrorist attacks on New York's World Trade Center and Washington's Pentagon. What does he mean?

Even before Sept 11, the economic downturn was worse than previously anticipated despite various efforts to check the downtrend. Now, all bets are off with the unpredicted effects of Sept 11 in terms of raising risk and other costs besides reduced demand in various spheres.

But one must remember that wars have also stimulated economies not directly devastated by war, for example, during the Second World War, Korean and Vietnam wars, though the Gulf War reminds us that this is not always the case; Clinton won by reminding the American people that 'it's the economy, stupid' although Bush senior had a high approval rating for bombing Iraq, and so on.

In the medium term, it is possible that 'military Keynesianism' with the US buying allies all over the world - for example, Pakistan, Indonesia, etc. - for its war against Afghanistan, may turn the now accelerated downturn around, but the greater risks in the post-Sept 11 and other developments could mean otherwise. I sound like the typical two-handed economist, but who really knows?