A fiscal deficit for tough times
WHILE the government tries to protect the economy and livelihoods from the effects of the Covid-19triggered movement control order, concerns about the country’s higher fiscal deficit and public debt have surfaced.
According to Finance Minister Tengku Datuk Seri Zafrul Abdul Aziz, Malaysia’s fiscal deficit is expected to register at 5.8% to 6% of Gross Domestic Product (GDP) this year (“Malaysia’s debt levels set to rise this year”, The Star, Oct 6; online at bit.ly/star_debt”). Local economists are expecting an even higher deficit, ranging from 6.5% to 7.5%. This is after taking into account the stimulus packages the government has announced so far, which total RM305bil.
Given the higher fiscal deficit, government debt is also expected to rise this year. The current debt-toGDP ratio stands at 53% of GDP and according to Tengku Zafrul, the year-end figure will come to around 56% of GDP, which is higher than last year’s ratio, 52.5%.
However, while the figure has gone up due to this unprecedented crisis, it remains below the approved statutory debt ceiling of 60%. In August, Parliament voted to allow the government to borrow up to 60% of GDP in the effort to ease burdens experienced by the people and businesses.
According to the executive director of the Socioeconomic Research Centre, Lee Heng Guie, the higher debt ceiling ratio gives the government the leeway to borrow an additional RM70bil to RM75bil.
While there are concerns about a rise in debt levels, it must be noted that unprecedented times call for unprecedented measures, and the government’s priority now is to save lives and livelihoods given the expectation that the economy will contract between 3.5% and 5.5%; it is expected to begin to expand between 5.5% and 8% only in 2021.
To be more specific, increased government spending is needed and hoped for by many to prop up domestic consumption – which has a share of 59.4% of GDP – which has been depressed, as reflected by firstand second-quarter GDP numbers.
Notably, this was one of the emerging issues discussed during a focus group discussion of the poll Emir Research carried out in the third quarter of the year. Instead of worrying about a higher fiscal deficit, the discussion group’s participants thought that the government should go all out this year to save livelihoods, and in particular, to help the unemployed. If this is not addressed adequately now, the focus group feared that the social consequences would be immense.
Government spending to ensure a smooth recovery is important. As the Chair of the US Federal Reserve, Jerome Powell, recently said, “If the recovery simply slows too much, it could lead to tragic outcomes for the less well-off, widening inequality and creating a situation where weakness feeds on weakness”.
Some will question the merit of spending more than what we earn – however, there is always a solution to every problem. Aside from the fact that the government actually has more room under the statutory debt ceiling to spend more, there are ways to improve our fiscal position going forward, ie, in the medium term when economic conditions get better.
For instance, the Finance Minister has said that a rebalancing approach will be taken to bring the fiscal deficit to a better position once economic conditions normalise in the future. Budget 2021, to be announced on Nov 6, is timely as it will no doubt touch on measures to shore up the government’s revenue base.
Leakages should also be monitored and reduced to ensure there is no, or less, unnecessary expenses within the government. Another possible mitigating measure is to reduce civil servants’ emoluments, as they account for 34.3% of total operating expenditure – the largest share among other components.
Of course, a medium-term fiscal framework to strengthen fiscal discipline needs to be planned, with suggestions to broaden the government income stream through tax-related changes such as a reintroduction of the goods and services tax (GST). But the timing of the implementation of such measures is crucial and needs to be right.
SOFEA AZAHAR Emir Research
Note: The letter writer is a research analyst at Emir Research, a think tank focused on strategic policy recommendations.