FISCAL DEFICIT IS OK
Without such pumppriming the economy in times of slower growth, as Malaysia is experiencing now, a country can descend into a recession
AS Budget Day draws near, it is the normal practice for the government to take stock of the milieu enveloping the country today. The milieu does not look sunny.
Take the global scene. The world is tilting towards de-globalisation and populism. The global recession, consequent to the 2008 global financial crisis, triggered this tilt. United States President Donald Trump’s trade wars against China, European Union, Canada and Mexico, further fuel this slide to increasing protectionism. They risk eroding the potential gains to global wealth as a result of free trade.
Together, our key trading partners, China, EU and the US, consume nearly a quarter of our exports. Declining fortunes in these countries can negatively impact on our export earnings and, consequently, our welfare. If it is of any consolation, the depreciating ringgit should boost our global competitiveness. It should keep our exports afloat amid the dampening of fortunes in our export markets.
The increase in petroleum prices recently might seem a relief. At around US$79 (RM327) the price is US$28 more than that which was used to estimate energy revenues for the 2018 budget. Assuming that the price holds, the government should be able to rake in an additional RM8 billion in revenue next year. Alas, much of it will go to subsidise fuel prices at the pump, leaving barely little, if at all, to finance other public expenditures next year.
On the home front, the government is concerned with the budget deficit and debt management. If these do take precedence over other matters of public finance, then that will only point to fiscal consolidation in the coming year. From a Keynesian viewpoint that may not augur well to revitalising a slowing economy. Added to this, the elimination of the regressive sales and services tax or GST will punch another RM17 billion hole in the public coffers next year. The gap would have been even wider if not for the sales and services tax or SST delivering RM27 billion to the government treasury.
All is not lost however. What is loss to the government coffers will be a gain to the public. The increased disposal income should enlarge public consumption and should help grow our economy. Sadly, that may not be the case. Our household debts, at 88 per cent of the gross domestic product (GDP), rank as one of the highest in Asia. The increased disposal income may go to reducing household debt, leaving little for spending. Notwithstanding, debt reduction itself is a good thing. It will eventually make the economy healthier.
While we have almost eradicated poverty, our society is still unequal in income distribution. Our GINI coefficient, a measure of inequality, is 0.399. We are too close for comfort to the World Bank’s cut-off point of 0.4, beyond which a nation becomes highly unequal.
Weighed down by auto and housing loans, our bank lending growth has yet to hit double- digit growth to catalyse a moderatelygrowing economy. The population is ageing. By 2030 we willl have 15 per cent or six million people over 60 years. Urbanisation is on the march as well. By 2050, 90 per cent of the population will be urban. These issues make public-policy changes imperative.
It is against this cheerless scenario that we need to assess the concern over budget deficit. Paul Krugman, a Noble-prize winning economist, argues that budget deficits are a necessity. They can reduce unemployment and bring about the needed economic recovery.
Without such pump-priming the economy in times of slower growth, as our country is experiencing now, a country can descend into a recession. There are already such signs looming in the horizon.
That is what happened to the United States in 1937 when then president Franklin Roosevelt prematurely reduced the New Deal stimulus. The New Deal, initiated in the aftermath of the depression in 1933, introduced all manner of programmes to provide economic relief during the Great Depression. Stimulus cutback threw the US back into recession.
In a similar refrain, Richard Koo in his 2015 book The Escape from Balance Sheet Recession and the QE Trap argues that budget deficits are not all that bad. Perhaps it was to avert such an apocalypse that Japan’s fiscal policy over the last decade has been expansionary. Without its fiscal deficits Japan could have suffered a great depression like that of the US.
In our quest to reduce the budget deficit we have often taken the easy way out by cutting development expenditure. As a result, development expenditure as a share of the total annual expenditure has declined some 40 per cent since early 2000s. Budget deficits are not bad if they are meant to finance development to revitalise the economy.
A budget deficit too will boost aggregate demand in the economy by compensating for the muted growth in public consumption. As such, fiscal retrenchment amid weak demand will be disastrous. At three per cent of the GDP, our budget deficit is small. But we must acknowledge that we have been incurring it for nearly 20 years. Hence the enlarged public debt that went to financing them.
We are not yet at a critical juncture to require a colossal budget stimulus as the US New Deal. Neither do we have massive unemployment that requires priming the pump as Krugman suggests. However, given the multiple demands that need to be met in Budget 2019, the government need not be overly concerned about reducing the budget deficit.
Paul Krugman, a Noble-prize winning economist, argues that budget deficits are a necessity.
The writer, a former public servant, is a principal fellow at the Graduate School of Business, Universiti Kebangsaan Malaysia