Fiscal Responsibility Act to be tabled in Parliament in 2021

THE government had announced several reform initiatives in Budget 2019 to strengthen its fiscal administration. One of the initiatives is the introduction of the Fiscal Responsibility Act, which is expected to be tabled in Parliament in 2021.

According to the 2020 fiscal outlook and the Federal Government Revenue Estimates report, the introduction of the Act reinforces the government’s commitment to strengthen public finances through enhancement of fiscal discipline, spending effectiveness and transparency. Fiscal Responsibility Legislations (FRL) contains fiscal rules which govern the conduct of fiscal policy through numerical targets or ceilings on budgetary aggregates. Generally, there are four main types of fiscal rules, namely budget balance, debt, expenditure and revenue rules for national or sub-national governments.

Budget balance or structural budget balance rule constrains the size of the budget deficit, thus controlling the evolution of the debt ratio.

Meanwhile, debt rules set an explicit limit on the stock of public debt in relation to GDP.

Expenditure rules impose a ceiling on the total, primary or operating spending in terms of growth rate or ratio to GDP while revenue rules set ceilings or floors on revenues to ensure revenue collection is sustainable and sufficient to finance expenditure.

The report said a single fiscal rule is insufficient to address concerns related to fiscal sustainability. Therefore, a combination of the four fiscal rules with flexible provisions could be a better option to develop a good fiscal framework.

In formulating the FRL, a government can consider various essential and optional components to be included in the law.

Many advanced and emerging countries have adopted FRL to strengthen their fiscal institutions, as well as to promote a more responsible and transparent fiscal management. The rules and principles of the law are either embedded in their constitutions, budget system laws and international treaties or enacted as a separate law to govern public finances.