A credible set of fiscal rules is needed to reduce fiscal deficits and debt-to-gross domestic product (GDP) ratios to sustainable level, promote inclusive economic growth, mitigate room for fiscal manipulation and encourage politicians to prioritise among the many demands on the annual budget.
The government’s massive fiscal support that has salvaged the Malaysian economy and businesses by saving lives and jobs has worsened both the budget deficit and public debt since 2020.
The statutory debt ceiling was raised twice from 55% of GDP in 2019 to 60% in 2020 and further to 65% in 2021.
Malaysia’s budget deficit has widened from 3.4% of GDP in 2019 to 6.2% in 2020 and 6.5% in 2021. This is targeted to reduce to 6.0% of GDP in 2022.
Public debt to GDP has reached RM969.3bil or 64% of GDP at end-September 2021 (end-2020: RM880bil or 62.1% of GDP; end-2019: RM793bil or 52.4% of GDP).
While it is expected that the budget deficit will improve and debt will decrease marginally in the next few years as the economy recovers, these developments raise questions about how deficit can be lowered and high debt can go without being disruptive.
Any loosening of fiscal discipline and unsustainable debt could bode ill for the country’s credit ratings.
Malaysia needs to fix its tight fiscal space to build economic resilience for buffering against future adverse shocks.
In the Medium-Term Fiscal Framework, the average fiscal deficit is expected to reach around 5% of GDP in 2022-2024, and in the 12th Malaysia Plan (2021-2025), the fiscal deficit will reduce to between 3% and 3.5% of GDP in 2025.
A robust set of budgetary rules and fiscal institution is needed to achieve overarching goals of ensuring fiscal stability and debt sustainability. Fiscal rules must be made simple, flexible and enforceable in the face of changing economic circumstances.
We hope that the government will enact the Fiscal Responsibility Act (FRA) in 2022, which aims at improving governance, accountability and transparency in fiscal management.
A Public Consultation Paper on the Act had been published and all constructive feedback would be considered to improve the draft that was being prepared.
The FRA set the course for a government’s responsible fiscal policy. Better-designed fiscal rules can chart a predictable path for government’s fiscal policy, avoid excessive fiscal deficits and unproductive spending, and keep public debt in safe territory in ensuring sustainable public finances.
The government’s commitment and credibility to well-managed public finances can reassure financial markets and investors that our country’s sovereign credit rating is in good shape and lower the risk of credit default.
As a result, we can continue to borrow with competitive costs.
The following principles are needed to enhance the effectiveness of fiscal rules:
> Fiscal structure
We need a revenue strategy that strengthens revenue collection and efficiency, including the predictability and stability of tax rates. We also need to broaden the narrow tax base and plug tax leakages.
On the other hand, there must be expenditure rationalisation and optimisation, which is outcome-based and meets expenditure efficiency rule to minimise wastage.
The ministries must be taken to task on the mismanagement of public funds. The reform of the government’s Procurement Act is necessary to rein in procurement of public projects from the problems of wastage, overpricing, cost overruns, delays and sub-standard quality.
Further, we must undertake structural fiscal reforms such as for cash handouts, subsidy or pension reform, and implement accrual accounting for the preparation of budget.
> Fiscal discipline
Fiscal policy is only used for counter-cyclical or to mitigate adverse shocks-induced economic recession. The government should save money in good economic times and prevent large expenditure increases, which can absorb all revenue windfalls.
> Achieve and maintain prudent public debt levels
Ceilings on public debt are a common feature of rule-based fiscal frameworks. Higher debt increases vulnerability to shocks and can undermine market confidence and lead to fiscal distress.
Calibrating the debt ceiling should not be set too high to foster fiscal responsibility. But the debt ceiling should not be too low, to allow space to finance development needs.
The debt ceiling of 60% of GDP threshold remains the most common among national debt rules.
> Contingent liabilities
Fiscal surveillance framework requires risk awareness and close monitoring of contingent liabilities. The government’s contingent liabilities have increased by 13.3% per annum to RM375.3bil at end-June 2021 (end-Dec 2015: RM177.7bil).
Scrutiny and disclosure of information is likely to generate pressure for greater fiscal discipline and contestability of resources. The government should consider setting a ceiling for contingent liabilities.
> Escape clause to accommodate unexpected shocks/events
Precise exceptions are allowed under a well-defined fiscal surveillance framework. A limited and clearly defined set of events can trigger the exception.
We must set a timeline and an exit strategy as well as effective control and monitoring mechanism and a good communication strategy to provide forward guidance.
> Good communication, timely and regular fiscal updates
The International Monetary Fund research shows that a country’s commitment to budget discipline and clear communication of policy priorities, backed by transparency on government spending and revenues, will pay off.
Simple, flexible and enforceable fiscal rules are vital to rebuild our country’s fiscal resilience in the face of future challenges.
We need political buy-in and a disciplined government as well as supporting institutions that enhance fiscal transparency and accountability.
This calls for the establishment of a fiscal council, which acts as an independent public watch dog to evaluate the implementation and effectiveness of expenditure and tax policy.
Lee Heng Guie is executive director of the Socio Economic Research Centre. The views expressed here are the writer’s own.