A CREDIBLE set of fiscal rules is needed to reduce fiscal deficits and debt-to-GDP ratios to sustainable levels, 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; saved lives and jobs has worsened both the budget deficit and public debt since last year.
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; -6.5% in 2021; and is targeted to reduce to -6.0% of GDP in 2022.
Public debt to GDP has reached RM969.3 bil or 64% of GDP at end-September 2021 (End-2020: RM880 bil or 62.1% of GDP; End-2019: RM793 bil or 52.4% of GDP).
While the budget deficit is forecast to improve and debt to decline slightly over the next several years as the economy improves, these changes raise concerns about how the deficit and high debt can be reduced without causing disruption. Any deterioration in fiscal discipline and excessive debt might jeopardise 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 5.0% of GDP in 2022-2024, and in the Twelve Malaysia Plan (2021-2025), the fiscal deficit will reduce to between -3.0% and -3.5% of GDP in 2025.
To achieve the primary objectives of fiscal stability and debt sustainability, a strong set of budgetary regulations and fiscal institutions are required.
In the face of shifting economic circumstances, fiscal regulations must be made clear, flexible, and enforceable.
We hope that the Government will enact the Fiscal Responsibility Act (FRA) next year, which is aimed 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 regulations may help the Government chart a predictable route for fiscal policy, avoid excessive fiscal deficits, deter wasteful expenditure and maintain public debt in safe territory to ensure 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:
- Improve Fiscal structure: (a) Revenue strategy: strengthen revenue collection and efficiency, including the predictability and stability of tax rates; broadening the narrow tax base; and plugging tax leakages; (b) Expenditure rationalisation and optimisation – outcome-based and expenditure efficiency rule to minimise wastage. The ministries must be taken to task for mismanaging public funds. The reform of Government Procurement Act is necessary to rein in on procurement of public projects from wastage, overpricing, cost overruns, delays and sub-standard quality; (c) Undertaking structural fiscal reforms (cash handouts, subsidy or pension reform); and (d) Implementing 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; 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 must include measures of not setting it too high to foster fiscal responsibility. However, the debt ceiling should not be too low, to allow space for financing 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 Federal Government’s contingent liabilities has increased by 13.3% pa to RM375.3 bil at end-June 2021 (end-Dec 2015:RM177.7 bil). Scrutiny and disclosure of information is likely to generate pressure for greater fiscal discipline and contestability of resources. 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) A limited and clearly defined set of events triggering the exception; (b) Set a timeline and an exit strategy; (c) An effective control and monitoring mechanism; and (d) A good communication strategy to provide forward guidance.
- Good communication, timely and regular fiscal updates; The International Monetary Fund (IMF) research shows that a country’s commitment to budget discipline and clear communication of policy priorities, backed by transparency about Government spending and revenues always pays off.
Simplicity, flexible and enforceable fiscal rules are vital to rebuild our country’s fiscal resilience in the face of future challenges.
Plus, we need political buy-ins and a disciplined Government ,as well as supporting institutions that would enhance fiscal transparency and accountability. This calls for the establishment of a fiscal council, which acts as an independent public watchdog to evaluate the implementation and effectiveness of expenditure and tax policy. — Dec 12, 2021.
Lee Heng Guei is the executive director of Socio-Economic Research Centre (SERC).
The views expressed are solely of the author and do not necessarily reflect those of Focus Malaysia.
