THE Government should seriously take into account the issues of inflation and stagflation when preparing Budget 2022.
This is given the recently-implemented lockdowns have generated supply-side shocks which are now pushing up prices of transports and commodities, according to Centre for Market Education Sdn Bhd CEO Dr Carmelo Ferlito.
Likewise, the additional money supply created by expansive fiscal and monetary policies is exacerbating the risks of inflation and potentially undermining the future recovery.
“When the COVID-19 pandemic hit, governments around the world rapidly increased expenditure with very little access to any increase in taxation. The result was more borrowing which was supported by money printing under a QE (quantitative easing) or similar programmes depending on the country”, added Fellow of CME Prof John Hearn.
As countries try to normalise, however, there will be a surge of money flow which adds significantly to aggregate monetary demand.
“Within 12-18 months from these phenomena, the economy will suffer inflation,” opined Prof Hearn who is a visiting professor at the London Institute of Banking and Finance.
“That is happening now in most countries and central banks and governments are misleading people into thinking that higher inflation is caused by supply side problems such as energy price rises, supply chain difficulties etc.
“This is wrong as the current inflation is the result of government overspending and monetary mismanagement; supply side shocks are not enough to generate generalised inflation, however increased money supply is.”
In Prof Hearn’s views, the only way out of this situation is that governments need to cut back expenditure immediately to pre-pandemic levels.
“Unfortunately, the temptation will be for governments to say that now, as they do not need to spend as much on the pandemic, they have more to spend on other things. This would be a big mistake,” he cautioned.
“Governments should be planning to balance their fiscal budgets within the next few years. Central banks need to slow the growth in money supply and manage monetary demand to be growing just a little faster than output so as to achieve their inflation target (2%).”
The inflation many governments have already caused needs needs no more fuel from any excessive monetary and fiscal expansions. It would be a mistake for a central bank to try and reverse policy and create a monetary contraction.
“This would be a case of two mistakes do not make things right,” Prof Hearn pointed out.
Finally the central bank needs to more closely align its official repo rate with market interest rates to ensure an economic rebalancing, stronger and freer markets as well as accelerating economic growth.
“These are elements that the government needs to take into account when preparing Budget 2022. It must renounce the temptation to keep on overspending as giving into this temptation will pose the risk of a serious economic crisis in the near future”, concluded Ferlito and Prof Hearn. – Oct 26, 2021
Pic credit: Kementerian Kewangan Malaysia
