Insight - Targeted fiscal support still needed

Lee Heng Guie SERC: A reduction in public sector demand would trigger a renewed contraction of the economy if the private sector has not recovered to take on as the growth’s driver seat. It’s not about only getting the right macro narrative; the impactful policies implementation must remain squarely in focus.

WITH the domestic economy at an early stage of recovery, albeit unevenly across sectors and businesses, accommodative monetary policy and fiscal support are incredibly important to ensure that the economic rebound and recovery will not turn anemic amid increasing concerns about an occurrence of a second wave of virus and the availability of vaccines.

Bank Negara’s monetary policy and liquidity measures are expected to remain in accommodative mode and will remain supportive in the foreseeable future.

Fiscal policy will be the key policy variable going forward to support domestic demand.

Fiscal support measures must be renewed periodically and are still needed to support the sectors that would take a longer time to recover, and these include the aviation industry, travel and tourism, small businesses and the vulnerable households and employees.

A reduction in public sector demand would trigger a renewed contraction of the economy if the private sector has not recovered to take on as the growth’s driver seat.

It’s not about only getting the right macro narrative; the impactful policies implementation must remain squarely in focus.

Bank Negara still has some policy levers and has done what it can in terms of frontloading interest rates cut to a historical low and implementing an unprecedented array of financial facilities, financing relief and liquidity injection programmes.

Steadying hand: The Bank Negara building in Kuala Lumpur. Its monetary policy and liquidity measures are expected to remain in accommodative mode and will remain supportive in the foreseeable future. Fiscal policy will be the key policy variable going forward to support domestic demand.

We identify the following three key emerging challenges facing the government and businesses as the economy enters the recovery phase.

> Retooling economic policy to improve cost competitiveness and strengthen economic resilience;

> Identifying new sources of economic growth and value creation industries, focusing on the deployment of digital technologies and digital transformation; and

> Aligning new targets for economic performance and socio-economic development in conformity with Environmental, Social, and Corporate Governance (ESG).

As we emerge and recover from the pandemic, we must be bold enough to discard race-based policy and non-competitiveness as well as dated impediments to ensure that future growth is inclusive, sustainable, and provides opportunity for all.

The quality and direction of economic growth must take primacy, which requires the policy makers to critically review existing policies and update policy toolkits, and remain committed to undertake a phase or big bang reforms in this unstoppable paradigm of increasing global complexity, “slowbalisation”, faster digitalisation and industry revolution.

Good sense and strong political must prevail to reset our national development agenda based on needs, irrespective of race while priority must be given to protect the most vulnerable groups.

When the economy recovers from the pandemic, the following areas of continue reforms are needed.

> Fiscal and debt stability framework: Sustainable revenue base to meet rising expenditure; plugging tax leakages; tax reforms (fair, effective and simpler); expenditure rationalisation and optimisation; debt management office; zero-based budgeting based on programme efficiency and necessity rather than budget history.

> Labour market and wage reforms as well as skill set transformation: Boosting wage-linked productivity and merit performance-driven reward system; revamping technical and vocational education training (TVET); spurring innovation and creativity as well as digitalisation; phased reduction of the reliance on foreign workers; a living wage system.

> Investment and market liberalisation: Equal and inclusive opportunities for all; targeted programmes for SMEs; reviewing current investment incentive programmes; removing unnecessary regulatory and compliance cost.

> Government-linked companies (GLCs) and state enterprises reform: Lean, responsive and less intrusive; functions to be systematically reviewed; better governance and subject to Parliamentary oversight; optimisation of resources and mandates for real competition.

> Strengthening the social safety net: Targeted at the vulnerable and needy households; conditionally social assistance system – income enhancement, employability and empowerment.

While the Covid-19 pandemic has disrupted government, consumers and businesses in every aspect, it also compels us to embrace as well as accelerate the pace of digital technology transformation in public delivery services, organisational processes and business models.

Business operators have to keep pace with changing employee and consumer protocol behaviour in the workplace and spending and consumption to ensure their business thrives.

A fiscal lever is needed to facilitate and sustain the recovery resilience.

The temporary raising of the self-imposed statutory debt ceiling from 55% to 60% of GDP through 2023 gives the federal government the capacity to borrow an additional RM60bil to RM75bil, based on a nominal GDP value of between RM1.4 trillion and RM1.5 trillion.

It’s now up to the federal government to flex its fiscal spending power. How much budget deficit spending and debt is it willing to commit in the tabling of Budget 2021 on Nov 6?

We expect the federal government to plan a budget deficit of 5.5%-6.0% of GDP for 2021 (estimated 6.0%-6.5% of GDP in 2020).

Budget 2021 is being formulated under the recovery MCO to cement early signs of recovery are firmly entrenched amid concerns about an occurrence of a second wave of virus and uncertainty on the availability of vaccines.

The 2021 budget expenditure programmes and measures should be targeted and prioritised to help the nation to reset, revitalise and recover from the pandemic.

Protect the vulnerable B40 households and affected sectors of society, boost purchasing power, revitalise domestic and foreign investment and create more jobs as well as improve income.

Priority programmes and initiatives to accelerate the adoption of digital technologies are needed.

Expand healthcare, industrial development, agriculture and entrepreneurship as well as the empowerment of women and youth.

Micro-economic policies that promote small enterprises, self-employment, multiple-skills, productivity, innovation and creativity, must be explored in these challenging times.

Lee Heng Guie is executive director at the Socio-Economic Research Centre. Views expressed here are the writer’s own.