The occurrence of a second worldwide wave of virus and a third wave on our shores is expected to temper the pace and strength of the anticipated firmer domestic economic recovery in the fourth quarter of 2020 and in 2021. It is critically dependent on the future virus path and the availability of vaccines.
It is a balancing act as fiscal stimulus support is incredibly important to support the revitalisation phase of the economy while keeping the deficit and debt manageable. Given the unwarranted risks and challenges ahead, the Finance Minister has budgeted a targeted expansionary fiscal stimulus of RM322.5bil – or 20.6% of gross domestic product (GDP) – in 2021, an increase of 2.5% from RM314.7bil (21.9% of GDP in 2020). This includes RM17bil in the Covid-19 Fund (RM38bil in 2020).
The budget’s measures and initiatives are two pronged, balancing the short-term needs and long-term goals, setting the stage for medium-term growth.
First, continued financial assistance and facilitation support to cement sustained economic revival and business sustainability, and second, digitalisation, innovation and technology as well as investments to build a diversified economy and businesses, especially reskilling the workforce digitally and helping SMEs to develop new capabilities in digital technologies.
Of the total expenditure in 2021, development expenditure (4.4% of GDP) is budgeted to increase strongly by 38% to RM69bil, the highest level on record to make up 21.4% of total expenditure.
This is to support stronger economic recovery through the implementation of projects and programmes with a high multiplier impact to promote economic growth and investment in the areas of education, healthcare, housing, transportation and public utilities, trade and industry. Amongst the projects earmarked are the upgrading, expansion and maintenance of highways, roads, railways, bridges, ports and airports.
The key risk is implementation capacity. Timely and critical steps need to be taken to ensure the projects and programmes are implemented quickly and effectively. More importantly, the budget’s allocation to the ministries and agencies must be disbursed accountably and timely to ensure positive spill-over on domestic demand. Any delay in the disbursement would trigger a renewed economic contraction if the private sector has not recovered to take up the slack.
The government has to tap on domestic borrowing to meet a deficit financing gap of RM84.8bil in 2021. The federal government’s debt-to-GDP ratio has been raised temporarily to 60% until 2022, allowing some fiscal space.
With the increase in borrowing needs to support growth, the debt is projected to increase to around 58% of GDP in 2021 (RM874.3bil or 56.6% of GDP as at end-September 2020).
There were concerns on the government’s commitment to reduce the fiscal deficit to 4.5% over the medium term, and hence affecting the country’s future fiscal space and sovereign ratings. It must be noted that some of the fiscal transfers such as the wage subsidy programme is one-off under the Covid-19 Fund in 2021. Hence, it helps to reduce the budget deficit if the Covid-19 pandemic is contained.
We believe that global rating agencies will give Malaysia some breathing space as long as the government pledges a firm commitment to resume its fiscal consolidation path when the pandemic is over. Rebuilding fiscal buffers are needed through a gradual reduction in the deficit level over the next two to three years when the economy recovers.
Malaysia has a good track record of delivering its promise on fiscal consolidation and strengthening fiscal space through a two-pronged approach – revenue enhancement, including revenue efficiency; and rationalisation and optimisation of non-critical expenditures, including subsidy in two distinctive periods.
It had achieved five successive years of budget surpluses between 0.2% and 2.4% of GDP in 1993-1997; and the fiscal deficit was trimmed progressively for eight years in a row, from -6.7% of GDP in 2009 to -2.9% of GDP in 2017.
In our view, fiscal discipline and governance must be observed when the economy stabilises and recovers. A fiscal target should be set such that it provides ample fiscal space to meet the fiscal demands created by a future deep economic shock or financial crisis.
The government must pursue the Medium-Term Fiscal Stability Framework (MTFSF) as a tool for medium-term fiscal planning with renewed vigour. We should draw up a clear and credible five-year fiscal consolidation plan returning to sound fiscal and debt sustainability. This helps to bolster investor confidence as well as safeguard the country’s sovereign ratings.
Putting the country on a more stable fiscal footing requires firm commitment to constrain the growth in spending and broaden the narrowed revenue base. This can be achieved through:
> Non-critical expenditure optimisation, including to rationalise a 5.3% per annum (pa) growth in operating expenditure, which has taken almost 100% of total federal revenue in 2010-19 (such as right-sizing the bloated 1.6 million public servants or 10.6% of total employment with a RM80.5bil wage bill or 30.5% of total revenue in 2019, a progressive entitlement reform of statutory pension payment, supplies and services);
> Continued rationalisation of subsidies and the consolidation of cash transfers/aids;
> Revenue enhancement initiatives, including reintroducing the goods and services tax ; and
> Reducing the tax gap to about 20% of GDP; plugging the shadow economy estimated at 18.2% of GDP in 2019, and taxing the sharing and gig economy.
Lee Heng Guie is executive director of the Socio-Economic Research Centre. Views expressed here are his own.
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