Budget deficits for 2020 till forecast 2022 average RM94.6bil per year compared to an average deficit of RM42.3bil per year in 2008-2019. Given the government’s limited fiscal space, how much “wow” factor can it actually afford?
AFTER three consecutive years of expansionary budgets (2020-2022) and eight economic and financial packages to help lift the economy out of the prolonged impact of the Covid-19 pandemic, the government is in for another year of budgetary planning for 2023, which is scheduled to be tabled in Parliament on Oct 28.
The 2023 budget marks the last budget for a five-year administration term, which will automatically be dissolved in July 2023 if not earlier.
The 14th general election was held on May 9, 2018.
The government has rolled out eight stimulus packages (RM530bil or 35.8% of the average gross domestic product or GDP in 2020-2021) and three years of big fiscal spending (2020-2022 forecast) totalling RM979.6bil.
The 2020-2021 budget had already spent RM647.5bil or an average of 21.9% of GDP, and it has budgeted another record total spending of RM332.1bil or 21% of GDP in Budget 2022.
From January till April 2022, it has utilised 35.2% or RM116.9bil of the total allocation.
Budget deficits for 2020 till forecast 2022 average RM94.6bil per year compared to an average deficit of RM42.3bil per year in 2008-2019.
Limited scope
Given the government’s limited fiscal space, how much “wow” factor can it actually afford?
Will the government backtrack its fiscal reduction path as guided under the Mid-Term Fiscal Framework, and go for another record year of fiscal spending? Does the government have the capacity to borrow?
As at end-March 2022, the federal government debt stood at RM1.006 trillion or 61.4% of GDP, while statutory debt was at RM949bil or 57.9% of GDP, which was below the statutory limit of 65% of GDP.
Total debt and liabilities stood at RM1.32 trillion or 86.7% of GDP as at end-March 2022.
The Debt Sustainability Analysis framework simulation demonstrates increased government debt vulnerabilities in the event if any shocks, thus limiting the fiscal space and the ability to raise additional borrowing for counter-cyclical responses.
The debt service ratio (DSR) had increased by 9% per annum in the 2018-2022 budgets to reach RM43.1bil in 2022, making up 18.4% of total revenue.
This means that for every RM1 revenue collected, 18.4 sen goes to service the payment of domestic and external loans.
It is higher than the fiscal rule’s limit that states the DSR must not be more than 15% of total revenue.
While the government is expected to table a deficit budget for 2023 with spending priorities on critical sectors, it must not be as large as the last three years’ budget deficit of averaging 6.2% of GDP in 2020 to forecast 2022.
Fiscal rules
It is time to resume a set of fiscal rules to carefully manage deficit, debt and costs while planning for the future.
It must be responsible to support current and future generations by reducing persistent deficits and managing debt prudently.
Our future generations will be compelled to confront the prospect of living in Malaysia where government debt is so high that its shadow darkens our fiscal and debt sustainable management and threatens the government’s credit standing and country’s financial stability.
Mounting debt levels put the country at risk of a fiscal crisis.
It’s important to remember how we got there and to ensure that history does not repeat itself.
In the early 1980s, Malaysia had suffered unsustainable fiscal deficit and debt levels and also current account deficit of the balance of payments.
As guided by the Finance Ministry’s pre-budget statement dated June 3, 2022, Budget 2023 will emphasise a more sustainable fiscal position by improving revenue and expenditure efficiency in balancing growth and fiscal consolidation.
The government needs to rebuild fiscal space for responding to future shocks.
Credibility issue
If ever the government proposes a budget that will be loaded with election goodies in seeking the support of the electorate, and showing no firm commitment towards fiscal consolidation, this will undermine our credibility in the eyes of rating agencies and investors.
If the government spends every ringgit it takes in, and then borrows even more to keep going and the fiscal deficit keeps widening, the full cost of the debt burden will be borne by not only the current generation but also future generations.
Building fiscal anchors face constraints because of budget rigidities (revenue can only be used for meeting operating expenditure; borrowings can only be used to finance development expenditure), extreme revenue volatility (dependence on oil revenue and a narrowed tax base), spending procyclicality and prioritisation, and limited implementation capacity.
While it is easy to run a deficit during downturns, building fiscal buffers during upturns by saving revenue windfalls could be difficult, owing to political pressures to spend in the face of large recurrent operating expenses, development and infrastructure needs.
Political economy considerations suggest that fiscal governance without strengthening fiscal institutions could create a fiscal deficit bias and fiscal leakages.
Reform strategy
In this regard, strengthening the fiscal governance framework requires a comprehensive macro and fiscal reform strategy, including spending and revenue reforms.
Faster implementation of these reforms will bolster confidence and economic recovery.
Over the medium term, rebuilding fiscal space, restoring fiscal sustainability and debt stability require continued restraint in expenditure growth and reforms to raise economic growth:
> An expansion of the revenue base (reforming the tax system and strengthening tax collection efforts).
Even if we have higher revenue say from the goods and services tax or GST in the future and bumper oil revenue, it must set aside a portion of the higher-than-expected revenue to narrow the budget deficit.
This mitigates the impact of higher interest rates on debt-service costs and improves the longer-term debt outlook;
> Rationalisation and prioritisation of expenditure, focusing on critical and functional as well as needs-based spending programmes.
Subsides must shift from product to targeted vulnerable households based on the principle of income and needs.
Implement conditional cash transfer programmes only for the vulnerable and under-served households and individuals such as the disabled, elderly and people suffering from poverty; and
> Increase economic output so as to outpace increases in public debt levels over time.
Lee Heng Guie is executive director of the Socio Economic Research Centre. The views expressed here are the writer’s own.
Can the govt afford another ‘wow’ budget?
