Eyeing an expansionary fiscal policy

THE Malaysian government has proposed an expansionary fiscal policy with Budget 2023 having a total allocation of RM373.3bil as compared to RM385.3bil in 2022.

This was done with the aim of balancing the interest of the rakyat with sustaining economic growth under the assumption of a more challenging year ahead, due to weaker global economic prospects amid political tensions and fiscal limitations.

The RM373.3bil budget accounts for 20.5% of gross domestic product (GDP), while 73.1% of the amount or RM272.3bil (RM284.7bil in 2022) has been allocated for operational expenditure (OE) and RM95bil (RM71.8bil) or 25.5% for development expenditure (DE).

Putrajaya has also allocated RM5bil under the new budget for outstanding payments of Covid-19 Fund (RM28.8bil in 2022) commitments made in 2022.

With OE rising some 400% in the past two decades, the government is embarking on a Public Expenditure Review and targeted subsidy initiatives to consolidate its fiscal position to ensure fiscal sustainability in the long term.

The slightly lower OE year-on-year under Budget 2023 is premised on expectations of reduced allocation for subsidies and social assistance, projected to total RM42bil as commodity prices moderate, coiled with the gradual implementation of a targeted subsidy mechanism.

Subsidies and social assistance amounted to RM80bil last year with 45% of the amount spent on fuel subsidies. This took government spending on subsidies and social assistance programmes to RM485bil from 2000 to 2021.

The OE, however, remains elevated due to higher allocation for emoluments, retirement charges, debt service charges (DSC) and grants to statutory bodies.

Emoluments for civil servants remain the highest spending from OE at 33% or totalling RM90.8bil due to provision of special annual salary increments and the adsorption of contract officers to permanent positions, particularly in the education (18,100 teachers) and health sectors (5,700 medical officers). Retirement charges are estimated to rise by 1.4% to RM29.1bil or 10.7% of OE under Budget 2023 with 75.3% or RM21.9bil of the amount going to pension payments for about 958,700 pensioners mainly.

The Finance Ministry’s Fiscal Outlook report 2023 forecasts that pension liabilities will expand going forward as the country becomes an ageing nation.

Some RM46.1bil of the OE is allocated for DSC in tandem with higher financing needs for DE and the Covid-19 Fund. About 98.4% of the money will go to coupon payments on domestic debt and the remaining amount on offshore loans.

The DSC ratio-to-revenue is estimated at 16.9%, slightly above the 15% threshold in accordance with international best practices.

The RM95bil DE under Budget 2023 aims to support economic growth and see allocations channelled to programmes and projects with high socio-economic impacts.

Of that, 56.9% of the amount has been allocated for the economic sector with 26.5% to go for social expenditure under the new budget.

Some RM16.5bil or 17.3% of DE will be channelled to the transport subsector for the construction of projects like the Trans Borneo Highway, Sarawak Sabah Link Road Phase 2, Pengalat-Papar bypass road in Sabah and upgrading of the Pasir Gudang Highway in Johor.

Some US$3bil (RM13.9bil) of the DE will be used to redeem a 1Malaysia Development Bhd maturing bond in March next year, according to the government report.

In view of the need to maintain a sustainable fiscal position, the Fiscal Outlook report said the government will review its current expenditure practices including subsidy programmes, pension reform, public- private partnership spending and financial commitments, as well as grants to statutory bodies.

It will also look to improve public spending efficiency and effectiveness to reduce leakages and offer better transparency in financial reporting.

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fiscal policy , GDP , OE , DE ,


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