Fiscal Responsibility Bill falls short of expectations

THE Dewan Rakyat passed the Public Finance and Fiscal Responsibility Bill, 2023 on Wednesday, paving the way for Malaysia to implement strict guidelines when it comes to managing its finances.

The Bill spells out the powers of the minister in charge of finance in formulating and implementing fiscal policy of the government with the main objectives of ensuring the sustainability of public finance, preserving macroeconomic stability, and safeguarding the well-being of the people.

Minimum threshold for development expenditure

The Bill also spells out what is expected of the government in the form of minimum development expenditure. This has been set at not less than 3% of the country’s gross domestic product (GDP) to ensure economic growth, as seen in the accompanying table, together with other fiscal objectives.

Certainly, as the government intends to spend more than RM90bil a year throughout 2023-2025, this threshold will easily be met.

Clause 8(3) of the Bill suggests that the quantified values shall consist of at least one numerical target to be achieved over the medium term, which has now been defined as a period of between three and five years.

Hence, these targets are not immediate targets that the government intends to meet, but over a period of time when the government’s finances are stronger.

Medium-term fiscal framework

Under Clause 9, the minister will formulate a medium-term fiscal framework to guide fiscal planning, strategies, and priorities in the medium term, supported by a revenue strategy and a public expenditure policy.

The government’s revenue policy, among others, must ensure sufficient and sustainable revenue generation in the medium and long term (any period of more than five years) as well as to have an efficient tax system and fair legislative framework and maintain a reasonable degree of predictability and stability of tax policy.

In addition to the revenue strategy, the minister will also be responsible for formulating public expenditure policy and preparing a statement of the estimated expenditure.

The minister is also expected to monitor the performance of programmes and projects in the expenditure estimates and report their outcome to ensure optimal resource utilisation. In addition, the minister shall also publish a mid-year expenditure performance report, not later than Sept. 30 every year.

Debt prudence

The Bill also spells out the minister’s responsibility in formulating and implementing borrowing and debt management policy of the government responsibly and prudently, to ensure debt affordability and sustainability.

However, other than those specified under the First Schedule for debt to GDP target ratio, the borrowings made by the government will continue to be governed under the existing five key legislations that are being used.

What if?

There are no penalties or jail terms recommended under the Bill that was approved in the Dewan Rakyat on Wednesday.

Under Clause 27, if the fiscal objectives and the quantified values as specified in the First Schedule are not achieved, the minister shall lay a fiscal adjustment plan to be approved by resolution of Dewan Rakyat.

The fiscal adjustment plan shall consist of reasons for not achieving the fiscal objectives, and measures and the expected time to be taken by the government to achieve them.

If the fiscal adjustment plan is not approved, the Dewan Rakyat may pass a resolution to require the minister to improve the fiscal adjustment plan to be laid in the Dewan Rakyat as soon as practicable.

Another committee

The Bill also recommends the setting up of the Fiscal Policy Committee (FPC) with up to 10 members, comprising the prime minister, the deputy prime minister, finance minister, economy minister, chief secretary to the government, secretary general of treasury, secretary general of the Economy Ministry, Bank Negara Malaysia governor and up to two others who shall be from among persons of standing and experience in fiscal or public finance.

The FPC shall not only oversee the fiscal matters, debt and liabilities, and fiscal risks but deliberate and propose policies to the Government towards achieving the fiscal objectives.

Further fine tuning needed

Under the First Schedule, only four key parameters are measured and the debt service charges (DSC) as a percentage of total government expenditure as well as a reasonable target of tax revenue to GDP have been left out.

Based on the Budget 2023 figures, as tabled in February this year, Malaysia has already surpassed the 15% self-imposed DSC threshold with an expected DSC at about 15.9% for this year.

In terms of tax revenue to GDP, with Malaysia’s current rate at less than 12% and well below the median of peers, which is at almost 19%, Malaysia should aim to have tax revenue to GDP target of at least 15% in the Bill, which will compel the government to find ways raise revenue.

Although these two thresholds were not included in the Bill, it is hoped that in future amendments to the Bill will be made to add these two critical fiscal objectives.

Pankaj C. Kumar is a long-time investment analyst. The views expressed here are his own.