Comment: A debt crisis will be waiting for us

AFTER more than two months of the movement control order (MCO), the Covid-19 pandemic is still with us.

In fact, many epidemiologists say that as long as a vaccine is not found or herd immunity not achieved, the coronavirus will continue to spread relentlessly. What the government can do is to merely attempt to "flatten the curve" by trying to ensure that our public health system is able to handle the number of infected patients. In this way the death rate of those being treated may be reduced even if fatal cases cannot be completely stopped.

But one problem that most governments in the world will find difficult to deal with is the debt burden resulting from this pandemic. In order to minimise the adverse economic impact, almost all governments have been spending huge amounts of money. The main strategy used is economic stimulus packages where the government will provide a variety of financial assistance to various categories of people and business organizations.

However, since almost all governments are already burdened by debt prior to this, in reality many of them cannot afford to implement those economic stimulus packages unless they added more debt to the existing unpaid amounts, thereby worsening their debt situation.

According to a recent report by Forbes magazine, in an effort to save the US economy, which has been severely affected by the lockdowns imposed in almost all states resulting in the closure of millions of businesses and the increase in the number of unemployed to more than 35 million people, the Trump administration and the US Federal Reserve have pumped over US$6tril (RM25.9tril) into the US economy. The report further states that the country's US$1.1tril (RM4.8tril) budget deficit for this fiscal year has jumped to US$3.7tril (RM16.1tril).

This amount actually exceeds the overall US government budget deficit during the whole of Bill Clinton’s administration. In fact, it is the largest deficit in American history, equal to the total deficit and surplus of the federal budget from fiscal years 1901 to 2003, a period of over 102 years.

As was the practice in the past, all the funds will be obtained via new issues of US government debt certificates called US Treasuries. As a result, total US government debt is projected to rise to US$26.9tril (RM117tril) by September 2020. It is likely to increase further if the US economy failed to recover and needed additional stimulus package. Debt-to-GDP ratio is expected to rise to 135%, which is well above the level of 85% that many economists say is the danger level that could lead to economic crisis.

The main reason for this potential crisis is excessive government debt which will result in an increase in interest payment burden. In this regard, the government will have to increase tax rates and reduce spending. As government spending is a major driver of the economy, any reduction will result in a serious and rapid contraction of the economy.

A similar situation is facing Britain. A BBC report states that government debt to GDP is estimated to rise to 100%, the highest ever since the Second World War. The government's budget deficit is estimated to be £260bil (RM1.4tril), which is more than five times the £48.7bil (RM261.5bil) projected for 2019-20.

Like the US government, the British government will obtain these funds by massive borrowing, £180bil (RM966.5bil) to be exact, in the form of government bonds to be issued in the period from May to July. It is likely that this number will increase further if the Covid-19 pandemic persists. In fact one report predicted that the British government may very well borrow around £500bil (RM2.7tril) in total to protect the economy, an amount which is equivalent to 25% of the country's economy. With such a high level of indebtedness, the risk to the British economy is not difficult to imagine.

In Malaysia, the amount of government debt is also expected to rise from its current level. The issue is a bit complicated due to disagreement as to the exact amount of the government’s existing debt level following the Pakatan Harapan coalition's victory in the 2018 general election. In that year, the Barisan Nasional government stated that the government's debt to GDP ratio was 50.8% which is below the maximum limit of 55%.

However, on taking over, the Pakatan government insisted that percentage was inaccurate as it did not take into account government guarantees on the debts of some government-owned organizations such as 1MDB, PTPTN and the Public Sector Housing Financing Board. These are called off-budget debt and if all of them are included, Malaysia's total public debt to GDP figure is actually more than 80%.

Notwithstanding that disagreement, what is certain is that the amount of government debt has increased following the move by the government to implement economic stimulus packages to address the problems caused by the Covid-19 pandemic. Direct subsidies alone amounted to RM35bil and this could be increased further if the country's economic situation continues to worsen resulting in this year’s budget deficit to exceed the previous forecast of 4.7% of GDP.

If off-budget debts were not included, the annual interest payment on Malaysian government debt last year was around RM28bil. For the coming year, if we include off-budget debts as well as the additional debt arising from the Covid-19 economic stimulus package, which may amount to RM150bil, it is likely that interest payments will be almost RM40bil, which is just slightly less than the total GST collection in 2017 of RM44.03bil.

It should be noted that GST was abolished by the Pakatan government in 2018 and replaced by SST. As a result tax revenues for the government have been reduced. As the country's economy slows down this year due to Covid-19, government tax collection will further experience a sharp fall. In short, the Malaysian government will face a very difficult challenge in the future as far as its debts are concerned.

Despite the difficulties we are currently experiencing due to the Covid-19 pandemic, one thing is for certain: the pandemic itself will eventually end, either due to the discovery of a vaccine or the attainment of herd immunity. Malaysians will then be able to move freely as the MCO will also end.

Unfortunately, this does not mean that all Malaysians will be happy and that things will revert to the way they used to be. This is because the government is likely to face a very serious debt burden, which will affect all Malaysians. The government will need to either increase the tax collection or reduce expenditures, or maybe both, in its attempt to reduce or pay off debt.

The serious problems that we are facing should teach us a very important lesson. Humanity needs to develop an economic development approach that is not completely based on debt, whether by the government, the people or the corporate sector.

Many religions and philosophers have warned us of the dangers of debt and the debt-for-profit industry. Both the Bible and the Quran contain many verses that condemn usury or the practice of seeking to benefit from debt. Unfortunately, many of us do not care at all about the teachings of our religion on this aspect. Even more unfortunate is that some scholars have been trying to find ways to maintain the debt industry.

Granted, the "debt industry" can be very lucrative to some people who are involved in it, but the reality is that most people’s lives, especially those who are weak and poor, will become increasingly tough and miserable as the level of indebtedness in society increases. Surely that is contrary to the essence of all religious teachings.

Prof Mohd Nazari Ismail is with the Faculty of Business and Accounting at Universiti Malaya. The views expressed here are solely his own.

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