Source: The Edge
The faster-than-expected growth in the Malaysian economy in the first half of 2017 has formed a rosy backdrop against which the upcoming, pre-election budget is being tabled. But will the government now continue spending to support the growth figures and keep voters happy, or will it prioritise fiscal discipline while the going is good?
Considering the recovery of crude oil prices and wider tax collection through the goods and services tax (GST), most economists are positive that the government will not have to tighten its belt too much to achieve its 3% fiscal deficit target.
In fact, the government may even have room to increase its liabilities in order to spur economic expansion, says Institute of Strategic and International Studies (ISIS) economist Firdaos Rosli. “Our debt has been stable over the past few years, and fiscal deficit has been on the decline.
The current levels are actually normal for a developing country,” he said, adding that the best thing the government could do now is to maintain the gross domestic product (GDP) growth momentum. While the fiscal deficit has been trending downward from a high of 6.7% in 2009 to 3.1% last year, national debt as a percentage of GDP inched up to a new high of 55.1% last year (see chart). One thing that may be prompting the government to stick to its fiscal discipline is Malaysia’s current sovereign credit rating, which has been relatively stable despite the controversial 1Malaysia Development Bhd debacle — any downside might make it harder for Malaysia to maintain current levels of private investments.
Firdaos, however, opined that the ratings will not be revised down so easily, considering the prudent financial management in recent years to stabilise national debt level and gradually reduce fiscal deficit. “We have upper-medium grade from all three international rating agencies. I think we should be able to manage deficit spending as long as it is under 3.5%,” he said.
AmBank Research chief economist Anthony Dass pointed out that the government is committed to expanding the domestic economy at a healthy pace. Furthermore, he opined the government could further reduce fiscal deficit and address the country’s public debt at the same time. In a research noted dated last Thursday, Dass was optimistic that the growth target will be at a healthy pace of between 5.5% and 6%.
On the other hand, Lee Heng Guie, executive director of the Socio-Economic Research Centre (SERC) foresaw a continued focus on fiscal consolidation, which he opined would be the responsible thing to do. “Prudence is likely to remain the main thrust of the 2018 Budget,” Lee said.
He was confident the fiscal target could be achieved as government revenue should remain buoyant given stablising oil prices. In addition, he anticipates the collection of GST to be at least RM41 billion — the amount collected last year.
CIMB Research economist Michelle Chia opined the GST, along with rationalisation of expenditure elsewhere, had helped plug the shortfall in oil-related revenue in the past years. “We think the government will attempt to broaden out the gains from the strong headline economic performance this year,” said Chia, noting that the Bottom 40 (B40), youth, elderly, and marginalised, as well as small and medium enterprises (SMEs) are possible beneficiaries of the upcoming budget.
However, there remain areas in which the government could optimise spending and improve procurement processes, Chia said, starting with areas highlighted in the Auditor-General’s report. The bulk of government expenditure over the years has largely gone towards operating expenditure (opex). Last year, the government allocated RM46 billion to development expenditure, or some 17.64% of total federal expenditure (see chart).
Firdaos noted that governments worldwide typically allocate more for development expenditure ahead of elections. However, a quick check of Prime Minister Datuk Seri Najib Razak’s budget feedback website indicates there is an overwhelming call for civil servant bonuses, which fall under opex.
Najib has appeared to heed these calls, hinting at “good news” for civil servants, but he had also indicated that the 2018 Budget would not be a populist one.
“Malaysians do not vote based only on the state of the nation’s economy. There are many other factors [affecting their decisions],” Firdaos said.
He added that although cutting down emoluments for civil servants is something the government should look into, the upcoming budget may not be the ideal time for such a decision. “But the government should at least control it (emolument for civil servants),” he said. In his opinion, it will take more than one national budget to curb the ballooning civil servants’ salaries.
On top of that, he opined any short-term stimulants should not be extended for long, and a proper structural reform needs to be in place. “It is very difficult to change private consumption behaviour with these short-term tools. When it comes to consumer spending, household debt and consumer confidence, what should be tackled now is the income factor and not just expenditure.”
“Any more stimulants for housing and transportation may have limited effect, considering government intervention over the years,” Firdaos said.
Private consumption has been the key growth engine of the domestic economy (see chart). It accounts for more than 50% of the GDP.
As such, the government could consider putting more money into the pockets of individuals, said Lee. “For example, there could be tax cuts for middle-income earners,” he added. He noted that when wage earners feel rewarded, they would be more motivated to be more productive.
Lee agrees that the government should have emphasis on medium- to long-term goals, such as addressing lower purchasing power, high cost of living and graduate unemployment. “The ageing population must also be addressed. The elderly are still an asset, but we will require a framework that looks into healthcare in order to harness their contributions,” he said.