Malaysia’s 2020 deficit at 3.2pc? So what? Three economists weigh in

R. Loheswar
A woman holds copy of Budget 2020 after its tabling in Parliament October 11, 2019. — Picture by Miera Zulyana

KUALA LUMPUR, Oct 13 — The Pakatan Harapan (PH) government is planning to spend RM297 billion next year, hoping to stimulate Malaysia’s economy during a global slowdown while maintaining a fiscal deficit of 3.2 per cent of the GDP.

Compared to this year’s deficit projected at 3.0 per cent, the 2020 figure is a significant 0.2 per cent higher. Opposition lawmakers and some financial institutions have latched onto this, saying the upward revision throws some red flags about the sustainability of PH’s 10-year Shared Prosperity Vision.

Economist Christopher Choong Weng Wai feels there shouldn’t be any concern with this degree of fiscal deficit, saying Malaysia’s domestic and external debts are still below dangerous levels and there is plenty of room for growth.

“In my view, when the economy is facing headwinds, we shouldn't be too concerned with fiscal deficit, projected at 3.2 per cent in 2020.

“Our domestic debt and external debt are all still below the self-imposed sustainable fiscal rules, so we still have fiscal space to be expansionary, plus our debt service charge is still below 15 per cent of our total revenue,” the Khazanah Research Institute deputy director told Malay Mail when contacted after the Budget 2020 tabling last Friday.

Choong said he personally expected the government to announce an expansionary budget for next year, only to find out it was a contractionary budget with spending down by 6.1 per cent compared to 2019.

“Having said that, Budget 2020 brings the total budget of the RMK11 to RM1.4 trillion, which is 14 per cent higher than RMK10 budget at RM1.2 trillion,” he said, using the Malay abbreviations for the 11th Malaysia Plan and 10th Malaysia Plan respectively.

Choong is optimistic that Malaysia’s growth won’t be limited, saying there is room for fiscal stimulus because the share of net development expenditure also increased in Budget 2020 compared to the start of the RMK11 period in 2016.

Not set in stone

Malaysia’s total revenue for 2019 is expected to increase RM1.5 billion to RM263.3 billion compared to its original estimates.

The government aims to maintain a certain level of control to maintain this trajectory and ensure that debts are manageable, noting that in 2019 the deficit was at 3.4 per cent.

During the Budget 2020 presentation, PH reiterated its commitment to strengthen the country’s financial position while initiating measures to shore up the economy in the face of global quakes due to the US-China trade tensions.

It allocated more money on upgrading schools, Felda farmers and Tabung Haji even as it set aside funds to service sovereign debts like those for SRC International.

The government is also pouring money to speed up big ticket infrastructure projects like the second stage of the MRT across the Klang Valley, the Pan Borneo Highway for a road link between Sabah and Sarawak, and the electrified double-track rail between Gemas in Negri Sembilan and Johor Baru.

Tightrope act

Bank Negara Malaysia’s Monetary Policy Committee external member Professor Yeah Kim Leng similarly said there is no issue if the government can sustain its fiscal deficit trajectory in the long-run, especially if its spending spurs consumers to spend, resulting in continued economic growth.

“For small economies, it is desirable to build fiscal space whereby the government can increase counter-cyclical spending while keeping debts at a manageable level, when faced with an external shock such as the global financial crisis.

“The key challenge is to determine the appropriate level of spending increase needed to counter with the downside risks posed by the slowdown in the global economy next year.

“The mildly expansionary Budget 2020 is adjudged to be appropriate given that the economy is expected to maintain a modest growth next year. The intended effect of the expansionary budget is to buoy private sector confidence and sentiments so that they will continue spending and investing,” he told Malay Mail.

Yeah sees PH as successfully navigating a tightrope between an expansionary budget and falling off the fiscal cliff in Budget 2020.

He noted that despite the much higher allocations for most ministries, the government did not hike tax except for the 2,000 or so Malaysians categorised as rich.

“It is well crafted as a catalyst for the Shared Prosperity Vision 2030, a solvent for past financial legacies and a balm for people struggling with high cost of living,” the academic said.

“The measures and initiatives on easing the cost of living covering housing, health, education, transport and income transfer are reflective of the shared prosperity vision. The financial legacies of 1MDB and SRC are being dissolved gradually with full commitment by the government to repay their debts despite lower tax collection from the resurrected SST.

“The government's loss, however, is the consumers' over gain in terms of lower tax burden. The balm for the low income and vulnerable groups comes in the form of lower toll, targeted fuel subsidies, higher income transfers, easier and lower financing cost for affordable housing, healthcare and transport,” Yeah added.

Too many variables

Singapore Institute of International Affairs senior fellow Oh Ei Sun agreed that with the government spending more, there is a higher chance Malaysian consumers will also spend money and this would stimulate the economy to grow.

But he had reservations, saying a high deficit is generally bad because it may throw the government off track in achieving its economic targets.

“I agreed our deficit is still manageable, but I am not sure that increased government spending will result in continued growth in economy, as leakages in the form of corruption is still very rampant, enriching only a very small group of well-connected elites,” he said when contacted

He said many sectors have been allocated a lot of money in Budget 2020 despite the world economic slowdown, cautioning that this generosity could drain the Treasury in the long-run as there are too many variables.

“I am not sure how many per cent of our debt is foreign vs local,” Oh added.


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