Mid-August saw the first reading in the Dewan Rakyat of the Temporary Measures for Government Financing [Coronavirus Disease 2019 (Covid-19)] Bill 2020. The bill is to create a RM45 billion fund to fight the ill effects of the pandemic.
The bill will surely reignite the controversy on managing public finances. The classical or traditional economists argued that budgets should be balanced.
Keynes, an influential economist, came along in the 1930s, when the world was reeling from the effects of the Great Depression, to argue that in a recession it is imperative that the government pump prime the economy. He said: "The government should pay people to dig holes in the ground and then fill them up… It doesn't matter what they do as long as the government is creating jobs."
International organisations that issue global-competitiveness league-tables tend to favour balanced budgets, or at least ones with a slim deficit.
Perhaps that explains our consistently poor ranking of below 40 out of 63 countries every year over the past 10 years on the criterion of "budget deficit as a percentage of the gross domestic product (GDP)" in the World Competitiveness Yearbook produced annually by the Swiss Institute of Management Development.
These rankings seem to reflect the fact that we have posted budget deficits for 12 years running. Modern-day thinking is more aligned to Keynesian economics. And this is apparent from the heavy fiscal-stimulus packages that almost all countries have introduced.
The United States leads the pack with over US$3 trillion, or 15 per cent of its GDP. Our package at RM295 billion is 20 per cent of our GDP. Surely, these countries will bleed red in their budget balances. Their budget deficits are expected to range from 1.0 per cent (Norway) to 18 per cent (Britain) this year. The four massive fiscal-stimulus packages will also widen our budget deficit this year to six per cent.
It will enlarge to nine per cent if the opposition clamour to double the proposed Covid-19 fund to RM90 billion becomes a reality. The doubling will also spike the public debt, although it may not exceed the 60 per cent statutory limit advocated under the temporary bill. Here are two suggestions to better manage our public finances.
FIRST, the proposed fund should be made permanent to tackle future economic shocks, including epidemics. Singapore manages a permanent national reserve. And for the first time since the 2008/9 global financial crisis, Singapore has drawn down this reserve to fight the pandemic.
SECOND, a number of laws, including statutory and administrative orders, regulate fiscal management. Without prejudice to other financial provisions, the government should enact a consolidated fiscal law that unifies all regulations related to budget and debt management.
This fiscal law will not only specify a statutory limit to public debt, but also commit the government to a budget surplus by, say, 2025. Once the surplus target is achieved, the law could then stipulate that the surplus must be retained in "normal" times.
However, should GDP growth falter to, say, below one per cent, this requirement can be loosened. These targets will impose a discipline upon the government to live, as far as it is possible, within its means. It will also demonstrate to credit-rating agencies, and international organisations that rank countries' global competitiveness, of the government's commitment to reducing its budget deficit.
Admittedly, it might be risky to set such strict fiscal rules in today's uncertain economic times. The International Monetary Fund expects world GDP growth to contract by 4.9 per cent this year. But, it has a rosy forecast of nine per cent growth for Malaysia next year.
And Malaysia's economic position looks better in the coming years if economic expansion holds and there are no more black swans.
A consolidated fiscal law will require discipline by the government to stay the course in budget balance and debt, especially when economic growth slows or when political pressure to increase spending grows. But where there is a will, there is a way.
The writer is a professor at the Putra Business School
The views expressed in this article are the author's own and do not necessarily reflect those of the New Straits Times