CONCERNS about higher fiscal deficit and public debt have again resurfaced but it is not the right time to restrict spending as the government tries to help the economy and livelihoods recover from the devastating effects of Covid-19 and the continuing Movement Control Order (MCO).
According to Finance Minister Datuk Seri Tengku Zafrul Tengku Abdul Aziz, fiscal deficit is expected to register around 5.8 to six per cent of Gross Domestic Product (GDP) this year. Local economists are expecting even higher deficit, ranging from 6.5 to 7.5 per cent.
This is after taking into account the stimulus packages the government have announced so far, involving RM305 billion. Given the higher fiscal deficit, government debt is also expected to elevate this year. The current debt-to-GDP ratio stands at 53 per cent of GDP and, according to Zafrul, the year-end figure will come around 56 per cent of GDP, higher than last year's ratio — 52.5 per cent of GDP.
This projection remains below the approved statutory debt ceiling of 60 per cent, albeit the fact that it has gone up due to the unprecedented crisis. In August, the Parliament voted to allow the government to borrow up to 60 per cent of GDP in the effort to ease the burden faced by the people and businesses.
According to the executive director of Socio-Economic Research Centre Lee Heng Guie, the higher debt ceiling ratio provides the ability for the government to borrow an additional RM70 billion to RM75 billion.
Despite a rise in debt levels, unprecedented times call for unprecedented measures and the government's priority now is to save lives and livelihoods given the expectation that the economy will contract within the range of 3.5 to 5.5 per cent and then start to expand by 5.5 to eight per cent next year.
To be more specific, increased government spending is vital and hoped by many to prop up domestic consumption that has been gloomy, reflected by the first and second quarter GDP numbers.
Notably, this issue appeared as one of the emerging issues discussed during EMIR Research's focused group discussion for the 3Q20 poll. Instead of worrying about higher budget deficit, the participants thought that the government should go all out this year if that's what it takes to save livelihoods, particularly the unemployed, and if it is not addressed, social consequences will get worse.
It's also best to show how important it is for the government to spend in ensuring smooth recovery based on what the Federal Reserve Chair Jerome Powell said recently: "If the recovery simply slows too much, it could lead to tragic outcomes for the less well-off, widening inequality and a situation where weakness feeds on weakness."
But some will question the effect of spending more than what we earn but there is always a solution to every problem. Besides the fact that the government can actually spend more given the reason mentioned previously, there are ways to improve the fiscal position going forward, i.e. in the medium term when economic condition gets much better.
Even the finance minister has mentioned in June that the government still has room to spend given that historically, fiscal deficit reached an even higher rate of 6.7 per cent during the Global Financial Crisis in 2009. Furthermore, he added that a rebalancing approach would be taken to bring fiscal deficit to a better position once economic conditions normalise in the future.
It is indeed a good time that in Budget 2021 announcement on Nov 6, measures to shore up government's revenue base will be touched on and this is important for everyone to adjust to the information. Leakages should also be monitored and reduced to ensure that there are no, or less unnecessary expenses within the government.
Of course, a medium-term fiscal framework to strengthen fiscal discipline needs to be planned with suggestions to broaden government income stream through tax-related changes such as the reintroduction of GST (Goods and Sales Tax). But the timing of implementation of such measures also needs to be right.
The writer is Research Analyst at EMIR Research, a think tank focused on strategic policy recommendations based on rigorous research