Looking at the 2025 Budget, which will be tabled in Parliament in October, the government must juggle several balls: fiscal discipline, economic growth and citizen wellbeing.
Many of these priorities are competing, if not conflicting.
For example, reduce the budget deficit and you reduce aggregate demand. While this will have a beneficial effect on the cost of living, it will muzzle economic growth.
We have been having budget deficits for 25 years since the Asian financial crisis of 1997 to 98.
That has resulted in the gradual accumulation of public debt to plug the deficits.
Even so, the deficit has been declining over last few years.
It stands at an estimated -4.3 per cent in 2024 compared with a high of -6.4 per cent in 2021.
If the government sticks to the envisaged deficit reduction of 3.5 per cent for next year, its debt could be decreased to 54 per cent of the GDP from 66 per cent.
That would allow the government to save RM8 billion in interest payments. These could be channelled to subsidies for the poor.
Apart from ensuring fiscal prudence, the government must allocate its revenues for many programmes. We suggest four priorities.
His Majesty Sultan Ibrahim, King of Malaysia, made a clarion call at his installation for better governance and increased productivity.
A greater allocation to agencies enforcing governance, such as the Malaysian Anti-Corruption Commission, the Auditor-General's Office and audit units in departments would be a step in the right direction.
These additional allocations will ensure that these agencies can cast their net wider to minimise mismanagement in government.
SECOND, greater allocation and incentives should be offered to small- and medium-scale enterprises (SMEs) to accelerate their digitalisation plans.
SMEs comprise 97 per cent of businesses.
Digitalisation will boost their ability to capture market opportunities, customise products, attract talent and optimise operations. Regrettably, only about 80 per cent of SMEs are at the early stage of digitalisation.
Apart from fiscal incentives, the help to digitalise their operations should include provide extension services for the concerted adoption of digitalisation.
THIRD, agriculture should be encouraged to improve our 41st rank in the Global Food Security Index.
The rank indicates that we are nowhere near food security.
Our agricultural productivity is 45 per cent of the average among high-income countries.
Malaysia has a higher percentage of arable land.
However, the United Nations Food and Agriculture Organisation reported in 2022 that Malaysia had a lower average yield compared with that of South Korea, Indonesia and the Philippines.
Greater investment in agriculture is required to minimise the damaging effects of floods and droughts.
Additionally, investments in rural agriculture will cushion the impact of escalating food prices, especially among the rural population.
FOURTH, the lack of productivity in agriculture and in other sectors of the economy points to the need for greater research and development (R&D).
R&D is the key to productivity improvement. Leading innovative economies — the United States, South Korea and Germany, — invest heavily in R&D.
Compared with the one per cent of GDP that Malaysia spends, these rich nations devote as much as three to four per cent of their GDP to R&D.
The 2025 Budget should address this inadequate investment in R&D.
In preparing the budget, the government must be mindful of three considerations.
FIRST, it must determine if the economy is operating below capacity. If so, then it should increase its capital spending, especially on state-of-art infrastructure. Otherwise, it will lead to inflation.
SECOND, it must be convinced that inflation is controlled. If so, the government can spend confidently without worrying about worsening the cost of living.
THIRD, it must answer whether its proposed budget will keep within the bounds of the projected budget deficit and the legal debt limit. If so, the budget will be sustainable.
The writer is adjunct professor at Perdana University