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PETALING JAYA: Socio-Economic Research Centre (SERC) said today a credible fiscal reduction plan needs to be instituted by Putrajaya to ensure the government can weather the effects of future financial shocks.
Executive director Lee Heng Guie said the government’s operating surplus has been in decline since 1996.
“The government needed to focus on their operating account as revenue will soon get to a point where it cannot cover costs,” he said at a briefing on the SERC Quarterly Economic Tracker report today.
He predicted the government would likely seek to extend the statutory debt ceiling in the medium-term to ensure it could continue with the smooth implementation of development projects.
He said the federal government’s direct debt stood at RM1.07 trillion or 62.8% of gross domestic product (GDP) as at end-September last year, a record-high level.
Malaysia’s debt service charges to revenue ratio stood at 16.3% in 2021, before falling to 15.1% last year. It is expected to surge to 16.9% in 2023, exceeding the 15% threshold of international best practices, said Lee.
The re-introduction of a goods and services tax (GST) was one option that the government could pursue to widen its revenue base.
“Several business chambers we have engaged agree with the reintroduction of GST. However, it is imperative that the government learns the lessons from our last experience with GST.
“Ensuring GST refunds are processed in a timely manner is important and a comprehensive list of exempted items must be formulated,” he added.
Reduce expenditure with subsidy rationalisation
To reduce government expenditure, the think tank mooted further subsidy rationalisation. At present, the government is pursuing a targeted subsidy programme for electricity tariffs.
Extending targeted subsidies to fuel would further abate the burden on government expenditure. However, a measured approach was necessary to ensure the government balances the impact of both inflation and the ongoing cost of living crisis, it said.
Lee noted it was critical to ensure that positive investor sentiment in the economy was maintained, and that persistent deficits had the potential to “shake their confidence”.
“Persistent high deficits and growing debt can trigger investors’ concern towards fiscal solvency. If there are twin deficits in both operating and overall (federal government budgets) it could undermine investors’ confidence in the government’s financial discipline,” he said.
Lee added that it was necessary for Putrajaya to table both their Fiscal Responsibility Act and Government Procurement Act, to ensure increased accountability and transparency in fiscal decision-making.
Normalisation of economic growth
On the Malaysian economy, Lee said it is set to experience a slower growth of 4.1% this year, down from an estimated 8.5% last year, reflecting largely the normalisation of technical high-base effects and a weakening external environment.
He added moderating exports, normalisation of domestic demand, inflation and high cost of living, and the lagged effects of interest rate hikes will weigh on domestic economic growth.
“The interplay of a weakening external environment, the new government’s macro-narratives, domestic inflation, and interest rates will ultimately shape Malaysia’s economic growth outlook for 2023,” he said.
Source: https://www.freemalaysiatoday.com/category/business/2023/01/09/govt-must-have-a-credible-fiscal-reduction-plan-says-think-tank/