Budget 2020 was announced on October 11, 2019. But less than six months later, the entire world’s economy has gone into recession.
From March to September this year, the Malaysian government has had to provide over RM300 billion in Covid-19 related financial assistance under various Prihatin and Penjana initiatives, including the latest Kita Prihatin package.
When the government announced its budget last year, the amount it estimated to spend for this year was RM297.02 billion with RM241.02 billion to be used for the country’s operating expenses alone.
The government already needs RM241.02 billion to cover regular operating expenses this year. This means the RM300 billion in Covid-19 related financial assistance is an extra expenditure on top of this.
Clearly, it is important for the government to continue spending more than what it can earn this year but how will this carry over to Budget 2021?
Does the government have any other option besides reducing spending?
In a recent interview, Finance Minister Datuk Seri Tengku Zafrul Abdul Aziz had said that Malaysia’s fiscal deficit will rise to 5.8% to 6%, as the government continues to fund measures to support businesses and citizens to deal with the economic fallout from the global pandemic.
“We’re anticipating and forecasting that deficit will go up this year for Malaysia … So far, fiscal injections into the economy stand at around 20% of the GDP” – Datuk Seri Tengku Zafrul Abdul Aziz
The Finance Minister had also voiced optimism that the economy next year will expand by up to 8%, reversing the negative growth from 2020.
However, many economists have pointed out that the government may still have to reduce spending as it is also getting less revenue this year. Another reason this may be possible is the lower tax collection and less dividend from Petroliam Nasional Bhd as these will significantly reduce the government’s financial resources to fund its expenditure.
With GDP reduced to at least -3.4% this year, cutting spending is a reasonable option to help the government cover the big gap between its income and expenses next year.
However, several experts we spoke to have suggested that the government should continue spending on what matters most to get Malaysians through the pandemic.
“Counter-cyclical fiscal policy is what we need” – PwC Malaysia
Patrick Tay, Deals Partner at PwC Malaysia, told iMoney that the government should still take an expansionary fiscal stance.
“The government should look to find savings where possible by cutting out low priority expenditure,” he said.
However, he cautioned that this expansionary approach needs to be only on specific areas that can produce the right counter-effects to the recession.
“Counter-cyclical fiscal policy is what we need now to sustain domestic demand,” he advised that this may mean increasing government spending to specifically counteract the effects of the economic recession.
“Spending should be on what matters most and to build the platform for increased competitiveness and growth.”
He explained that since the government needs to continue spending, we can expect the debt to GDP to rise, even up to the new debt limit of 60%.
“Deficits of 5-7% are not unreasonable to expect this year but a clear plan should be put in place to return us to more sustainable levels,” he pointed out that means bringing the deficit back to less than 4%.
“Deficit over a period of time should be lower than the country’s growth rate,” he added.
“There would be concerns regarding the views of rating agencies” – MIER
According to Malaysian Institute for Economic Research (MIER) head of research Dr. Shankaran Nambiar, the government should not lose sight of its goal in this economic situation.
“Rather than worry about ratings, I think it is more important to have a plan on fiscal management going forward,” he points out.
With fiscal deficit rising to 6% and the country increasing its debt to GDP to 60%, these signs can cause rating agencies to reconsider Malaysia’s credit rating under normal conditions. But these are extraordinary times for every country around the world.
“We need to keep in mind that this is a global phenomenon, with Malaysia being caught in a corner because it is a small economy that is heavily dependent on trade.”
Dr. Nambiar also shared his viewpoint that the government will not cut spending.
“I do not think the government is about to cut government spending due to the double-digit contraction in Q2.
“To the contrary, the government may be inclined to increase government spending so as to cushion the impact of muted domestic demand and to pump up expectations,” he added.
If cutting government spending is proving to be an unpopular move, will the government have to increase taxes to continue to fund Malaysia’s recovery and rebuilding after the pandemic? At the end of the day, what every Malaysian wants to know is whether we earn enough money to pay for food, housing and be able to afford to take care of our family.
Follow us on iMoney.my as we talk to experts about jobs, taxes and other goodies we can expect in Budget 2021.
