Allow higher fiscal deficit ratio for 2022

This is to accommodate economic recovery and growth to pre-crisis levels 

by NUR HANANI AZMAN / pic by AFP

THERE should be greater tolerance for a higher fiscal deficit ratio for 2022 to accommodate economic recovery and growth. 

Research for Social Advancement (Refsa) Economics Team believed this should be part of a fiscal plan for the early 2020s that takes longer-term fiscal consolidation into account once growth is back to pre-crisis levels. 

According to the International Monetary Fund, Malaysia’s projected gross domestic product (GDP) deficit of 6%-7.5% for 2021 is still well below the average fiscal deficit of 9.8% among emerging economies as of 2020, so there is room for targeted government spending to continue. 

“Ultimately, it is important that the government not withdraw fiscal support for affected businesses and households too soon as the road to recovery remains unpredictable and challenging,” Refsa said in a statement. 

As at the end of June 2021, the federal government’s debt level had risen to 61.2% to GDP with the statutory debt level at 56.8%, which is still below the statutory limit of 60%, according to the Pre-Budget Statement (PBS) by Ministry of Finance (MoF).

“However, with the revision of growth prospects and fiscal targets in line with the implementation of the National Recovery Plan, the government needs to ensure adequate fiscal space in the face of the pandemic crisis.

“As such, there is a need to increase the statutory debt limit to provide additional fiscal space in strengthening the domestic economy and ensuring a sustainable recovery,” said MoF. 

Refsa has previously mentioned that the debt to GDP ratio is a moving target that can be raised temporarily given the circumstances, and now is the right time to do so. 

In line with the MoF’s recognition that Budget 2022 should focus on strengthening the public healthcare system, Refsa stresses the importance of ensuring adequate health allocation for effective “Find, Test and Trace, Isolate, Support and Vaccinate” infrastructure. 

“A comprehensive strategy covering essential hotspot detection, testing, contact tracing will enable us to better handle any future outbreaks. 

“An expansion in the capacity of the healthcare system will reduce the justification for economically punitive lockdowns, which have been demonstrated to create uncertainty and dampen domestic demand among others,” it added. 

The small and medium enterprises should be given requisite support in this regard through grants, soft loans and/or tax incentives where appropriate. 

Meanwhile, vulnerable sectors, such as tourism, hospitality and entertainment, would benefit from further support in the form of loan guarantees and credit extensions because tax exemptions alone will not address their insolvency issues. 

The Institute for Democracy and Economic Affairs (IDEAS) Malaysia also welcomed the plan to release a consultation paper on the Fiscal Responsibility Act which will provide a clear strategic direction of Malaysia’s fiscal plans in the future. 

“While the PBS is certainly a welcome development, we believe that it can still be improved upon by providing more information on Budget 2022 as well as the projections of revenue, expenditure and debt lev-els for the next two to three years. 

“Including this information would bring us up to the international standard of budget transparency. This will also show whether the government has a clear plan on fiscal consolidation,” IDEAS senior research manager in public finance Sri Murniati Yusuf said in a statement. 

IDEAS welcomes the plan to review public spending. It should be noted that most developed economies already have this mechanism in place and this will be an important tool in the government’s future efforts to expand its fiscal space. 

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