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Has the gov’t got the capacity to stimulate the economy?

Our Second Finance Minister Johari Abdul Ghani rightly stated, “We have to look at our capacity - the ability to have the revenue to do what we need to to do.” He was speaking to the press after receiving a briefing at the 31st National Economic Briefing at the Malaysian Institute for Economic Research (MIER) yesterday.

Yes this capacity is constrained and the Budget must seek solutions to these severe problems. Indeed this is the time of the year when the Treasury, in consultation with the Economic Planning Unit and Bank Negara and the rakyat through the Budget Dialogues, must step up their consideration of the shape, size and direction of the Budget 2017, that will be announced in about three months time in October.

Ministry caught in a bind with capacity constraints

The new minister and his earnest officials wil be caught in a bind. The anticipated low economic growth rates all over the world and the consequent economic slowdown to around 4 percent in Malaysia this year and possibly lower rates next year, requires the government to stimulate the economy.

But its capacity to do so has serious constraints for the following reasons -

1. The loss of about RM30 billion in revenue from the lower prices in oil and gas.

2. The introduction of the Goods and Services Tax (GST) helped alleviate the situation, but its revenues have not been significant enough to more than compensate for the loss of oil and gas revenues.

3. We are committed to keep the Budget deficit at around 3 percent of the Gross Domestic Product (GDP).

4. There is also an obligation to cap our borrowing to about 50 percent of GDP?

5. Expenditures have been widely reduced and many ministries are experiencing severe cutbacks and strains.

Striking the balance

So how do we strike the necessary balance between stimulating the economy and maintaining the Budget’s integrity?

Bank Negara has come to the rescue by lowering the interest rates and injecting more liquidity. This should have some ‘preemptive effect’ as the governor, Muhammad Ibrahim, has said and done.

But this welcome measure may not be adequate in the longer term, especially if the world economic engine of growth continues to falter.

What then are the possible Budget solutions to build capacity to counter the Budget constraints?

1. The government has to decide to take the risk of countering the constraints of controlling deficits and sticking to the self-imposed debt ceiling.

There is no economic law of having to rigidly stick to Budget deficit and debt ceilings. They are good goals, but can be breached in times of economic stress. However these breaches have to be monitored closely and controlled carefully, lest we lose control in steering the economic ship through difficult straits.

2. Expenditure wastages and corruption must be more strenuously attacked. There is no point in borrowing more and frittering it away with expenditure wastages and especially grand corruption and even any kleptocracy. I am afraid we have to be much more aggressive to combat these national weaknesses in good governance - otherwise we will pay the price of fiscal and financial decline.

3. The interest rates may have to be further lowered to stimulate the economy. But here we have to watch the inflation rates very carefully. We cannot allow more liquidity to cause a rise in inflation. The poor will be badly affected and this can cause social unrest.

4. The private sector must be allowed to perform a more important role in stimulating the economy. Too much economic protectionism and the continuing dominance of the government-linked companies (GLCs) will discourage both local and foreign investment. The government will have to attract the private sector to invest more in infrastructure, education and health and tourism, etc through the provision of more tax incentives.

5. Tax policies should be designed to attract more investment rather than focus mainly in raising revenues. For instance a great deal of government expenditures in health and education could be saved, if the private sector is encouraged through tax incentives to expand these public services.

Conclusion

The government’s Budget capacity to stimulate the economy is seriously constrained.

There have to be new ideas and innovations introduced in the Budget 2017, if the government capacity to stimulate the economy and to remove the slack in the system is to be achieved.

The business and investment climate and outlook have been recently made more uncertain, dampened and dismal, by recent allegations of misallocation of precious resources.

Good governance has to be improved considerably in Budget 2017, for Malaysia and its economy to move more confidently ahead.

Then our capacity to stimulate the economy will increase.


RAMON NAVARATNAM is chairperson of Asli/Centre of Public Policy Studies.

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