26-Day Countdown to 13GE – Federal Government Deficits and Debts

Unlike many developing countries, Malaysia had until the last 15 years, avoided deficit funding and the accumulation of high levels of external and internal debt that culminated in debt crises of the type that afflicted Argentina, Mexico and many countries in Sub-Saharan Africa.

The Federal Government followed prudent policies and followed fiscal policies that were viewed favorably. Both Foreign Direct Investment flows and the domestic private sector contributed to growth.

Thus, through the early 1970s and the decade of the 1980s small deficits were recorded, indeed in the early 1990s small surpluses were recorded. The size of the public debt was largely stable and did not exceed RM 100 billion.

However, the 1997 East Asia crisis, triggered by contagion effects of the crisis in Thailand, led to a radical change in fiscal policy. The Federal Government embarked on a pump priming effort to revive the economy.

Many large scale projects were mounted; many heavily indebted crony corporations were bailed out. The public sector surplus of RM 6.6 billion recorded in 1997 evaporated and became a deficit of RM 5 billion in 1998.

Since 1998, despite the recovery, the Barisan Nasional (BN) Government has continued to run deficits ever increasing deficits which peaked under the Prime Ministership of Datuk Seri Najib to RM 47 billion.

Indeed, during his tenure, deficits have exceeded RM 40 billion a level double that in the previous years under Abdullah Badawi.

Much of the deficit can be attributed to the launch of mega projects handed over to crony capitalists, the increase in the size of the public services, and rampant abuses in procurements of equipment and services.

The total debt (domestic and foreign) of the Federal Government now stands at over RM 500 billion. This amount is close to the Debt/GDP ratio of 53 percent.

That percentage represents the limit to which the Government is permitted to borrow. Indeed, that limit has in all probability been breached if account is taken of the partial disclosure of contingent liabilities said to amount to over RM 100 billion.

These amouts of debt do not take account of the unknown levels of debt accumulated by the GLCs.

Therefore, taken as a whole, the overall debt situation is reaching critical levels and placing the Malaysian economy in grave circumstances.

Malaysia now risks facing a serious debt crisis of the type confronting several EU countries such as Greece, Spain, Italy, Portugal etc.

It may be compelled to embark on an austerity program that would have devastating implications for all Malaysians.

Despite repeated pledges made in successive Budgets to curb the deficits and to check the growth of debt, the BN government has been on a reckless spending binge, the main beneficiaries of which have been a selected group of cronies and well-connected individuals.

The policies that are being followed have also contributed to a massive out-flow of capital, estimated at over a RM 1 trillion by a respected Washington DC-based think-tank.

The BN Government has offered no clear policy statement as to how it proposes to reverse current policies and change the trajectory of its highly irresponsible fiscal policies that result in unsustainable level of deficits and a ballooning debt level.

Correction of these policies is critical if Malaysia is to avoid a calamitous economic crisis and more mired in the middle income trap.

The present policies if continued will led to a severe fall in confidence and a collapse of the private sector as markets and the rating agencies downgrade Malaysia.

There is also a clear and present danger that a re-elected BN government will make a belated attempt to change course and attempt to curb the deficit.

It is most likely to do so by taking steps to bring about a so-called “widening of the tax base”.

This will be attempted via the introduction of the long announced Goods and Services Tax (GST).

This regressive tax effort is likely to be accompanied with a withdrawal of a number of consumer subsidies and the further privatization of government services.

The latter in all likelihood would include the handing over of health services to BN-linked corporate entities. Taken as a whole, these measures would impact adversely on the middle and working classes. These measures will be regressive and burden ordinary citizens.

The Pakatan Rakyat promise

The Pakatan Rakyat Manifesto has outlined in clear terms as to how it will protect living standards and provide a safety net for all vulnerable groups. It will adopt responsible policies to achieve these goals and restore fiscal responsibility and take steps to stop the unsustainable growth in debt. It is appropriate to further spell out some of the strategies it will adopt.

As a first and urgent step, the Pakatan Rakyat Government upon assuming office will appoint an independent panel to undertake a Public Expenditure Review.

The Review will identify areas where savings can be made through elimination of waste and inefficiencies.

So-called new “development” or mega projects will be strictly evaluated to assess rates of return that are commensurate. There would appear to be ample scope for such savings. An area with particular promise, are the procurement policies of the Government.

Transparency in procurements with competitive bidding and elimination of rent seeking offer considerable prospects. The experience of the Pakatan Rakyat-run state governments will be applied at the Federal level.

Another area that will offer savings is that concerning payments and subsidies provided to corporate entities such as toll operators and Independent Power Producers.

These “corporate welfare” payments do not have a place in the fiscal system. Loss making GLCs will be restructured and will be hived off by way of management buy outs.

The present fiscal regime on the revenue side has not been reviewed. There are numerous tax exemptions and so-called incentives that have been granted. Their actual impact for private sector growth has not been examined.

There is a case for a review and the adoption of a revenue neutral system. Pakatan Rakyat is committed to creation of a business friendly environment that is pro-growth and supportive of Small and Medium sized Enterprises. Pakatan Rakyat is of the view that the introduction of a GST is inappropriate ant unwarranted in the current circumstances and stage of development.

The extent of the contingent liabilities that add to the stock of public debt will be studied. Certain of these liabilities can be transferred to the commercial banking sector. An effort will be made to do so in an orderly manner.

The Pakatan Rakyat experience and record in prudent management of public finances at the state level is indicative of how a Pakatan Rakyat administration would perform its fiscal responsibilities.

It is a proud record of effective financial management commended by the Auditor General. That record includes the absence of scandals and inappropriate behavior. It also demonstrates the professional competence of those in public office and confirms their commitment to high standards of integrity and honesty.