Higher fiscal deficit is needed for tough times

Sofea Azahar, Research Analyst at EMIR Research

While the government tries to recover the economy and livelihoods from the catastrophe caused by the Covid-19 pandemic and the Movement Control Order (MCO), concerns about higher fiscal deficit and public debt have surfaced but it is not the right time to restrict spending for the sake of the people and also the nation.

According to the Finance Minister Tengku Zafrul, fiscal deficit is expected to register around 5.8% to 6% of Gross Domestic Product (GDP) this year. Local economists are expecting even higher deficit, ranging from 6.5% to 7.5%.

This is after taking into account the stimulus packages the government have announced so far which total up to RM305 billion.

Given the higher fiscal deficit, government debt is also expected to elevate this year.

The current debt-to-GDP ratio stands at 53% of GDP and according to Tengku Zafrul, the year-end figure will come around 56% of GDP, higher than last year’s ratio – 52.5% of GDP.

However, this projection remains below the approved statutory debt ceiling of 60%, albeit the fact that it has gone up due to the unprecedented crisis.

In August, the Parliament voted to allow the government to borrow up to 60% of GDP in the effort to ease the burdens experienced by the people and businesses.

According to the executive director of Socio-Economic Research Centre (SERC) Lee Heng Guie, the higher debt ceiling ratio provides the ability for the government to borrow an additional RM70 billion to RM75 billion.

Despite seeing a rise in debt levels, unprecedented time calls for unprecedented measures and government’s priority now is to save lives and livelihoods temporarily given the expectation that economy will contract within the range of 3.5% to 5.5% and then start to expand by 5.5% to 8% in 2021.

To be more specific, increased government spending is needed and hoped by many to prop up domestic consumption (holds a share of 59.4% of GDP) that has been gloomy, reflected by the first and second quarter GDP numbers.

Notably, this issue appeared as one of the emerging issues discussed during EMIR Research’s focused group discussion for the 3Q20 poll. Instead of worrying about higher budget deficit, the discussants thought that the government should go all out this year if that’s what it takes to save the livelihoods particularly the unemployed and if it is not addressed, social consequences will get worse!

It’s also best to show how important it is for the government to spend in ensuring smooth recovery based on what the Federal Reserve Chair Jerome Powell said recently, “If the recovery simply slows too much, it could lead to tragic outcomes for the less well-off, widening inequality and a situation where weakness feeds on weakness.”

But some will question the effect of spending more than what we earn but there is always a solution to every problem.

Aside from the fact that government can actually spend more given the reason mentioned previously, there are ways to improve the fiscal position going forward, i.e. in the medium term when economic condition gets much better.

Even the Finance Minister has mentioned in June that the government still have room to spend given that historically, fiscal deficit reached at even a higher rate of 6.7% during Global Financial Crisis in 2009.

Furthermore, he himself said that a rebalancing approach will be taken to bring fiscal deficit to a better position once economic conditions normalise in the future.

It is indeed a good time that in Budget 2021 announcement that will be on 6 November, measures to shore up government’s revenue base will be touched on and this is important for everyone to adjust to the information.

Leakages should also be monitored and reduced to ensure there are no or less unnecessary expenses within the government. Another way to try to go about it is perhaps by cutting civil servants’ emoluments as it accounts for 34.3% of total operating expenditure – the largest share among other components.

Of course, a medium-term fiscal framework to strengthen fiscal discipline needs to be planned with suggestions to broaden government income stream through tax-related changes such as reintroduction of GST. But the timing of implementation of such measures also needs to be right.