KUALA LUMPUR (Oct 11): The government’s recently tabled Public Finance and Fiscal Responsibility Bill 2023 has left an economist perplexed by certain parameters, or their absence, concerning the safeguarding of Putrajaya's coffers.
In particular, Datametrics Research and Information Centre managing director Pankajkumar Bipinchandra highlighted his surprise at the Bill capping government guarantees at 25% of gross domestic product (GDP) as one of the four quantitative parameters to be achieved within a medium-term period of three to five years.
“The government is saying they will continue to borrow off-balance sheet. Assuming then when the Bill becomes an Act [and after medium-term targets are achieved after three to five years], the government will still run with about RM400 billion worth of off-balance sheet contingent liabilities,” Pankajkumar explained during the MARC360: Pre-Budget 2024 Views Series 2 — Malaysia's Long Story of Fiscal Consolidation webinar on Wednesday (Oct 11).
“This is despite assurance before that the government will make sure that all borrowings are done through the budget. So, the FRA (Fiscal Responsibility Act) itself seems to contradict what the government is saying,” he added.
The other three parameters set out in the FRA are for federal government development expenditure to be at least 3% of GDP, a fiscal deficit cap of 3% in three to five years, and a lower debt ceiling of 60% of GDP (versus the 65% previously).
At end-2022, Malaysia’s outstanding government guarantee, or contingent liabilities, stood at 17.8% of that year’s GDP, while fiscal deficit was 5.6%, and federal government debt was 60.4%.
Pankajkumar also flagged that the FRA lacks a quantitative parameter for the government’s debt service charges (DSC) to GDP.
He stressed that come 2023, Malaysia is expected to breach its DSC threshold of 15% of federal government revenue — as guided by the government’s administrative guidelines — at 15.8% (DSC of RM46.1 billion against revenue of RM291.5 billion).
“The Bill did not specify the DSC quantitative value the government intends to meet. It's an open-ended situation, which is not the right thing to do.
“If you’re coming out with the FRA, it should spell out relevant parameters which credit rating agencies are looking at, and that includes DSC,” he added, suggesting that the Bill requires further refinement if it intends to comprehensively ensure Putrajaya is fiscally responsible in managing its coffers.
The Bill was tabled in Dewan Rakyat for the first reading on Monday (Oct 9) and is slated for the second reading on Wednesday.
Fiscal rules, a matter of adherence and keeping fiscal sustainability in mind
Fiscal rules need to be strict and clear pieces of legislation, according to Barclays Corporate & Investment Bank Senior Southeast Asia economist (director) Brian Tan, to ensure the government of the day adheres to fiscally sustainable practices.
“If you’ve written the rules in a way that you can quietly shift some of the spending off-balance sheet and accumulate in some other kind of private finance initiative, that’s not a very binding rule, is it?
“It's not a problem with the concept of fiscal rules per se, it's just how you’ve written them. If you’ve written them in a way that allows for these loopholes and exemptions for people to play games around it, then that’s exactly what you’re going to get,” he said.
While Tan recognised that extraordinary circumstances may press governments to circumvent or make exemptions to fiscal rules — as seen during the Covid-19 pandemic — it is still crucial to make the correct policy move with the right intentions.
“[The situation during the Covid-19 pandemic] was a practical issue. In an extraordinary situation, you would not want to say that we can’t support the economy, let people suffer, because we’ve got these fiscal rules. There needs to be that kind of system by which you suspend it, but then a lot of this has to do with the view that these suspensions are temporary. They’re not supposed to be permanent.
“There is a big difference between suspending the fiscal deficit ceiling for a few years and requiring the government to go back under it within a timeframe, versus permanently raising the debt ceiling.
“If you permanently increase the debt ceiling, there is no strong incentive for the government to reverse that,” he said.
Tan underlined that when and how a government chooses to stray from its fiscal rules when needed, comes down to the willingness and focus of policymakers to adhere to those fiscal rules with fiscal sustainability in mind.
“Institutionally, you must have policymakers and officials who are quite serious about meeting these [fiscal] rules. In Indonesia for example, you do find that the policymakers take their fiscal rules very seriously. And, they were very happy to announce that they had returned the fiscal deficit back to under the 3% fiscal deficit ceiling (in 2022), a year before they were supposed to.
“In Singapore, when you look back at the global financial crisis in 2008, they had to withdraw money out of the fiscal reserves, and they made a big point of paying it back when the economy recovered — even though it was not required for them to do that.
“They made that point that look ‘we don’t have to pay it back, the rules don’t say anything about it, but we are doing it because we take this very seriously and its a matter of principle to us’,” he said.