This article first appeared in Forum, The Edge Malaysia Weekly on October 23, 2023 - October 29, 2023

Much reform is expected of this government, notwithstanding that it is a patchwork of political parties that have not worked together on either side of the aisle. The electorate did not give a clear majority and, therefore, a clear mandate on what the priorities are. But this unity government is a legislatively powerful government. It commands two-thirds of the Dewan Rakyat. The last time a government had that majority was in 2004. This is a powerful government that can act decisively.

This government is therefore well-poised to undertake the necessary reforms, reforms that have been ignored or delayed. Repealing or amending existing laws or enacting new laws that do not require constitutional amendments only require a simple majority in Dewan Rakyat. Whatever were the reasons for kicking the can, many cans, down the road, the problems have just got bigger, and the window to avert a crisis is getting smaller.

The state of government finances and therefore the effectiveness and efficiency of fiscal policy can be easily seen from the numbers. Fiscal policy has become a blunt policy instrument; it has lost much of its footprint and therefore its ability to influence the economy.

Back in 2000, the fiscal footprint — the sum of operating and development expenditures as a percentage of GDP — was over 26%. Budget 2024 has it at 20.1% of GDP but it also contains debt-servicing expenditures of a whopping RM49.8 billion or 2.5% of GDP. That makes the footprint less than 18% of GDP. The development expenditure in the budget — public investments to build new capacities and induce private investments — has shrunk. Budget 2024 can only propose a development budget of RM89.2 billion in an economy that is nominally estimated to be RM1.9 trillion, or just 4.5% of GDP.

One can start looking at the fiscal picture from any end — expenditures, revenue or debt — and the case for reforms are obvious. They have been obvious for decades. It is also the case that despite all this spending and debt, the economy is not robust and neither are the distributional outcomes satisfactory.

There are two reasons for not changing things, for doing things differently, for reforms — it’s either one is vested in the status quo or reforms are difficult and politically expensive. If there is a lesson from the last four general elections, it is that the electorate, perhaps from different departure points, wanted to get rid and got rid of those who benefited from the status quo. Malaysians of all stripes may not all understand the details of everything, but the majority knows that there are those whom they have given the trust to govern who have instead benefited from that trust. They do not want this any more.

It would be folly not to accept this lesson. The electorate may be fractured and the conversation can appear toxic, but there is that common disgust and rejection of corruption and abuse of power. In fact, the last government that had an elected two-thirds majority lost it in the following election.

So, there is only the other reason for not undertaking reforms — the fear of a backlash, that the pains from reform will turn into votes against the government.

This is again an underestimation of the electorate. If they understand the first reason, they can certainly understand the second one. Honest, reasonable people understand the depth of the problems the country is facing and they understand that the solution will not be painless. They are not dense. Yes, there are detractors of all kinds spreading lies and half-truths to cloud the issues from partisan perspectives but most people can see through these.

In this environment where politics is seemingly based on narrow partisan interests, the pursuit of furthering the common national interest will provide a contrast that the electorate can observe. Contestants in this over-simplified world of identity politics seek support by offering divisiveness. The government should offer the opposite — the pursuit of common interests — and build trust, surely the scarcest and therefore the most valuable commodity in politics. Trust can only be obtained by action. Actions can fail, some will fail, but inaction is worse.

This parliamentary sitting is an opportunity for the government to legislate its reform agenda, and it has begun doing so. The most significant piece of legislation in the present sitting is the tabling and passage of the Public Finance and Fiscal Responsibility Act (PFFR). This is a landmark law — the most significant reform of the management of public finances that we have seen for many decades.

Our legislative tradition — perhaps a reflection of its colonial origins — has always given wide, sometimes discretionary, powers to the executive. Laws clearly stipulate the relevant minister responsible for them and that minister is given rather broad powers notwithstanding the letter of the law itself. Statutory entities, even regulatory and law enforcement ones, are not independent of the executive, and while the executive is subject to parliamentary scrutiny, the mechanism available for parliament to do so is limited.

The PFFR represents a break in this tradition and that is why it is a major reform initiative. The PFFR not only devolves the powers of the finance minister to parliament, it also subjects the government to fiscal metrics — budget deficits, debt ceiling and allocation for development spending — that are approved by parliament. It also requires disclosure of public finance information to parliament beyond what is typically done today. Such increased transparency to parliament is effectively making the information public.

Scandals such as 1MDB will no longer be possible under this new regime. If it does happen, it will be revealed much sooner as it will be revealed as a matter of process. The 1MDB experience taught the lesson of not only how it was possible, but also the various subsequent machinations to hide it which further undermined institutional integrity. The use of government guarantees and executive decisions to borrow and therefore incur liabilities to the government will also be made more transparent. Any decision to do that, and there are possibly instances where that may be required, will not solely be a decision by the executive. It will automatically be subject to parliamentary oversight.

There are many other existing laws that should follow the lead of the finance ministry in empowering parliament and increasing its oversight role. Indeed, the PFFR is simultaneously a part of parliamentary reforms. This government has introduced the weekly prime minister’s Question Time, in addition to the regular daily ministerial Question Time. It has also created the various select committees which now require proper empowerment via changes to the standing orders of Dewan Rakyat to give the committees real teeth. There has been discussion on the re-enactment of the Parliamentary Services Act, which would make it administratively independent of the executive branch.

The recently tabled budget, Budget 2024, can also be seen as an early step towards fulfilling the parameters set in the PFFR. The government has embarked on preliminary steps to address the key issues in ensuring it fulfils the PFFR. Budget 2024 can be seen as putting in place the foundations towards further consolidation.

There is an emphasis on enforcement to close the gaps of leakages that is the result of highly distortionary and expensive blanket petroleum, diesel and electricity subsidies. There was also the announcement of subsidy rationalisation for diesel which can be seen as a prelude to the much larger problem of petroleum subsidies. A more targeted subsidy regime will enable the government to reallocate resources towards enhancing Malaysia’s rather weak social safety nets.

There is also the glaring need to broaden the revenue side of the fiscal equation. The revenue side is too narrow, too dependent on Petronas and lacks buoyancy. Tax revenues as a percentage of GDP have been declining over the decades and this needs reversing. It is also very low compared to our regional peers or countries with similar levels of income. The goods and services tax (GST) or more generally, the value-added tax (VAT), is the tax that is universally acknowledged as efficient and buoyant and used in almost all countries. Of course, its implementation must be accompanied by the appropriate transfers to retain the purchasing power of the targeted group.

The announced implementation of e-invoicing can be seen as a prelude to building a system for the efficient implementation of such a tax. The VAT is not a four-letter word that is taboo. 1MDB is the four-letter word. In fact, the VAT will uncover all transactions, formalise every part of the economy, remove its grey part, capture the free riders and generate sorely needed revenues for the government to sort out the rather sorry state of government finances.

Nungsari A Radhi is an economist and a member of the Advisory Committee to Finance Minister (Acfin)

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