PETALING JAYA: The government has been urged to review the targets it has set under the proposed Public Finance and Fiscal Responsibility Act (PFFR Act) to better manage its operating expenditure.
Two economists who spoke to FMT Business said the absence of specific targets showed a lack of direction and could lead to unlimited spending.
Geoffrey Williams of the Malaysia University of Science and Technology has described the absence of these targets as a “serious omission”.
A total of RM303.8 billion, amounting to 77% of the RM393.8 billion allocated under Budget 2024, has been set aside for operating expenditure.
Development expenditure accounts for the remaining 23% or RM90 billion of the allocation.
The targets
When tabling the PFFR Bill for first reading on Oct 9, deputy finance minister Ahmad Maslan said the government would be setting four targets under the new legislation. The bill was passed two days later.
The first target, Ahmad said, was to keep the annual development expenditure at 3% or more of the GDP. The annual average has been at 4% since 2015.
On the other hand, the fiscal deficit would be kept at 3% or less over the next three to five years.
The fiscal deficit has averaged 4.42% of GDP over the past nine years, reaching its lowest level of 2.9% in 2017. It is currently at 5%.
Ahmad said the third objective is to keep the debt level at not more than 60% of the GDP in the next three to five years. It currently stands at 56.3%.
Finally, the government plans to keep its guarantees or contingent liabilities at not more than 25% of the GDP. The average over the past eight years is 17.8%.
Focus on operating expenditure
Williams said rather than reduce the development expenditure, the government should set targets to lower the operating expenditure.
He pointed out that day-to-day spending determines how much revenue and taxes the government needs as well as how much it must borrow.
“If there are no targets or control mechanisms for operating expenditure, the government will continue to spend without limits,” he said.
He said areas where there has already been “too much spending” are debt financing, which amounted to RM45 billion, and the civil service pay and pensions of RM31 billion this year.
“There needs to be some control here, but the PFFR Act has no mechanism for it,” Williams said. “Neither are there mechanisms to cut wastage, leakages and corruption in the operating expenditure.”
He said keeping the annual development expenditure at 3% of GDP when the historical average is 4% indicates that there has been a contraction of government investment in development.
However, he said, it is not all bad. This reduces the interference of the government in the economy, giving businesses wider opportunities to participate, he added.
Williams explains that if the government spends money on infrastructure investment it reduces opportunities for private sector investment.
“This also means that the government takes up debt to fund it, denying it to private firms and crowds them out of the market,” he added.
Williams also criticised the government for setting the deficit at 3% or less. He said this would enable the government to spend more than it earns every year “in perpetuity”. “This formalises deficit spending as the default option of fiscal policy,” he added.
“This is not an indication of fiscal responsibility,” he said, adding the deficit should be zero over a reasonable period or over the economic cycle.
He said setting the debt level at up to 60% of GDP also formalises high government borrowing.
As the economy grows it allows the government to borrow more and this raises financing costs. “Financing debt is already the second largest expense for the government and this means money is spent on debt payments rather than on health and education for example,” he said.
“The target should be to reduce actual debt financing, not debt as a percentage of GDP,” he added.
Williams also said that contingent liabilities are also not dealt with properly. These are already below target while some, such as PTPTN, are unsustainable, he added.
“Hence, it is sustainability and risk of the contingent liabilities that matters, not the percentage of GDP,” he added.
Williams said the lack of an independent oversight of fiscal policy paves the way for civil servants to decide on tax, spending, deficit and debt.
“(As it is) the PFFR Act is just an exercise in smoke and mirrors. It will not in itself improve the fiscal environment in Malaysia,” he added.
Bank Muamalat Malaysia Bhd chief economist Afzanizam Rashid said the the government should have a coherent communications strategy to get its message across to the public. “This is also essential to ensure there is no misinformation or confusion,” he said.
“Ultimately, we want a total buy-in from all the stakeholders,” he added. - FMT
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