KUALA LUMPUR, Oct 8 — Introducing or increasing certain taxes and investing prudently could be a way out for Malaysia, which faces high national debt, economist Professor Joseph E. Stiglitz said today.
Stiglitz, who is a Nobel laureate, shared his sympathy at Malaysia’s predicament of having a high debt-to-gross domestic product (GDP) ratio, which he noted was not due to the nation’s investment in infrastructure or technology “but because the money was stolen from the country”.
Stiglitz then went on to share the experience of the United States and Sweden in managing their country’s economy.
He noted that the Malaysian government’s declared debt to GDP ratio of around 80 per cent was actually lower than that of the US at the end of World War II.
“But how do we respond to this high debt-GDP ratio? We responded by the Bill of Rights, every American could go to school.
“Even though we have a huge debt, we said the future depended on investment in our children, we invested in infrastructure, we began investment in technology,” he said in a speech here, adding that the government decision then to make such investments was bipartisan.
Unpopular, but more taxes productive
To overcome the high debt-to-GDP ratio problem, the GDP has to be brought up and such a goal could be achieved by either making “productive investments” or increasing taxes, Stiglitz said.
“Nobody likes to pay taxes. I once asked the minister of finance of Sweden why their country was so successful. He answered ‘because we have high taxes’.
“What he meant was a successful country needs to spend on public expenditure, a successful country has to balance revenue and expenditure. And that means we have to have taxes, because there has to be expenditure.
“So it was the high taxes and high expenditure well-managed that led to Sweden’s success,” the professor at US’ Columbia University added.
As for the types of taxes that could be imposed, Stiglitz suggested carbon tax.
“It’s better to tax bad things — pollution, than good things. I’d rather tax pollution, than tax work or savings,” he said.
He also mooted property tax to discourage property speculators and also capital gains tax which would tax the major source of income for the high-income group.
“These are taxes that raise significant amount of money and actually make the economy perform better,” he said.
“What you want is encouraging innovation, you want to encourage new enterprises, not rent-seeking and real estate speculation.
“Taxing increase in property values is a way of discouraging that sector and using such resources to help promote more dynamic sectors of the economy,” he added.
Malaysia currently does not have capital gains tax, but does impose taxes on profits derived from the sale of properties.
Stiglitz compared such methods to that adopted in Europe when Greece was asked to cut back on spending and impose austerity measures to tackle the latter’s high debt-to-GDP ratio.
“We know what happened. GDP went down and so the debt-to-GDP ratio went up. Twice they restructured the debt and after twice restructuring the debt, the debt-to-GDP ratio went higher than in the beginning,” he said.
Stiglitz was speaking at the two-day Khazanah Megatrends Forum 2018.
At the same event, Malaysia’s Economic Affairs Minister Datuk Seri Mohamed Azmin Ali had also spoken of how Malaysia has to readjust its spending priorities due to its RM1 trillion debt that was contributed by the 1Malaysia Development Berhad (1MDB) scandal and “reckless” borrowing.
Azmin said the federal government has “reprioritised” development projects in the country — including mega rail projects — according to its financial capacity, but had also assured that the government would at the same time continue implementing high-impact projects that would directly improve Malaysians’ wellbeing.
Impact of capital controls
Today, Stiglitz also noted that Malaysia’s adoption of his advice to introduce capital controls had helped reduce the impact of the 1997/1998 Asian financial crisis on the country.
“Malaysia did take that advice and did impose capital controls and the result of that was the economic downturn in Malaysia was smaller and the legacy of downturn was less than in other countries,” he said.
Stiglitz said he had offered that advice to other countries then, but noted the International Monetary Fund (IMF) was then seeking for powers to force countries to remove capital controls.
He noted that the IMF had following the 2008 financial crisis in Western Europe changed its views to say that capital controls was acceptable.
