MARCH 20 — We are in a bit of a bind. We need a fresh round of injections from federal government expenditure to address a broad range of issues: Incentivise employment retention, support frontline workers, expand social assistance and safeguard health.
However, our fiscal space is currently limited by a budget balance rule—or a golden rule, which Malaysia adopts as a fiscal prudence measure. In short, the government can only borrow for development or capital spending and our current fiscal balance cannot be in the negative.
Unfortunately, our current fiscal balance is low and a significant increase in our budget would see us breaking the fiscal rule. And we cannot do this without removing legal constructs that are put in place to safeguard this rule.
What are our options? One, we can increase revenue. But this is not realistic in the short-term.
Drastic drop in crude oil prices has slashed revenue (every US$10 or RM43) drop in oil price is a reduction of RM3 billion in revenue) and decrease in economic activities would further reduce tax collections.
Two, we can design the economic package to tilt more towards development or capital spending.
But this means that things like subsidies and social assistance, which would reach firms and households faster, cannot be increased substantively. Again, in the short term, this is not my preferred option.
Third, we can reallocate resources from the existing budget. With a total budget of RM297b for 2020 and given that we are only in the first quarter of the year, this means that we have room to move resources from the non-essentials to the essentials. This is the argument made here about defunding uncritical ministries.
In the short term, I think there are merits to this idea and our most pragmatic solution for now.
However, we need to convene parliament urgently to approve any reallocation. We also need to convene parliament if we want to consider relaxing the fiscal rule to prepare for the medium term in case the situation worsens.
But our current political imbroglio might be inhibiting this. The triple whammy of Covid-19, oil price crash and our political impasse are challenging our quest to find fiscal space. At this critical juncture, we have to muster enough trust and non-partisanship to overcome this impasse.
* Christopher Choong is deputy director of research, KRI.
** This is the personal opinion of the author and does not necessarily represent the official views of KRI nor Malay Mail.
