OCTOBER 10 — Every year, as budget season approaches, the familiar warnings arrive: Malaysia must show fiscal responsibility and budgetary discipline.
Commentaries bemoan the large sum of government debt (currently at an all-time high) and urge prudence. International ratings agencies and global banks warn of downgrades and negative market reactions should we dare deviate from the fiscal consolidation path.
We are told to cut public spending, raise taxes, and above all – heed the market. Governments, we are told, should behave like frugal households.
Of course, this government-like-households analogy is wrong-headed where it matters most. For one, governments are not like households at all, and do not share the same borrowing and spending constraints.
But even before that, the oft-cited notion of fiscal responsibility begs the question: who, exactly, are we being “fiscally responsible” for anyway?
This is worth asking because, by fixating on moralising notions of responsibility and prudence, we run the risk of inadvertently centring the concerns of markets over the priorities and needs of Malaysians.
When that happens, key social and development priorities are subordinated to the concerns of investors and external creditors, and we may allow the democratic questions (“do Malaysian voters want and benefit from this spending?”) to be eclipsed by financial ones (“will this please external holders of our securities?”). It reduces Malaysians’ agency over how public resources are used.
But what about debt and default risks? Recall that Malaysia issues its own currency – the ringgit – and that a monetarily-sovereign, currency-issuing government does not face the same solvency constraints that a household does.
Malaysia has never defaulted on its sovereign debt, and absent deliberate political choice, literally cannot default in its own currency. Moreover, the overwhelming share of Malaysian federal debt is raised at home, in ringgit, and held domestically by public institutions such as EPF and KWAP.
Borrowing costs, while not trivial, remain anchored by deep local demand, with MGS yields still relatively low historically and relative to the region.
And what about taxation and revenue? Of course, we should lay the groundwork for more progressive taxation and broaden the tax base – though it’s not because, like a household, governments need to “collect” enough ringgits from the economy before they can spend them.
Rather, a currency-issuing state issues the currency it spends in and, as a consequence, can always fund the myriad developmental priorities it deems to be productive and strategic.
Then, the primary role of taxation is to shape economic incentives, temper excess demand in sectors, and to advance equity through progressive taxation and redistribution.
None of this means we can spend on anything and everything. There are limits — but those limits are not best enforced by fiscal responsibility.
In fact, the binding constraints on public spending are not the treasury account, but out here in the real economy: inflation and productive capacity. Put simply, the key limits to spending are not whether we hit a specific deficit number, but whether or not this outlay creates productive capabilities, assets, and services without pushing inflation beyond target.
This is where and why the usual “be responsible” refrain risks missing the point and comes up short against current realities.
Today, more so than ever before, Malaysia faces a long list of urgent, strategic priorities, and demands on public spending will continue to mount as development needs grow.
A rapidly ageing population and rising non-communicable disease rates require greater spending on stronger health, care and social protection across the life cycle so participation and productivity do not stall.
Changes in technology and geopolitics demand significant investment to strategically build and upgrade industry, and to fund research and development in advanced manufacturing.
Rising climate and ecological risks require urgent investments in adaptation and mitigation to safeguard families, communities, and ecologies.
This is to say nothing of the essential public services Malaysia needs — education (including the recently announced universal pre-school goal), public transit, and housing — all of which are vital to improve quality of life, wellbeing, and opportunity.
Already, the costs of inaction are clear. By 2030, nearly 10 per cent of Malaysia’s population will be elderly, suggesting about 1.5 million Malaysians daily would need assistance for instrumental activities.
Some 96 per cent of Malaysian households are at moderate-to-high exposure to climate change risks, with nearly 6 million Malaysians currently living in flood-prone areas — a figure that is set to climb.
In the Klang Valley, public transit modal share sits at 26 per cent against a 40 per cent target by 2030.
Indeed, we are often presented with a false dilemma: social development versus fiscal responsibility. Yet, it is easy to see the former is more important for human flourishing than the latter.
Over-indexing on “fiscal responsibility” can, in effect, be developmentally irresponsible.
To this end, we need to shed our collective fetish for fiscal restraint and instead look towards fiscal renewal — rather than allowing a small handful of capital market actors outside the country to dictate our social and economic outcomes.
To confront the challenges of the coming decades, Malaysia needs to spend more, not less.
*Calvin Cheng is the Director of Economics Institute of Strategic and International Studies (ISIS) Malaysia
** This is the personal opinion of the writer or publication and does not necessarily represent the views of Malay Mail.
