Cover Story: The first 100 days - Instil public confidence that fiscal sustainability is possible

This article first appeared in The Edge Malaysia Weekly, on August 20, 2018 - August 26, 2018.
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LIM Chee Sing

Former executive chairman, group chief economist, Malaysia strategist and head of RHB Research Institute Sdn Bhd

 

Rationalise balance sheet

Weak government finances and fiscal sustainability have been constraining the government from taking a more progressive role in the development of the economy over the last two decades. It is, therefore, important for the new administration to reassess its role in the economy — including that of the government-linked institutions — rationalise its assets and liabilities, and in the process, provide a more conducive environment for the private sector to thrive.

Too much government involvement in businesses tends to crowd out private businesses. For various reasons, government-run businesses tend to be less efficient and it tends to be a platform that leads to less efficient allocation of scarce resources in the country. In view of the government’s high debt level and weak cash flow, it is also timely for the new administration to rationalise its assets and liabilities and ensure fiscal sustainability over the medium term. There is a need for the new administration to instil public confidence that it can work towards balancing its budget over time given steps taken to do away with the Goods and Services Tax, reintroduce targeted fuel subsidy and abolish toll charges that will constrain its ability to grow revenue.

 

Efficient use of revenue

As the federal government has been incurring a budget deficit for the last two decades and with 98% to 99% of its revenue used to fund operating expenditure in recent years, it is imperative for the new administration to look into ways of cutting its operating expenditure. This is to ensure that sufficient revenue can be reallocated for developmental purposes to create new sources of growth for the economy without resorting to excessive borrowing that would exacerbate the high debt level and debt servicing of the federal government.

As it stands, remuneration and pensions paid to civil servants and debt service charges are estimated to have taken up more than 57% of its operating expenditure this year, and all the three items are rising each year. The country has a large civil servant population that needs to be rationalised and the non-fungible pension system also needs to be reformed for it to be sustainable over time. Obviously, it is equally important for the government to grow its revenue by sustaining economic expansion and overhauling the taxation system that has many shortcomings.

 

Labour reform

The country’s over-dependence on cheap foreign labour, low labour productivity and wages that lead to low income levels, and the shortage of labour in a number of industries, also need to be addressed urgently and in a holistic manner. Otherwise, the sustainability of economic growth over the medium term will become an issue. Even if the nation manages to advance to a high-income level, progress and development of the economy will be constrained.

 

Skills upgrade

What perhaps needs to be re-emphasised is the urgent need to reform the country’s education system to address the high youth unemployment, low labour skills, low labour productivity, wages and income levels.

 

Mindset change

Finally, the new administration should take progressive steps to help change the mindset of the population who are dependent on government subsidies and handouts. Appropriate steps can be taken progressively to help them upgrade earnings skills and raise their level of competency over time.

 

 

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