This article first appeared in The Edge Malaysia Weekly, on October 12 - 18, 2015.

IN about two weeks, Prime Minister Datuk Seri Najib Razak will unveil Budget 2016, which is being referred to as a “bigger budget”. Official statements and comments by the Ministry of Finance (MoF) hint that the government’s weapon of choice for dealing with the country’s economic woes next year is the tried and tested pump-priming.

Second Finance Minister Datuk Seri Ahmad Husni Hanadzlah has said a bigger development expenditure can be expected in Budget 2016. This hints that large sums will be poured into the construction of new roads and highways, bringing running water and electricity to rural areas and building affordable homes. The lower-income group is expected to benefit from higher targeted financial aid through Bantuan Rakyat 1Malaysia (BR1M). The aim, says Ahmad Husni, is to spur domestic demand, Malaysia’s most reliable engine of economic growth.

The MoF’s decision to fall back on public spending to give the economy a nudge in 2016 is entirely predictable. Budget 2016 sets the pace for the 11th Malaysia Plan (11MP), the last five-year plan to take Malaysia through what should be the final leg of its transformation into a high-income developed nation by 2020.

As Rosnani Rasul, head of research at M&A Securities, says, “If the government doesn’t spend now, you will not see results. It shouldn’t be looked at negatively. Many of the infrastructure projects that will be rolled out will take a long time to complete.”

But, the question is: Can the government really afford to spend more?

The fall in crude oil prices since the start of the year, which allowed for the smoother lifting of petrol subsidies, resulted in the government needing to revise Budget 2015, which was tabled last October. In January, Najib, who is also the finance minister, revised downwards the country’s gross domestic product (GDP) growth projection to the range of 4.5% to 5.5%, cut operating expenditure (opex) by RM5.5 billion and moved the goalpost for reducing the fiscal deficit from 3% to 3.2% of GDP. These revisions were made despite some RM10.7 billion in savings received from the removal of fuel subsidies.

State-owned oil and gas company Petroliam Nasional Bhd (Petronas) is already drawing on its cash reserves to pay the government a RM26 billion dividend this year, even though it is less than the RM29 billion paid last year. In August, Petronas said it did not have enough operating cash flow to fund both its capital expenditure and dividend payments. This puts into perspective the government’s aim to reduce its dependency on petroleum-related revenue to 15.5% in 2020 under the 11MP.

The saving grace is the implementation of the Goods and Services Tax (GST) in April. Economists say it will help support the bigger budget the prime minister wants in order to keep the economy going. MIDF Research estimates that GST collection will contribute about RM30 billion to the government’s revenue next year.

Even so, cash in hand is not cash to spend. The prime minister wants to cut Malaysia’s fiscal deficit to 3% next year — a painful but necessary task that, in theory, should force the government to spend more prudently.

Rajiv Biswas, Asia-Pacific chief economist at HIS Global Insight, says, “The fiscal deficit in 2Q2015 was -2.8% of GDP, which represents a substantial reduction in the fiscal deficit compared with -3.5% in 1H2014. The GST is very helpful towards helping to create a reliable long-term source of fiscal revenue as well as mitigate the impact of lower oil-related revenue. Therefore, the government’s leeway for additional fiscal is limited.”

Achieving the fiscal target in 2016 is particularly important because credit rating agencies are watching Malaysia’s fiscal discipline. Najib may have been “credited” for making politically unpopular decisions such as introducing GST and removing fuel subsidies when oil prices were low but a deviation from the path of fiscal reform will come with the risk of a downgrade of Malaysia’s credit rating and cripple investor confidence.

Besides, the government is also flirting dangerously close to the self-imposed debt ceiling of 55% of GDP. Netting out repayments, the government’s gross borrowings stands at RM627.5 billion or 53.7% of GDP as at end-June. This debt level may be “modest” but the balance sheet conceals the billions the Najib administration is spending off it. During a parliamentary session in June, Najib disclosed that the government would spend RM4.76 billion to RM11.62 billion on nine MoF (Inc) firms from 2015 to 2020. No further details were provided.

Debt guaranteed by the government stood at RM175.81 billion in 2Q2015, up RM12.9 billion or 7.9% year on year, latest Bank Negara Malaysia data shows. The figure is about 30% more than the RM133.35 billion of 2Q2012, representing an average annual growth of 9.65% in the past three years. This pushes government debt well above the 55%-to-GDP debt ceiling.

Yeah Kim Leng, dean of the School of Business at Malaysia University of Science and Technology, says the need to prop up domestic growth under the challenging global situation makes the job of balancing an enlarged budget while keeping fiscal discipline “very challenging”.

“First, government revenue has to meet government spending. Then, there is the overarching need for fiscal discipline for Budget 2016. This means that it has to spend efficiently to achieve the desired fiscal outcomes,” Yeah says.

One way to find that balance is to reduce government opex and spend more efficiently. Ahmad Husni has indicated that this is what the government will do but the extent of its cuts are still unknown. Market observers say one area the government should look at is containing the ballooning civil service. In Najib’s initial Budget 2015, RM223.4 billion was allocated to opex, with emoluments taking up close to 30%, or RM65.6 billion. Only RM50.5 billion was set aside as development expenditure.

“New employment should replace natural attrition but the total number of government employees should not increase. Compared with other countries and relative to the population, our civil service is on the high side. Spending can be focused on upskilling civil servants and not increasing absolute numbers,” Yeah says.

But, the government’s track record shows a tendency to overspend. Supplementary budgets have been a permanent fixture in Parliament’s annual calendar since Najib became finance minister in 2008. In March, Najib asked for RM2.22 billion in extra funds, on top of the RM4.11 billion he requested in June last year to plug the gaps in Budget 2014. Supplementary budgets for 2011 to 2013 were at least RM20 billion a year, so much so that economists would be surprised if there were none — and that’s not counting off-balance-sheet items.

Even if there is room for additional spending, is pump-priming the best way to stimulate domestic demand? After all, the Malaysian economy is still growing, albeit at a slower pace. As policymakers often extol, Malaysia’s economic fundamentals remain strong and it is capable of absorbing external shocks.

Yeah, for one, reckons that the government should be prudent: “At this juncture, I would prefer the government to preserve fiscal ammunition when economic pressures are much worse.”

Focus should be on nurturing private sector growth instead of direct government spending, he adds. Greater multiplier effect and a longer-term impact on the economy can be created through removing regulatory burdens on businesses, improving the ease of doing business and government efficiency and lowering tax requirements for start-ups or high-value industries.

“The B40 (bottom 40% in terms of income) group should receive financial support from the government, but I think it is more effective to spend on upskilling the lower-income group and create income-generating opportunities than have direct wealth transfer through schemes like BR1M,” Yeah says.

Rosnani, who thinks that the economy is “still balanced”, suggests that the government capitalise on the weaker ringgit to increase exports.

“The Ministry of International Trade and Industry should be very busy with trade missions to countries like the US, where the economy is recovering, to reduce our dependency on the Chinese market,” she says.

Other experts recommend that government-endorsed campaigns like the Belilah Barangan Buatan Malaysia introduced during the 1997 Asian financial crisis should be revived to discourage imports. This should improve both the current and trade account balances while boosting the local economy.

Yet, those who support pump-priming argue that there is no better time than 2016 to spend.

Malaysia’s other economic growth engines seem to have stuttered this year. In 2Q2015, Malaysia’s GDP growth moderated to 4.9%, against 5.6% in 1Q2015. Private consumption slowed to 6.4% from 8.8% in 1Q2015 as households adjusted to the GST. Private investment growth was a laggard, at 3.9%, versus 11.7% the quarter before.

External trade activity appears to have picked up. In August, the trade surplus grew to RM10.2 billion after July’s dismal RM2.4 billion. It is worth noting, however, that exports of some of Malaysia’s biggest revenue earners — such as palm oil and palm oil-based products, crude oil, rubber, liquefied natural gas and timber and timber-based products — declined during the month.

The slowdown in global economies is not helping either. Some of Malaysia’s biggest trade partners such as China and Japan are grappling with economic slowdowns of their own, putting the country’s future export revenue at risk. In that sense, says an economist, “Malaysia is in need of a larger budget to cushion it against headwinds from external volatility.”

If this is the case, the government will need to strike the magic balance of ensuring fiscal discipline and spurring economic growth in Budget 2016. Ideally, the money the government spends should go towards shoring up local consumption as well as domestic investments by the private sector to help spur economic growth.

As the MoF puts the finishing touches to Malaysia’s financial plan for next year, much rides on the making of right decisions.

Save by subscribing to us for your print and/or digital copy.

P/S: The Edge is also available on Apple's AppStore and Androids' Google Play.