This article first appeared in The Edge Malaysia Weekly, on November 2 - November 8, 2015.

Decision makers in the government need to impose better fiscal measures to ensure public funds are well-utilised, says Accountant General’s Department senior deputy director Er Beng Kiong.

Take, for example, the government’s off-budget spending. Earmarked as “contingent liabilities”, such expenses are not disclosed in the public ledger until the borrower defaults on payments, forcing the government to dip into public funds, Er says during a dialogue titled “Enhancing Transparency in Public Sector: The Role of Accountants” at the Malaysian Institute of Accountants (MIA) International Accountants Conference 2015 last week.

“All of us are aware that contingent liabilities need to be disclosed in the notes to the accounts. [But] we will not have to make any provisions unless the borrower defaults on the payment, whereby it would require the federal government to pay on behalf of the borrower,” he says. 

Using government-owned entity Pembinaan PFI Sdn Bhd — which was found to have amassed RM27.862 billion in liabilities — as an example, Er says that such practices are burdening the public coffers. 

In June, the Public Accounts Committee (PAC) said that Malaysia's budget deficit and debt as a percentage of gross domestic product (GDP) was skewed due to Pembinaan PFI’s off-budget expenses. 

The PAC had conducted an investigation on the government-linked company after the 2013 Auditor-General's Report found that it had amassed a substantial sum in liabilities but the projects developed by the firm were poor in quality, among other grouses. 

The parliamentary body pointed out that excluding the loans under Pembinaan PFI from government liabilities could create doubts over the figures adduced in the national budget. 

“We are actually spending on behalf of our future generation. We spend now and the future generation has to pay; this is what we call off-budget [spending]. It is a concept derived from creative accounting. 

“On top of this [kind of] liability, if we move on to accrual accounting, [we are] not [only] talking about off-budget [spending] … we have many other types of liability [such as] lease liability and concession liability,” says Er.

“In the light of [the implementation of] accrual accounting, all these off-budget liabilities need to be reported in the financial statement. This is what we call accountability and transparency [and] we need to enhance it,” he adds.

In efforts to ensure accountability and transparency, the federal government is moving towards accrual-based accounting, diverting from years of practising cash-based accounting. The new measure, which is expected to be put in place next year, will take into account financial transactions when they occur rather than when payment is made, or received.

“[With the current accounting system] we are not looking at long-term sustainability of fiscal finance in this country [when off-budget spending occurs]. We don't want Malaysia to turn into Greece, where the debt to GDP ratio is 165%. We say that we want to cap it at 55%;  this is based on what is borrowed and what is disclosed in the memorandum of accounts,” he says. 

A fiscal deficit has plagued the country since 1998. The government has revised the country's fiscal deficit for 2015 to 3.2% from the initial 3% announced in October last year.

Exacerbated by the drop in the price of crude oil, which has more than halved from its peak in mid-2014, Deputy Home Minister Datuk Nur Jazlan Mohamed says, the time is ripe to ensure public expenditure is more accountable.

He points out that the “shocks to the economy”, followed by rocky crude oil prices, have hampered the federal government from spending “benevolently”. According to Bloomberg, the Malaysian government derives about 22% of its income from energy-related sources.

“It [the federal government] has done quite well but it needs to do better. The government has the ability to manage the country’s natural resources but it is on the decline. If we didn’t manage Malaysia’s natural resources well, we wouldn’t see Malaysia develop as it is today,” says Nur Jazlan, who is a qualified accountant. 

“This is already a signal that public expenditure needs to be more accountable and the persons managing the public proceeds needs to be more accountable to the public because the public will feel a direct hit to their pockets because of the tax policies.” 

Taxation policies such as the Goods and Services Tax (GST) would not be an issue, he adds, if the people understood the objective behind the broad-based consumption tax policy. 

“Most countries in the world today have a robust tax policy and the people understand why the government needs to impose taxes but what they also demand is better transparency to know where their tax money has gone to.

“When they are confident that their money is being spent in the right way, they will, therefore, re-elect the government that gives them that confidence,” says Nur Jazlan.

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