This article first appeared in The Edge Malaysia Weekly on March 22, 2021 - March 28, 2021

THE RM20 billion People and Economic Strategic Empowerment Programme (Pemerkasa) involved a direct fiscal injection of RM11 billion, bringing the total Covid-19-related assistance given by the government to RM340 billion (RM72.6 billion in direct fiscal injection) in seven stimulus packages since February 2020, excluding the measures announced in Budget 2021.

The latest stimulus will raise the country’s fiscal deficit to 6% of GDP from the 5.4% projected earlier, Finance Minister Tengku Zafrul Aziz told reporters last Thursday (March 18). The projected 6% of GDP for 2021 post-Pemerkasa is still 20 basis points below last year’s fiscal deficit of 6.2% of GDP.

Direct federal government debt will rise to RM975 billion from RM879.6 billion or 62.2% of GDP as at end-2020, and RM793 billion or 52.5% of GDP as at end-2019, he said.

Zafrul did not say how much RM975 billion is in terms of GDP, but the figure may be little changed from 62.2% of GDP, based on the RM84.84 billion estimated by the Ministry of Finance when the fiscal deficit was 5.4% of GDP. This is also consistent with the projected 2021 nominal GDP of RM1.57 billion, according to data on the Ministry of Finance’s (MoF) website.

Malaysia’s debt-to-GDP ratio will be lower than expected if GDP grows faster than the current official forecast of 6.5% to 7.5%. The sizeable additional stimulus could make it easier for Bank Negara Malaysia to retain a bullish 2021 GDP growth outlook when releasing its 2020 annual report later this month or in early April, even though a number of economists have lowered their GDP growth forecasts to about 5% for 2021.

We also know that the growth in the federal government’s direct net borrowings of RM95.4 billion this year is about 10.2% or RM8.8 billion more than the RM86.6 billion year-on-year growth in direct net borrowings last year, when the fiscal deficit of 6.2% of GDP was RM87.65 billion in absolute terms.

Yet, it appears that there is no immediate need to seek parliamentary approval to further raise the temporary statutory debt ceiling from 60%, with Pemerkasa only nudging statutory debt — which comprises outstanding Malaysian Government Securities (MGS), Malaysian Government Investment Issues (MGII) and Malaysia Islamic Treasury Bills (MITB) — to 58.5% of GDP from 58% of GDP as at end-2020 and 48.7% as at end-2019.

How much debt headroom is there left for further direct fiscal support before there is a need to raise the statutory debt ceiling further?

The 1.5% of GDP gap between 58.5% and the 60% statutory debt ceiling works out to between RM21.6 billion and RM23.5 billion if one were to consider Malaysia’s nominal GDP of RM1.44 trillion for 2020 and RM1.57 trillion for 2021, a simple back-of-the-envelope calculation shows.

It may be necessary, however, to ask parliament for permission to raise the current RM65 billion ceiling for the Covid-19 Fund — established under the Temporary Measures for Government Financing (Covid-19) Act 2020 — if further fiscal spending to support the country’s economic recovery becomes necessary. Zafrul did not elaborate on this when telling reporters on March 18 that the government intends to “fully maximise the Covid-19 Fund”. The ceiling for the Covid-19 Fund was raised by RM20 billion to RM65 billion last November.

When Budget 2021 was announced last November, about RM55.02 billion of the Covid-19 Fund had been earmarked — RM38.02 billion in 2020 and RM17 billion for this year. The RM17 billion was before the announcement of the RM15 billion Permai package in January that required RM6.6 billion in fiscal injection, but it did not change the fiscal deficit projection of 5.4% of GDP.

While Pemerkasa requires RM11 billion in direct fiscal injection, it is worth noting that the government is benefiting from higher global oil prices even though it has allocated about RM3 billion to cap RON95 fuel and diesel prices at the pumps (at RM2.05 per litre and RM2.15 per litre respectively) to help people manage the rise in cost of living. Brent crude oil was hovering above US$65 per barrel at the time of writing, 55% above the US$42 per barrel assumed in Budget 2021 last November. Every US$1 increase is said to add RM300 million to the government’s coffers.

That additional fiscal space from higher oil prices is certainly welcomed, given that the government would be hard-pressed to introduce new taxes before the economy recovers from Covid-19. Zafrul had told reporters that no new taxes would be introduced for the time being, even though the government is looking at ways to broaden its revenue base.

When participating in a panel discussion after the launch of a World Bank report last Tuesday, MoF deputy secretary-general Zakiah Jaafar mentioned the need to review tax incentives, consider new revenue sources such as the Goods and Services Tax, as well as review the public pension system to a less burdensome structure — an acknowledgement of the World Bank’s recommendation that Malaysia needs to enhance revenue generation and improve fiscal spending efficiency to finance shared prosperity — without providing the specifics on what will eventually be implemented.

According to Richard Record, the World Bank Group’s lead economist for Malaysia, the country needs to raise more revenue and spend it more effectively. “Malaysia, of course, benefits from having oil and gas revenues as a source of non-tax revenue, but these have tended to be quite volatile,” he tells The Edge.

“Revenue collection is low mostly because rates are low and there are so many allowances and exemptions. Reforming the SST (Sales and Services Tax), and in particular sharply reducing the number of non-essential items that are zero-rated or exempt (lobster and avocados are two examples) would help.

“But greater effort would also be needed across tax instruments, to increase the progressivity of personal income tax, re-examine the number and targeting of corporate income tax incentives and — in time — consider new sources of revenue such as environmental taxation and capital gains taxation.”

The introduction of capital gains tax, raising the tax rate for those in the top individual tax bracket and imposing a tax on retirement savings above a certain threshold were among the suggestions on how to enhance revenue in the World Bank’s report launched last Tuesday.

“The strongest argument for introducing a tax on capital gains is one of fairness. It is hard to justify one person’s income (such as from a dividend) being taxable, while another’s capital gain of the same value (such as from the appreciation in the value of an asset) is not taxable,” says Record.

“Taxing income but not capital gains also distorts economic decision-making. The vast majority of OECD economies have a capital gains tax, and to ensure equity, many countries have opted to tax capital gains at the same rates as personal income. This is the case in Australia and South Korea.

“Japan taxes gains arising from sales of stocks and land, but at different rates. New Zealand is in the process of establishing a capital gains tax. Singapore does not tax capital gains. There is no evidence to suggest that investment is not attracted to countries that tax capital gains — there are many other more important drivers of investment decisions.”

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