Our country is faced with numerous fiscal challenges. Many of them have resulted from inaction stemming from the inability of members of parliaments, ministers and the prime ministers to compromise. For them, understandably, compromise is unacceptable, an admission of failure.
The net effect of this dysfunction has contributed to a total government debt and liabilities as of June 2022 estimated to be at RM1.42 trillion and will rise further next year as the previous Prime Minister Datuk Seri Ismail Sabri Yaakob’s administration tabled a deficit Budget 2023, the biggest federal spending plan to date. In figures, 1.42 trillion is written as 1,420,000,000,000.
The government will still spend more than it earns in 2023. It has budgeted to spend roughly RM372.3 billion, while it estimated lower public revenue of RM272.57 billion, according to the 2022/2023 Economic Report released by the ministry of finance (MoF). The budget deficit in 2023 will be the 26th, notably being one of the second largest on record, after 2022. The budget deficit is that gap between revenue and spending.
With another budget revision, maybe, just coming up, to correct the one that the minister of finance ‘kidded’ everyone with before the general election, it might be time to answer the question of whether deficits really matter? The truth is that there are two entirely different arguments going on here. There’s an economic one and that’s conducted to one set of rules. To set the scene here. We’ve two sets of macroeconomic policies. One is monetary, the other is fiscal.
Monetary talks about the quantity of money floating around, the interest rate which determines how the narrow money supply that central bank money supply. We’ve had a recession, cut the interest rate, which translates into a wider money supply that greases the economy upwards. Then we’ve inflation so throw the system into reverse by raising interest rates.
Fiscal is talking about the size of the government deficit really. How much is government spending, how much is it raising in tax, what’s the difference between the two? We’re in a recession, the government spends more and boosts up that economy, but it doesn’t raise taxes. It’s the increase in the deficit, funded by borrowing, which does the boosting. We’ve inflation, government taxes more than it spends, runs a budget surplus, this tames matters. But, in my view, neither monetary or fiscal policy will work and of course, there are those who much prefer one over the other to address those new circumstances.
Then there’s the political argument, which is being run on entirely different lines. Each borrowing whatever part of the economic story seems suitable for their purpose at the time. And equally ignoring the bits of the economic story that seem inconvenient to their preferred arguments at any one time.
In that strict economic sense: the government spends more than it collects in taxes. Oh dear me, what a tragedy. This is about as worrisome as my borrowing RM10 until payday. Because that’s what is being done, some borrowing is being done from future government revenue to spend now. Even if we accept the idea that the borrowing is minimal, that tells us nothing about the size of the deficit. It tells us about how the deficit is financed. In the opinion of Auditor General Datuk Seri Nik Azman Nik Abdul Majid, “Half of the new debts are used to pay old debts.”
There’s another way of looking at it, which is that, when we’re in recession, a deficit is a very good idea. Borrow money, spend it on the economy, this boosts aggregate demand and reduces either the depth or the duration of the recession. Admittedly, there are some economic schools that don’t agree, the Austrians, for example, for they insist that the recession is necessary to purge the economy of the excess accumulated through the boom. Only when all the previous malinvestment is liquidated can we get back to growth.
Four years ago, there was an interesting little piece of macroeconomic management proposed in Ghana through the Fiscal Responsibility Bill which was passed by parliament. If the minister of finance allows a budget deficit of over 5 percent so, therefore, of 6 percent of GDP then parliament should impeach him or her at the beginning of the next fiscal year. What’s even more interesting about it was that it aimed to increase confidence in the fiscal integrity of the Ghanaian government.
If we tie our hands in such a manner then this will increase the confidence that we’ll not just blow the budget. That we’ll work at least reasonably hard to keep government spending in a reasonable relationship with what can be taxed out of the population. It works because we’re not cynical at all when we note that politicians do really, really, like their jobs so they’re unlikely to do things which mean they lose them.
One criticism would be that this prevents the finance minister from really ramping up the deficit if it is really, really, necessary to do so. That recent unpleasantness that started in 2008 led to greater than 6 percent of GDP deficits in a number of countries and rightly so too. The answer being that of course it doesn’t stop the minister of finance at all. If he really, really, needs to run such a deficit he can. He’ll lose his job, true, but then which minister of finance wouldn’t be happy to do that if it were really, really necessary?
OK, we might temper that a little, the new government was elected and that’s really what the fight is about here in political terms. Not whether deficits should exist or what the correct level of the national debt should be. But what should be the level of public spending as a proportion of the economy? Those who think spending should be higher are arguing that we should run a deficit to maintain those essential public services. Eventually all will agree that at some point that debt will rise up and swallow the rest of the economy.
The economic arguments can and possibly should inform whether we should shrink that deficit, stop adding to that national debt, quickly or slowly, in what manner. But what should be the role and size of government is a purely political question. As such, of course, that second question is entirely up to you, you in aggregate in your position as voters.
The views expressed here are those of the writer and do not necessarily represent the views of New Sarawak Tribune.
