This article first appeared in The Edge Malaysia Weekly on December 27, 2021 - January 2, 2022

WHEN The Edge wrote about Malaysia’s debt spiral in January 2018 — detailing how federal government debt had surged because annual spending in excess of revenue (budget deficit) had taken only seven years to double from about RM20 billion a year in the early 2000s to RM40 billion by end-2017 — the intent was to highlight the need for fiscal reforms to strengthen government finances to deal with an increase in rising spending needs as society ages.

Since then, we, the people, have discovered more details on gaps in governance that allowed the signing of lopsided public agreements that disadvantaged the government as well as the creation of 1Malaysia Development Bhd (1MDB), which borrowed billions that ended up being stolen instead of benefitting the people. Incidentally, for next year and 2023, Malaysia will have to cough up more money to pay for unproductive debt taken by 1MDB because not enough assets were recovered to pay for all the borrowings taken — principal and interest for 1MDB debt are RM16.2 billion in 2022 and RM13.3 billion in 2023. As at end-September 2021, there was only RM15.3 billion in the 1MDB asset recovery fund versus RM39.3 billion outstanding debt and interest.

Even before Covid-19, the excess spending on top of revenue earned (absolute size of budget deficit) had ballooned from RM40 billion-levels in 2017 to RM50 billion-levels in 2018 and 2019.

The necessary spending to counter the devastating effects of the pandemic on the lives and livelihoods of the people and the survival of businesses bumped up the amount the government had to spend in excess of what it earned to RM87.64 billion in 2020.

The amount of “excess spending” is currently estimated at RM98.78 billion for 2021 and has been budgeted at RM97.5 billion for 2022. As a percentage of GDP, the fiscal deficit doubled from 3%-levels to as high as 6.5% of GDP in 2021 and is currently projected to be 6% of GDP for next year.

To be sure, the government is right in its counter-cyclical spending decision in the face of the crisis, prioritising the people over the country’s sovereign credit rating during these extraordinary times.

Yet, as government revenue also fell in tandem with rising expenditure during the pandemic, the federal government is forced to take on more debt — causing direct federal government debt to jump more than RM300 billion in less than four years.

Direct federal government debt surged from RM686.8 billion as at end-2017 to RM879.56 billion as at end-2020 and rose further to reach RM969.34 billion as at end-September 2021. The RM1 trillion debt level is likely to be breached within the first half of 2022 and reach almost RM1.08 trillion at the end of the year, our back-of-the-envelope calculations show.

As a result, debt service charges — basically interest payment on direct federal government debt — had risen from RM27.9 billion in 2017 to RM34.5 billion in 2020. This is projected to amount to RM39 billion for 2021 and RM43.1 billion in Budget 2022 — 18.4% of RM234 billion, which is the federal government’s expected revenue for next year.

Malaysia used to target to keep debt service charges below 15% of its revenue. To continue following this rule, the federal government would need to have RM287 billion in revenue — RM53 billion more than the projection for 2022 — or cut direct federal government debt by roughly RM200 billion to trim debt service charges by RM8 billion. Reality, however, is a lot more complicated than simple maths.

Simple logic, however, says the government needs more revenue — especially if it cannot cut any of its annual recurring operating expenses and reduce its financial obligations. As Finance Minister Tengku Datuk Seri Zafrul Abdul Aziz lamented to editors present at his pre-Budget 2022 briefing, easily 80% to 90% of operating expenses are “fixed”. That means that unless reforms can be made to expand the government’s fiscal space, the minister would continue to have his hands tied — even if the government very much wanted to do more for people and businesses.

The Edge has previously written about the possibility of the government pooling together all its assets from various institutions to create a large-enough fund-size that can generate a sizeable investment income to supplement the annual federal government budget. Singapore’s annual budget, for instance, has benefitted from the Net Investment Returns Contribution (NIRC) since 2000. Malaysia is fortunate to have dividends from Petroliam Nasional Bhd but, obviously, more needs to be done on this front. While the government has tapped funds set aside in the National Trust Fund (KWAN) and the Retirement Fund Inc (KWAP), simple maths will show that withdrawals cannot be large because the funds, in their current form, are simply not big enough to mirror what Singapore has.

A reform of the country’s growing public pension obligation has also been looked at for years without much change because a wrong move is akin to political suicide. The same can be said for the reintroduction of a broad-based consumption tax, be it the Goods and Services Tax (GST) or Value Added Tax (VAT), even though many economists see the move as likely to improve government finances significantly going forward. The pandemic had forced the government to update its database on the hardcore poor as well as others in vulnerable groups who need aid to be given out quickly in a disaster. This database would come in handy when the government wants to provide targeted subsidies to cushion the impact of any rise in the cost of living from the introduction of a broad-based consumption tax — one of the lessons from Malaysia’s failed implementation of the GST.

Malaysia has only nine years before it becomes an ageing nation in 2030. If fiscal reforms are not made early enough to broaden and shore up its revenue base, the government may find itself even more hard-pressed than during the Covid-19 pandemic.

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