Fiscal Policy

Topics: Tax, Public finance, Income tax Pages: 2 (798 words) Published: February 17, 2013
The need for fiscal reforms
Malaysia’s fiscal policies have generally been expansionary, with 46 years of budget deficits, punctuated by only six years of budget surpluses, since Independence. While this does smack of a serious lack of fiscal discipline in an otherwise impressive macroeconomic management track record, there is no doubt that Malaysia has managed these deficits fairly well, with the notable exceptions in the early eighties when the deficits had ballooned warranting external financing. In the early eighties, budget deficits as percentage of gross domestic product (GDP) had swelled to unsustainable double-digit levels, rising to roughly 16 per cent of GDP in 1982. The economic crisis of the mid-eighties was a wake-up call, which led to fiscal deficits being progressively reduced and eventually reversed with five years of fiscal surplus (1993-97).

In the wake of the Asian financial crisis, to contain the fallout, Malaysia reverted to budget deficit in 1998. To be sure, there is nothing wrong with that, as budget deficits during economic downturns are justifiable. However, the problem with Malaysia is that it gets addicted to deficits even after the bad times are over. Admittedly, Malaysia was not the only country in the region to run budget deficits in the late nineties, as all crisis-hit countries were at it. The difference, however, was that Malaysia has remained stuck in budget deficits, while South Korea and Thailand were able to return quickly to surplus budgets. Even Indonesia, the hardest hit, could keep its budget deficits at low levels, way below that of Malaysia, relative to GDP. This is not to suggest that Malaysian policymakers were unaware of the need to balance the books, and indeed there were serious efforts at reducing the deficit-GDP ratio progressively between 2002 and 2007. Since 2008, however, there has been a reversal with deficits rising again. Government spending under the two fiscal stimulus packages totaling...
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