Fiscal policy is the use of government revenue collection (taxation) and expenditure (spending) to influence the economy. The two main instruments of fiscal policy are government taxation and changes in the level and composition of taxation and government spending can affect the following variables in the economy: * Aggregate demand and the level of economic activity;
* The distribution of income;
* The pattern of resource allocation within the government sector and relative to the private sector. Fiscal policy refers to the use of the government budget to influence economic activity. By practicing the fiscal policy, the government decides how much to spend, what to spend, what to spend for and how to finance its spending. Federal government expenditure in Malaysia was allocated for 2 major purposes namely, operation purposes and development purposes. The rationale for allocating the budget for operation purposes is to upgrade and improve productivity as well as to impede long term economic growth potential. The largest component of operating expenditure is emoluments, subsidies, supplies and services. The factor contributing to higher allocation for emoluments is to accommodate the improved scheme of service for the police as well as the amendment to the salary scheme of medical and dental lecturers in public higher education institutions (Economic Report, Ministry of Finance 2010-2011). Subsidies is second top operation expenditure. Its trend has increased over the years starting from 2006 onwards and the impact is closely linked to the world commodity prices, particularly oil (Economic Report 2010/2011; Ministry of Finance). The reason for improving subsidies is to reduce the burden of society especially to the poor and disadvantaged group. On the other hand, the rationale for allocating the budget for development purposes is to upgrade rural basic infrastructure, urban transport, low income household and other social services. These expenditure purposes have a significant role in sustaining growth momentum and positive economic transformation. Figure 2(a) shows the growth rate of government operating and development expenditure for the 1980-2011 period. The government development expenditure growth is faster than the operating expenditure which is 7.1 percent compare to 8.5 percent for development expenditure.
The main source of the federal government revenue is the tax collection and non-tax revenue to finance its expenditures and to improve growth prospect of the country as well. There are several types of tax and non-tax revenues such as service tax, sales tax, excise tax, export duties, import duties, income tax and non-tax revenue (license, permit and investment income). The income tax is the major tax revenue in Malaysia (Economic Report,Ministry of Finance 2010-2011). Malaysia has been experiencing fiscal deficit over the years. In 2007, the deficit was recorded at RM23764 million and it was increased to RM36553 million and RM47943 million in year 2008 and 2009 respectively [See Figure 2(a)–2(b)]. Even though this amount was getting bigger throughout the years, as compared to GDP growth, it was reported at 7 percent of GDP in 2009 and was decreasing to 5.6 percent in 2010 (Bernama, May 13 2010).
This figure indicates that the growth of Malaysia’s economics relatively faster that the growth of fiscal deficit. As consequences of government injection, it would affect the aggregate demand, government capital formation and labour incentive and finally in the long run it would stimulate economic growth
* Malaysia has been a star performer in the region as the global economy has wilted, growing at an enviable 5.4 per cent in the second quarter. Much of Malaysia’s growth has been driven by strong domestic demand and government spending on infrastructure projects, but lurking beneath the surface is a worrying structural fiscal deficit that threatens to undermine...