Fiscal Policy in Malaysia

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Fiscal policy in Malaysia

1. Background

In the 1970s, the Malaysian government played a key role in the economy. The government ventured beyond its traditional functions and took on a more direct and active role in the country’s overall social and economic development process. This period saw the government’s direct participation in the private sector through the establishment of large commercial enterprises. Government participation in the economy expanded further in 1980-82 as it pursued an expansionary countercyclical fiscal policy aimed at stimulating economic activity and sustaining growth to ride out the effects of the global recession. The countercyclical policy led to “twin deficits” in the government’s fiscal position and the balance of payments. When confronted with this twin deficit problem, the government implemented comprehensive structural programmers to reduce spending and reordered national objectives consistent with domestic resource availability and to ensure prudence in its recourse to external borrowing.

The new direction in public policy
also sought to promote the private sector as the main engine of growth for the economy. The most significant development was the reduction of the public sector’s commercial activities, implemented through the privatization programmer. Subsequently, government intervention has been largely in support of private sector initiatives towards overall development of the country. The tax structure was also reformed to increase international competitiveness as well as promote national savings to meet future levels of growth and investment requirements.

The shift in emphasis towards private sector-driven growth contributed to a marked improvement in the government’s financial position as well as a reduction in its borrowing requirements. As a strengthened fiscal position emerged in the late 1980s, the government was able to prepay its external debt, thereby improving the nation’s external debt profile. It also culminated in fiscal surpluses for five years during 1993-97. With the consolidation of public activities, the share of public expenditure to GDP declined to 21% in 1997, from a peak of 44% in 1982. The total debt level of the federal government was substantially reduced to 32% of GDP by the end of 1997, from a peak of 103% in 1986. The external debt of the government was also low, at 4.6% of GDP or 7.6% of total external debt in 1997. The prudent policies adopted accorded the government greater flexibility in implementing expansionary measures to support growth during the crisis years.

2. Fiscal policy response to Asian financial crisis

During the early stages of the Asian financial crisis, the government tightened budgetary operations to bring about a reduction in the current account deficit of the balance of payments and to reduce inflationary pressures arising from the depreciation of the ringgit. As the regional economic crisis continued into 1998, fiscal policy turned expansionary to support economic activity. The fiscal measures included a selective increase in infrastructure spending, establishment of funds to support small and medium-sized enterprises, a higher allocation for social sector development and a reduction in taxes. Special funds were also established or expanded to provide credit to priority sectors at concessionary rates. The fiscal stimulus package was MYR 7 billion or 2.5% of GDP, of which MYR 1 billion was allocated for social safety net measures to mitigate the impact of the crisis on the poor. As a result of these measures, a fiscal deficit of 1.8% of GDP emerged after five years of surpluses.

As global economic uncertainties continued to persist, the 1999-2003 budgets maintained an expansionary stance, with the authorities’ conscious of the need to maintain debt sustainability. The countercyclical fiscal policy, implemented largely through discretionary measures, was effective in supporting economic recovery and sustaining...
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