Last week the British finance minister announced a “mini budget” which cut taxes financed largely by higher borrowing.
As he spoke the pound plummeted to levels not seen since 1985. Interest rates on UK bonds rose to levels not seen since 2008 and the Bank of England faces intense pressure to hike short-term interest rates to levels not seen in 20 years.
As we look forward to Budget 2023 it is important not to repeat this scenario in Malaysia.
The government promises a budget focussing on the rakyat, business, the economy and the government. If instead we see a populist pre-election bonanza of hand-outs it could damage the Malaysian economy in the way that the British finance minister has just done in the UK.
Budget 2023 must focus on structural, supply-side reforms to free-up the economy, promote competition and agility and reward enterprise, innovation and creativity. Less, not more government is better for real economic growth.
This includes tax reforms across the board, not just on GST and SST but including all taxes, lowering tax rates and simplifying the system. A more efficient tax system increases revenue with better incentives for business growth. It stabilises government finances and reassures the markets.
Budget 2023 should allow the rakyat to keep more of the money they earn and spend it as they choose. A universal basic income (UBI) funded through a direct credit scheme should reform existing welfare payments into regular monthly payments to people below a living wage threshold. This will rationalise the subsidies bill and stabilise government finances.
Pensions should be prioritised with tax incentives and removing the tax-free Employees Provident Fund (EPF) voluntary contributions limit. There must be reform of the pensions system to provide a universal basic pension (UBP) funded by consolidating small, under-performing, government linked funds into a new Malaysian SuperFund. This would provide a new investment player to stimulate the financial markets.
The systemic risk from the student loans system must not be ignored. PTPTN debt is bigger than 1MDB and was unstable even before the Covid-19 crisis. Fixing this will reassure markets.
An independent fiscal institution to analyse the impact of the budget on the wider economy would also provide a credible assessment and forecast for markets to assess Malaysia’s fiscal stance.
Malaysia cannot protect the ringgit with interest rates or market interventions. To encourage investors to hold and buy ringgit there must be sound, credible economic policy aimed at supporting the fundamental recovery of the post-Covid-19 economy and promoting private investment to drive domestic demand in case the global economy contracts as expected.
This must focus on household balance sheets to support spending from income, not borrowing, and business investment based on higher revenues from that spending.
The government must also control and reduce its own spending taking advantage of the end of Covid-19 to make savings from the stimulus packages which are no longer necessary.
If we see a populist pre-election budget with higher spending on a list of hand-outs to voter groups the markets will not be impressed.
Bank Negara Malaysia (BNM) will come under more pressure to move from its sensible recalibration of interest rates, which may be close to the right levels, towards bigger and more harmful hikes which will hit consumers and businesses through higher loan costs.
Budget 2023 must be coordinated with BNM’s efforts to promote price and financial stability, and support sustainable growth. Conflict between fiscal policy inflating demand and monetary policy squeezing demand must be avoided.
Otherwise the ringgit might follow the pound to record lows and Malaysian long-term interest rates might follow UK bonds to highs not seen in decades.
Professor Geoffrey Williams is an economist at the Malaysia University of Science and Technology.
The views expressed are those of the writer and do not necessarily reflect those of FMT.
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