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MALAYSIA’s economic growth and fiscal positions had been adversely affected due to the unprecedented Covid-19 pandemic and the low commodity prices.
Since the onset of Covid-19 pandemic, the government has unveiled eight stimulus packages worth RM530bil to address the health crisis.
According to a comparative analysis of government assistance by the Finance Ministry, the Covid-19 aid packages have contributed more than 20% of Malaysia’s gross domestic product (GDP).
Notably, this is comparably higher than that of some developed countries and regional developing nations.
Despite the contribution to the GDP, there remains dissatisfaction with official efforts over the provision of the fiscal relief packages. This is because of the limited fiscal space after running budget deficits for over the past 20 years.
With the pandemic’s unprecedented crunch, there are not enough public funds to dig into. This necessitates the government to look into ways to overcome the fiscal constraints post-pandemic as well as in the long term.
Restoring fiscal firepower
Under the 12th Malaysia Plan (12MP), the government pledged that it remains committed to resume its fiscal consolidation efforts once the pandemic is over. It is estimated to meet the fiscal deficit target of between 3.5% and 3% of total GDP in 2025.
In order to achieve the targeted fiscal deficit, despite the immediate short-term priority on recovery from the effects of Covid-19 pandemic, a longer-term perspective on sustainable fiscal management is required to ensure the future resilience of the nation.
First and foremost, the budgeting framework and process must be improved to promote good governance, transparency, efficiency and effectiveness.
Initiatives should be focused on enhancing budgeting transparency and aligning allocation priorities between various sectors, introducing the value gateway mechanism and reviewing the legal framework in government procurement.
These initiatives will contribute to efforts in strengthening fiscal management and enhance the integrity of the public sector.
Malaysia’s fiscal policy is much less re-distributive than those high-income Organisation for Economic Co-operation and Development (OECD) nations and some other some regional countries.
OECD countries tend to have much larger and more progressive tax and transfer systems that reduce income inequality by redistributing income from richer to poorer households.
World Bank reported that in most OECD countries, tax and transfer policies reduce the Gini coefficient of income inequality by 13 to 15 percentage points, which stands in stark contrast to the two percentage point reduction observed in Malaysia.