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Fiscal transparency should not be missed out in the “Prihatin” Stimulus Package

Written by Tricia Yeoh and Sri Murniati, Fellows of IDEAS

Prime Minister Muhyiddin Yassin on 27 March 2020 announced a RM250 billion economic stimulus package intended to tackle the negative economic impacts of the Covid-19 crisis. While it is commendable that the government has taken bold measures to address what we expect will be an unprecedented fallout in the economy, whether in the form of income lost from individuals or businesses, there are several points that need to be clarified.

First, although the total announced package is RM250 billion, the total actual fiscal injection amounts to only RM25 billion, as stated by the Prime Minister himself. It should also be pointed out that what was announced is inclusive of the first two stimulus announced, the first of which was unveiled by then Prime Minister Mahathir Mohamed on 27 February.

Second, the Prime Minister did not include several crucial points in his announcement, important information which is the duty of a fiscally responsible government. For instance, he did not state what the financing source would be for the fiscal injection.

Will the RM25 billion be drawn from the national Contingencies Fund? Article 11(3) of the Financial Procedures Act 1957 states that the Minister of Finance may make advances from the Contingencies Fund to meet an “urgent and unforeseen need for expenditure for federal purposes for which no other provision exists”, which presumably this would fall under. In fact, the available balance in the Contingencies Fund as at the end of 2018 was only RM250 million. While the 2020 Budget allocated RM2 billion to the Contingencies Fund, this is nowhere close to the RM25 billion intended to be spent, and even so it is meant for development, not operating expenditure.

This leaves the second option, which is for the RM25 billion to be reallocated from the existing 2020 budget. Although the Financial Procedures Act is not very clear about the rules of virement between ministries (it only prohibits virement within ministries), any budget reallocation would under normal circumstances require the convening of Parliament, in the interest of democratic oversight, good governance and accountability. All national budgets – and supplementary budgets – are by convention tabled, debated and approved by Parliament so that our elected representatives can transparently discuss matters of national interest.

Additionally, under the Movement Control Order (MCO), all states in the country (and the federal territories) are currently defined as “infected local areas” under the Prevention and Control of Infectious Diseases Act 1988. Because they are not classified as a “security area” under the National Security Council Act 2016, by law the National Security Council cannot supersede Parliament. However, given the special circumstances we are in, where 222 Members of Parliament meeting in the Dewan Rakyat would contravene the basic tenet of the MCO – social distancing – perhaps an alternative would be to form a bi-partisan Special Finance Committee for the virement purposes. This Committee should consult all Members of Parliament remotely prior to the budget reallocation, then table its report to Parliament immediately once the latter convenes.

A third option is for the stimulus to be financed through borrowing. If so, how much will it add to the outstanding debt? As at end-June 2019, the federal government debt stood at RM799.1 billion or 52.7 percent of GDP, below the self-imposed limit of 55 per cent. Even if a small percentage of the RM25 billion is financed through borrowing, the government needs to be transparent in stating how the debt to GDP ratio will be affected, and whether it breaches the 55 percent limit.

However, if the source of financing is not from budget reallocation, then the new stimulus package will add to the 2020 current operating expenditure estimates, increased from RM244 billion to RM266 billion. Current fiscal rules prevent the government from borrowing for operating expenditure, where operating expenditure cannot exceed forecasted revenues for that financial year. If the current stimulus is not financed by budget reallocation, the government would be breaching this fiscal rule and should provide justification to parliament for the purposes of transparency.

Third, the Prime Minister did not elaborate upon the impact of the economic stimulus package on the budget balance. The estimate of 2020’s budget deficit was 3.2% of GDP. If the current source of financing is not from the budget’s reallocation and is in fact an additional expenditure, Malaysia’s 2020 budget will amount to RM322 billion in total. This would increase the deficit rate from 3.2% to 4.8% to GDP, calculated based on 2020 GDP estimates which may change due to the current economic situation.

A less efficient budget deficit is not entirely bad considering we are facing a crisis. Countries around the world have also announced equally large economic stimulus packages since the onset of Covid-19, and a balanced budget target is not necessarily the first priority of many governments given the current economic climate. But what is clear is that the government needs to acknowledge the fact that it will likely miss the balanced budget target and be open about it.

One may well argue that desperate times call for desperate measures, since sharing information publicly and consulting parliament may hamper the government’s effectiveness in tackling the crisis. However, consulting parliament and sharing information is the fiscally responsible thing to do. More importantly, there must be oversight and accountability mechanisms over what is still a relatively large amount of money being spent. Consultation should not of course derail the implementation of the stimulus.

The experience of the past month will inform policymakers and lawmakers of the future, specifically in providing lessons for handling future national crises such as the one we are facing. A pandemic of this scale will not likely, we hope, repeat in the coming decades, but situations will invariably arise that demand urgent action and fiscal injection into the economy. The Fiscal Responsibility Act, which is due to be tabled in 2021 must therefore include clauses to account for such circumstances in which the government can provide the necessary immediate financing but at the same time do so in a transparent and fiscally responsible manner.

2020-03-30T17:25:14+08:00 30th March 2020|Opinion|Comments Off on Fiscal transparency should not be missed out in the “Prihatin” Stimulus Package