The case against raising the statutory debt limit


RECENTLY, Finance Minister Tengku Zafrul Abdul Aziz announced that he will propose raising the statutory debt limit to 65% from the current 60% of the gross domestic product.

Economic history teaches us that governments all over the world and throughout the millennia always find themselves in emergency situations that require them to borrow more money, increase taxation, or devaluate the currency.

It also teaches us that governments very seldom spend these resources efficiently or for the common good. Therefore, we should be very careful in granting them the favour of additional resources. 

The Center for Market Education highlights that there are several negative consequences generated by additional borrowing: 

1) Additional debt is transferred to future generations, not only in terms of money to be repaid, but also in terms of a weaker currency (additional debt creates inflation) and less job opportunities (within a generally weaker economic environment). 

2) It further deteriorates Malaysia’s credibility and investors’ confidence, further limiting private investments and therefore job opportunities. 

3) The additional demand for loanable funds will push up the interest rate, discouraging private investments and thus limiting growth and job creation. 

In addition, governments may not necessarily spend the additional borrowing on sectors in need. This is because a central authority operates outside the market, and therefore does not possess the entrepreneurial knowledge to meet the needs of the economic system.

In order to boost government’s revenues without negative unintended long-term consequences, the Center for Market Education proposes the following measures: 

1) Speed up the reopening of the economy, including domestic and international movements, to create an investment-led growth which, by increasing profits in the private sector, will also boost the government’s revenue. 

2) Cut corporate direct taxation by 1%. 

3) Introduce a special fiscal program for micro-businesses (like the one by Indonesia), whereby micro-enterprises can enter the circuit of the formal economy by paying a small and flat tax on revenues, while accounting and reporting obligations are waived. 

4) Implement a tax reform that involves the simplification and introduction of a multi-layered goods and services tax (consumption tax) to encourage the rebuilding of savings that are necessary for the long-term financial stability of households and which will serve as a good resource for private investments. – September 5, 2021.

* The Center for Market Education (CME) is a boutique think-tank based in Kuala Lumpur, Malaysia.

* This is the opinion of the writer or publication and does not necessarily represent the views of The Malaysian Insight.


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