CME: RAISING THE STATUTORY DEBT LIMIT IS NOT A GOOD IDEA
SUNDAY, 5 September 2021: Finance Minister Tengku Datuk Seri Zafrul Abdul Aziz announced that he will propose to raise the statutory debt limit to 65 per cent from the current 60 per cent of the gross domestic product (GDP).
“Economic History teaches us that – all over the world and all over the millennia – governments found themselves always in a situation of emergency which constantly pushed them to borrow more money, increase taxation or devaluate the currency”, said Dr Carmelo Ferlito, CEO of the Center for Market Education. “Economic History also teaches us that governments very seldom spent these resources efficiently or for the common good and 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 unintended consequences generated by additional borrowing:
- 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).
- It further deteriorates Malaysia’s credibility and investors’ confidence, further limiting private investments and therefore job opportunities.
- The additional demand for loanable funds can push up the interest rate, discouraging private investments and thus limiting growth and job creation.
In addition to the three points listed above, it is not necessarily true that the government may be able to spend the additional resources precisely in those sectors where expenditures are necessary. This is because a central authority operates outside the market and therefore does not possess the entrepreneurial knowledge necessary 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:
- Speed up on reopening the economy, including domestic and international movements, so to create an investment-led growth which, by increasing profits in the private sector, will also boost government’s revenue.
- Cut by 1% corporate direct taxation.
- Introduce a special fiscal program for micro-businesses (like the one conceived 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.
- Implement a tax reform based on simplification on one hand and on the introduction of a multi-layered GST (consumption tax) on the other, so to favour the rebuilding of savings which are necessary not only for the long-term financial stability of households, but also as the sound resources for private investments.
About CME: The Center for Market Education (CME) is a boutique think-tank based in Kuala Lumpur, Malaysia. As an academic and educational institution, CME aims to promote a more pluralistic and multidisciplinary approach to economics and to spread the knowledge of a sounder economics, grounded in the understanding of market forces. In order to do so, CME is not only involved in academic initiatives, but it organizes seminars, webinars and tailor-made economics classes for students, journalists, businesspeople and professionals who wish to better understand the relevance of economics for their daily lives and activities. Economics matters and needs to be presented in a fashion in which the link with reality is clearly visible. In this sense, we look not only at theoretical economics but also at policy making, with an emphasis on the unintended consequences generated by political actions.