It is that time of the year again. The tabling of Malaysia’s Budget 2022 is right around the corner, scheduled for Oct 29. This will be the second consecutive budget during the Covid-19 pandemic. Not surprisingly, it will be another difficult one, primarily because tax revenue is down while expenses are rising as a result of prolonged economic disruptions and fiscal aid due to the outbreak.

At the mid-year mark, total government revenue was only 45% of the full-year forecast that was made in Budget 2021. Meanwhile, it had already spent half of its budgeted operating expenses in the first six months of the year. The Covid-19 Fund, in particular, is rising rapidly — with total payment commitment currently at RM91.8 billion ($29.8 billion). Excluding the RM38 billion spent last year, this suggests the tab for 2021 could hit RM54 billion, compared with the budgeted RM17 billion — with RM18.4 billion already spent in 1H2021 (exceeding the fullyear budget). The government is proposing to lift the ceiling for this expense item to RM110 billion, from RM65 billion at present.

As a result, both public debt (estimated at 65% to 66% of GDP by end-2021) and fiscal deficit (6.5% to 7% of GDP) are running higher than previously forecast — and would have a spillover impact on Budget 2022. We do not buy the irresponsible arguments by some that Malaysia should just ignore any fiscal restraint, spend as you wish, borrow relentlessly and not worry about the consequences to the exchange rate, interest rate, credit rating and other long-term repercussions. Clearly, the government needs to reduce its deficit and slow the rise in borrowings. The question is how best to do so?

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