KUALA LUMPUR: The government's proposal to implement the Fiscal Responsibility Act (FRA) is deemed as an "indispensable" tool in managing Malaysia's fiscal space, according to World Bank Malaysia.
The FRA, which was mooted in the 2022 Budget, would be necessary for the country's economic recovery to facilitate a sizeable fiscal space, said country manager Dr Yasuhiko Matsuda.
"There seems to be a concern on the levels of indebtedness and its impact on the long term macroeconomic stability, which is a legitimate concern in any circumstance," he said at a virtual press conference after launching the World Bank Group's Malaysia Economic Monitor report titled: Staying Afloat, here today.
He said the FRA would be an essential tool to stabilise Malaysia's fiscal management on condition if the act is well designed and complies with its objectives.
The government had in late October planned to introduce the FRA to improve governance, accountability and transparency in the country's fiscal management, ensuring fiscal sustainability and supporting macroeconomic stability.
Finance Minister Tengku Datuk Seri Zafrul Abdul Aziz reportedly said a public consultation paper on the Act had been published and all constructive feedback would be considered to improve the draft that was being prepared.
Nonetheless, Matsuda said the act should not be seen as a 'magic ball' as no single piece of legislation can fix the economy.
Instead, the legislation should be seen as a tool in the overall approach towards fiscal credibility.
World Bank Group lead economist (macroeconomics, trade and investment) Dr Apurva Sanghi said the FRA is urgently required if properly designed and implemented to help establish a medium-term fiscal consolidation and deepen public trust and government spending.
"We do not suggest something is done right away, as we are still in a situation where we have a negative output gap, and fiscal policy needs to be expansionary but targeted to those affected," said the economist.
He said FRA would be important for the medium term as it sets a fiscal consolidation path in motion.
"There is also a need to improve tax collection framework, revisit wasteful tax expenditure, and secure taxation from other sources such as consumption taxes and sin taxes, which would help alleviate the issue.
To recap, the government unveiled the 2022 Budget with its total value estimated to stand at 20.3 per cent of the gross domestic product (GDP).
The 2022 Budget has a proposed allocation of RM332.1 billion - the highest budget tabled in the country to date. Of the total proposed allocation, RM233.5 billion would be allocated for operating expenditures and RM76.5 billion for development expenditures.
Additionally, RM23 billion was proposed for the Covid-19 Fund and RM2 billion for contingency.
Apurva said Malaysia's debt limit was raised from 60 per cent to 65 per cent of GDP to accommodate higher spending.
However, he said increasing the debt limit in the absence of higher revenue and rigid expenditure - paying more to services - has contributed to narrowing Malaysia's fiscal space, increasing fiscal rigidity, and crowding out discretionary spending.
Apurva said the 2022 Budget indicated Malaysia's fiscal space would likely remain constrained, and the government was considering imposing a comprehensive revenue raising strategy.
This included windfall tax (prosperity tax), sugar-sweetened beverages, and tax exemption foreign income removal.
Therefore, he said a more efficient expenditure spending would be required for the government.
However, he said Malaysia's fiscal space was shrinking due to the Covid-19 pandemic as the government expenditure has risen to about 6.5 pct of GDP this year.
"Revenues have been consistently dropping for almost a decade. The government fixed expenditure commitment such as pension and emoluments accounting for more than 60 sen of each ringgit raised in revenue, underscoring the narrowing of Malaysia's fiscal space," he said.
Matsuda conceded the issue of emoluments and rigid expenditure would be a difficult matter to address in any economy and the matter of raising taxes.
"Moving forward, goods and services tax (GST) is an efficient tax measure, and it should be on the table for consideration, but it should also be coupled with better measures to ensure expenditure efficiency."
The World Bank Group said improving the efficiency of public spending may require some difficult decisions on public sector efficiency and productivity, given the high level of emoluments expenditure.