PERHAPS one of the most misunderstood economic concepts in Malaysia today is public debt. What is it, and how does it affect our lives?
What is its connection to other fiscal and monetary measures, its association with other economic variables, and its relation to credit ratings?
Public debt is not a household debt or a debt incurred by businesses. In this sense, the federal government, technically speaking, cannot go bankrupt like how a person or a company can.
Of course, under certain circumstances, governments might go bankrupt, such as when they do not have the sovereignty to issue their own currency, like what happened in Greece or Portugal back in the 2008/09 Sovereign Debt Crisis.
There are also governments which have an extremely high level of external debt, like Argentina, which has defaulted many times.
But most federal governments, Malaysia included, have sovereignty in issuing their own currency and their sources of debt are mostly internal.
Simply put, public debt is merely an accumulation of deficits over the years.
A deficit is when the government spends more than it earns for a period of one year.
Having a high level of public debt and a deficit in the budget does not necessarily reflect badly on the management of the economy.
The same is true for a low level of debt or a surplus budget, which does not necessarily reflect the good performance of an economy.
Malaysia has experienced public debt, with debt-to-GDP ratio as high as 103.4 per cent and 101.7 per cent in 1986 and 1987 respectively, but our economy didn't go bankrupt.
Similarly, we experienced a budget surplus from 1993 until 1997, which led to the debt-to- GDP ratio falling to as low as 31.9 per cent in 1997.
But that didn't shield us from the 1998 Asian Financial Crisis, which hit the economy severely. The GDP contracted by 7.4 per cent, the ringgit fell to RM4.88 against the greenback, and international reserves plunged to US$20 billion.
Financial scandals are nothing new in the Malaysian economic scene, and can be traced back to the early 1980s. Again, the Malaysian economy did not go bankrupt then and will not now.
Another myth is that the future generation has to pay for today's debt and the government has to introduce new taxes to the people to pay the debt. These are fiction and easily accepted as they give coherence to the metaphor used in the understanding, or rather misunderstanding, of public debt.
As for credit rating agencies, the more important questions would be what the government would do with the accumulated debt, what type of investments or missions the government would want to embark on, and what strategies and policies would be employed to generate new sources of growth.
Of course, growth here is not growth per se; it must be inclusive, sustainable, and stable at around five to six per cent yearly so that the debt and deficit levels can be managed.
This is how the thinking should be framed when formulating the 12th Malaysia Plan (12MP) and the upcoming 2022 Budget.
In other words, the government must think big and play its role innovatively and proactively, rather than merely being reactive or simply being a facilitator when market failures exist.
The Covid-19 pandemic requires the government to address the plight of the people, businesses and the economy. At the same time, there is also a need to invest in big projects and missions.
These include addressing climate change, improving the social safety net, reforming the education system, looking for new sources of revenues like a tax system, investing in healthcare and the digital economy, tackling poverty, reducing the rural development divide especially in Sabah and Sarawak, and many other challenges like the Fourth Industrial Revolution, ageing society, social inequality, as well as malnutrition among children.
The 12MP will be a let-down if we are still preoccupied with deficit and debt, especially on how we are going to finance huge and impactful programmes and projects for the sake of the people and the planet.
The writer is associate professor of Economics and head of Political and Economic Risk Research Unit, Universiti Utara Malaysia
