So, our newly elected government has recently announced that our country’s debt is around 1 trillion Ringgit. How did this happen? Well, without going into numbers, below is my opinion on how Malaysia as a country, reached 1 trillion Ringgit in debt.
Well, it is obvious that our previous government need to shoulder some blame here, especially our infamous ex-prime minister and ex-finance minister (the infamous Najib). I think he has a group of really bad advisors surrounding him and he himself is incapable to think logically as well. The previous government were too fixated in GDP growth (GDP = Consume spending + Government Spending + Corporate Spending + Net Export), so much so they were willing to spend at all cost to boost our country’s GDP so that the headline number looks good, propping up the stock market and make themselves look good in return.
What is the problem with government spending? Well, for government to spend, they must have money to begin with. Where does government get their money from? Taxation and borrowing. Since it is difficult to raise money from the citizen without making people angry, like all governments, Najib and his gang decided to raise money from the debt market instead. So far so good, the problem is, too much borrowing will be reflected on the debt to GDP ratio. And high debt to GDP ratio will spook foreign investors who are looking into developing countries such as Malaysia. Since Malaysia has a fixed debt ceiling of 55% debt to GDP ratio, Najib & Co. have to rely on creative accounting (not necessary fraud) to massage the number so that they are presentable to the investing public. How do they do that? Well, they can set up companies and ask these companies to borrow money from the debt market and act as guarantors in the event of failure. The benefits? The company will get low interest rates because the borrowing is guaranteed by the Malaysia’s government and the debt will be recorded on the company’s balance sheet thus making the debt off the national’s account. This creative accounting technique is not wrong, but it is immoral and misleading. Because if we read the headline news, it will be something like: Malaysia has achieved x% GDP growth while maintaining the debt to GDP ratio, it sounds good, it feels good but it is misleading.
Even with borrowing, the government eventually needs to pay back the debt and interest with cold hard cash. The only way for government to get cold hard cash is by raising taxes. This is quite obvious with the introduction of GST. While I agree with the concept of GST as a more efficient way to tax the people, it burdens the people. Let’s go back to GDP formula, if government announce they collected RM20 billion extra by switching from SST to GST. It simply means these money will come from the people and corporations. If government spend these money, it means the consumers will have less money to spend (RM20 billion less), so the net GDP effect is actually zero (assuming the consumers spend the full RM20 billion).
If we have a clean government who knows what they are doing, GST is a great idea. These money can go into education, health care and etc. which will actually bring more value to the society in general. Instead, in Malaysia, these money will be used to built buildings we don’t need, to pay absurd amount of operation cost to run the government (for example: salaries of the civil servant) whilst spending tiny bit of the money investing in infrastructure projects. Anyways, last but not least, these money are wasted in corruption scandals such as 1MDB. The hard-earned money of the people are wasted and squandered. If the consumer were to spend the RM20 billion, it will be spent on businesses which actually produce desirable goods which in turn spur these business to invest more within Malaysia. I suspect the multiplier effect might be even higher and more immediate as compared to government spending (especially in Malaysia). The RM20 billion will be spent on goods and services that will actually make the economy better. This is far better than making a few cronies and politicians filthy rich (maybe they bought into the koolaid that trickle down economy works). That being said, I think GST is still better for the country, businesses will be accountable and tax evasion can be minimized via GST.
So in summary, the previous government believe too much in GDP growth and they are committed to increase the GDP no matter what. They proceed to raise a lot of debt to pursue mega projects which in return make cronies and politicians disgustingly rich due to corruption that is running rampant in all levels of the government. They also try to hide their debt by using accounting techniques to move these debts off-balance sheet. However, no matter how creative they are, eventually, they have to pay their debt and interest. Running of cash, the government proceeds to hound businesses to pay tax, disrupting many businesses from their day-to-day operations. In addition, the government also introduced GST to collect more tax revenues from the people. The increased tax revenue allows the government to finance their debt which in turn gave them the false impression that everything is alright. These people then have the audacity to introduce more mega projects which they claim will create more jobs and create economic values.
What should we do moving forward? Who knows? So far the new government has scraped many mega projects. This is definitely a good start. Shelve these mega projects, fix the procurement system, drain the swamp, curb corruption and take the bitter pill. After everything is in place, revisit these mega projects again. As of writing this, the local stock market has fallen a lot which is also due to macroeconomic factors such as Italy. So we can’t really blame the new government 100%. The new government must choose their battle carefully. The country’s wealth is limited, hence, the new government should think carefully before embarking on any mega projects. The new government should also not focus too much on the GDP value as it is not the ultimate goal. Not all government spending will have a high multiplier, sometimes, it is better to give the power back to the businesses and consumers to determine where the money should go. The new government should focus on setting up an environment which is conducive for businesses and foreign investors, focus on education & healthcare to produce a country with top-notch human resources to cater for high-tech industries, be vigilant on any threats to the country (extremists and etc.) and minimized corruption.
Having said that, RM 1 trillion debt is not as bad as it sounds. Our economic foundation is definitely strong. Malaysia as a country will suffer in the short-term, but I am optimistic of the future. After all, we as a country has achieved the improbable: we managed to bring down the previous government which ruled Malaysia for many years.
Difficult times ahead and all the best to Malaysia!
