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Friday 14 Dec 2018 | 08:57 | SYDNEY
Friday 14 Dec 2018 | 08:57 | SYDNEY

Malaysia's election: Fiscal future at risk



15 April 2013 17:16

Liam Hanlon is a political analyst at Cascade Asia Advisors, a research firm focused on Southeast Asia. For questions on his article, please email Liam here.

Malaysia's 13th general election, scheduled for 5 May, is shaping up to be the tightest in the country's near 60-year history. The ruling coalition Barisan Nasional (BN) should slightly edge out the opposition Pakatan Rakyat (PR), but fail to reclaim the coveted two-thirds majority necessary to amend the constitution. Behind the divisive rhetoric of this unofficial campaign season, however, neither camp has formulated a viable, long-term solution to one of Malaysia's most insidious problems: fiscal imprudence.

Malaysia's struggles with public finances are nothing new. With the exception of a brief period in the mid-1990s, Malaysia has long maintained a fiscal deficit and carried one of the region's largest budget shortfalls in 2012 at 4.5%. It has also done little to rein in public debt, which officially sits right under the debt-ceiling threshold of 55% of GDP.

Malaysia's deficits are not inherently irresponsible, but there is another, more concerning, trend: a tide of 'hidden' public debt. This includes contingent liabilities such as government guarantees on debt and 'off balance sheet' borrowings. Such debt has more than doubled since Najib took office in 2009, and comes from government entities that fund massive transportation and infrastructure projects. It is not inconceivable that these liabilities may eventually find their way on the federal balance sheet.

Additionally, the Government's revenue stream, which has remained unimpressively low, is too heavily reliant on the state oil company Petronas, responsible for almost 35% of federal revenues.

Underpinning many of these structural issues is a proclivity for subsidies and cash handouts, particularly when an election is on the line. As BN recovered from the political shock of the 2008 election that saw PR erase its parliamentary majority, Prime Minister Najib Razak unleashed budgets saturated with voter-friendly measures. The 2013 budget provided bonuses to over 1.3 million civil servants, cash for low-income families, smart phone rebates, and a cut in the income tax rate.

These additions reflect the political reality that prudent fiscal management does not carry votes in Malaysia. Malaysians frequently lament the rising cost of living, making subsidies politically expedient for anyone running for office.

Malaysia's 13th general election is no different. PR leader Anwar Ibrahim and Prime Minister Najib are competing for the hearts and minds of Malaysia's electorate, promising to shower them with gifts and reduce their taxes. Anwar unveiled his election manifesto on 25 February, outlining an agenda replete with election sweeteners. He promised free secondary education, lower car prices, an increased minimum wage, and greater oil revenues for Sabah and Sarawak.

Najib revealed his electoral platform on 6 April, proffering his own brand of populist pledges. He promised to raise the annual cash handout for poor households from $165 to almost $400, build one million new affordable homes and subsidise car prices. Najib also delayed the implementation of a goods and services tax which would expand the tax base and ease dependency on oil revenues. The electoral payoffs for these political ploys make it risky for any leader to advocate for long-term fiscal management.

However unpromising this election cycle has been, one policy prescription has emerged that can drastically alter Malaysia's financial future. PR has advocated reforming the country's longstanding quota system favouring Malays, opting instead for a system based on socioeconomic status. Eliminating racial preferences in public contracts could conceivably yield more efficient and useful government investments, and free revenue for the high subsidies PR wants to dole out.

More importantly, this reform will reinvigorate Malaysia's domestic competitiveness and empower truly disadvantaged segments of society. If implemented correctly, it would signal to the international investment community that business in Malaysia no longer runs on cronyism and race-based politics. Touting an improved investment environment could position Malaysia to better compete for much needed foreign investment, easing pressure on the government to drive investment.

To be fair, Najib has taken strides to roll back some of the archaic policies benefiting Malays. In 2009, he overturned a longstanding requirement for certain companies to sell at least 30% of their shares to Malays. But the Prime Minister stopped short of addressing the bulk of preferential racial policies that infuriate ethnic Chinese and Indian Malaysians, particularly those in education and government contracts. The United Malays National Organization is still the most influential party component in BN, essentially guaranteeing that Malay interests will continue to guide the coalition's policies. Regardless of Najib's own ambitions, institutional impediments may prove too powerful to overcome.

Photo by Flickr user Gavin White.

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