More pump priming, protecting and creating jobs
Published on: Tuesday, October 20, 2020
By: Bernama
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Kuala Lumpur: Coming off a second-quarter slump, businesses and households are now grappling with high numbers of Covid-19 pandemic cases which have lad to movement curbs, making Budget 2021 a tough call and a crucial one.

The government is expected to continue with its pandemic relief and stimulus initiatives, making it none other then another expansionary budget to sustain the recovery process, albeit slowly as the country faces headwinds from the third wave of Covid-19 infections.

“The disproportionate economic and health impact of the pandemic on the low-income households would need to be addressed with bolder fiscal measures,” Sunway University Business School professor of economics Dr Yeah Kim Leng said.

The budgetary measures should include larger income support, as well as, stronger measures to protect jobs, create new ones and to have reskilling programmes to improve the livelihood of the rural and urban poor, he told Bernama in an email interview.

Echoing Yeah, the UOB Global Economics and Markets Research in its budget preview said that Budget 2021 should be focusing on mainly caring for the people, steering the economy, enabling sustainable living and enhancing public service delivery.

Its senior economist, Julia Goh and economist Loke Siew Ting said the stimulus measures in 2020 (including wage subsidies, cash aid for the bottom 40 per cent of the household income group (B40) and M40, automotive sales tax exemptions and property-related measures) may be extended into 2021.

These would be supported by new measures to boost consumption, stimulate investment, accelerate digitalisation, improve job creation and wages, and promote environmental sustainability, they said.

They also expect Bank Negara Malaysia (BNM) to keep its policy rates on hold in the near term.

An expansionary budget refers to when a government enlarges the money supply in the economy either by ways of increasing spending or cutting taxes, aimed at providing the people and businesses more money to spend.

By giving more money to the people, especially to the B40 and M40, it could fuel the people’s purchasing power, and at the same time it could reduce unemployment which later on could also spur consumers’ spending, thus boosting the economy.

In the United States, for example, under the administration of President Donald Trump, it uses the expansionary policy through the Tax Cuts and Job Act of 2017 and also increased discretionary spending mainly for defence.

The economists agreed that the advantages of an expansionary fiscal policy, if done appropriately, can work fast.

Among others, the tax cut can put more money into the hands of consumers, although those in the higher-income brackets preferred to use their tax cuts to save or invest, which does not help spur the economy.

What is crucial is that the expansionary fiscal policy helps restore consumer and business confidence which is critical, especially for Malaysia, an open and diversified economy.

The disadvantages are that the tax cut will reduce the government’s revenue, and create a budget deficit and straight to its debt. Malaysia, following the anticipation of a higher-fiscal deficit this year amid the fiscal injection into the economy, has recently raised its debt-to-gross domestic product ceiling to 60 per cent from 55 per cent.

The country will have a fiscal deficit of 5.8-6.0 per cent as expected, due to the fiscal measures injected.

To recap, since the start of the pandemic, Putrajaya rolled out stimulus packages worth RM305 billion to help the people and businesses tide over the impact of Covid-19.

Under the previous government, Budget 2020 saw an expenditure allocation of RM297 billion, excluding RM2 billion reserved for contingencies, compared with RM277.5 billion in 2019.

It comprised operating expenditure of RM241 billion and development expenditure of RM56 billion.

BNM deputy governor Jessica Chew said that Malaysia’s financial system today allows the authorities to respond to current critical times and continue to support the economy, be it businesses or households.

As at end-June 2020, the total capital ratio of the banking system stood at 18.3 per cent with an aggregate excess capital buffer of RM122 billion, while the liquidity ratio was 149.2 per cent.

The current banking system is substantially stronger compared with the time of the Asian financial Crisis (AFC) in 1997/98, with 18 per cent capital ratio (AFC – 10 per cent), which is due to stronger lending standards, she said in the recent virtual briefing, in conjunction with the release of the Financial Stability Review – First Half 2020 last week.

She added that Malaysia’s bond market is also much more developed compared with during the AFC period, therefore the degree of concentration of economic dependence for funding on the banking system has reduced.

Bank Islam Malaysia Bhd chief economist Mohd Afzanizam Abdul Rashid is of the view that the government’s Bantuan Sara Hidup (BSH) is a short-term measure and it is not meant for a total solution to the current problems faced by the lower-income group.

“For social upward mobility to happen, education is extremely critical. There are also issues on digital divide, entrepreneurship and health. So one should look holistically in respect to government measures,” he explained.

He said certain measures would receive greater limelight and this situation could overwhelm the existence of other measures which are equally important.

Therefore, the role of effective communication is also key to disseminating the right information to the targeted group.

Mohd Afzanizam also foresees that jobs would still be at risk with the third wave while debt levels are likely to go to a higher rate than the 60 per cent that was revised recently.

“Our debt level used to be higher in the 1980s but it was a different era. Now our economy is more healthy backed by the strong bond market, institutional investors like pension funds, insurance, banks and asset managers to cushion the market,” he said.

On a cautious note, Mohd Afzanizam said the government needs to be flexible with its approach to handling the health crisis, saying that the country may be heading towards a K-shaped (recovery), which refers to the lower-income group and unskilled workers to be most affected and would take a while to rebound.

“I think it would exacerbate income and wealth inequality, which may look like a ‘K shape”. To quote US presidential candidate Joe Biden: “K means those at the top are seeing things go up, and those at the middle and below are seeing things go down and getting worse.”

The K-shape recovery happens just when an economy recuperates unevenly, and there is a separate trajectory for the two segments of the society. 

Malaysia’s neighbour, Singapore was also reported to have experienced a K-type recovery following its third-quarter (Q3) rebound, with information technology (IT), advanced manufacturing and financial services leading the way, while other sectors likely to suffer a more prolonged impact.

Similarly, Malaysia’s economic activity outcome for the Q3 too is expected to rebound, the Department of Statistics Malaysia said.

This is mainly driven by the manufacturing, automotive, IT, financial and healthcare sectors, while tourism-related sectors are expected to experience a slow recovery.

Malaysia is poised for a better growth next year with a 5.5 per cent to eight per cent growth in 2021 from the growth forecast for 2020 of between -3.5 per cent and -5.5 per cent.

The country’s unemployment rate fell to 4.7 per cent in July, down from 4.9 per cent in June and 5.3 per cent in May.

While the numbers look promising, it cannot be taken for granted.

It is time for the government to be consistent in addressing pressing matters such as protecting jobs, creating more (jobs) and safeguarding the people’s well-being. 


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