Key Points Summary:
The article discusses the need for fiscal reforms in Malaysia in conjunction with the 13th Malaysia Plan.
There is a focus on improving public finance management, increasing revenue collection, and containing unnecessary government spending.
The paper emphasizes efficient allocation of resources and the need to minimize leakages and wastage within public institutions.
The importance of addressing social benefits and subsidies is highlighted, promoting targeted rather than broad-based handouts.
The government is encouraged to enhance productivity, stimulate economic growth, and enable service expansion within fiscal constraints.
Fiscal reforms should support the development of public goods and social assets, which promote overall societal well-being and long-term growth.
The author calls for better management of the public sector workforce, including performance evaluation and cost control.
The article concludes that continued fiscal discipline and reform are critical for sustainable growth, effective delivery of services, and achieving the goals set out in the 13th Malaysia Plan.
Why these constraining constraints? Because this is what reforms mean. The starting point here is that by 2023, when the FRA (Fiscal responsibility Act) came into effect, total federal government debt was RM1,173 billion. Debt servicing expenses in 2023 were RM46.3 billion, which was larger than the total personal income tax collected that year, which was RM37.8 billion. Beyond that, there were also liabilities incurred from the guarantees extended to public entities totalling RM326 billion at the end of 2024, some of these requiring the Treasury to service the debt, thus eating into the annual budget. The FRA forces the government to decide on trade-offs — a smaller deficit 3%of GDP requires either higher revenue or less expenditure, or some combination that obtains the targeted deficit. We cannot go on the existing trajectory without risking a sovereign downgrade, which would be disastrous for the economy.
Malaysia currently faces several critical fiscal challenges that require urgent attention. Our analysis reveals that Malaysia's fiscal sustainability index stands at 57.3 compared to Singapore's exceptional 93.6 on a 100-point scale. This significant gap reflects structural weaknesses in three key areas: revenue diversification, expenditure efficiency, and debt management.The most pressing concern is Malaysia's heavy dependence on oil and gas revenues, which constitute approximately 25% of total government revenue, making our fiscal position highly vulnerable to commodity price volatility. Additionally, our operating expenditure consumes 80% of the total budget, severely limiting resources available for development investments that could drive long-term economic growth.
Propose the following strategic initiatives:
1. Revenue Diversification and Sustainability
Immediate Priority: Reduce Oil Revenue Dependency
Malaysia should establish a target to reduce oil and gas revenue dependency from the current 25% to 15% by 2030. This can be achieved through:
•Carbon Tax Implementation: Introduce a comprehensive carbon pricing mechanism starting at RM 10 per tonne CO2, potentially generating RM 3-4 billion annually while supporting Malaysia's climate commitments.
•Digital Economy Taxation: Expand digital services tax coverage to capture revenue from the rapidly growing digital economy, targeting RM 1.5-2 billion in additional annual revenue.
•Tax Base Broadening: Gradually reduce the personal income tax exemption threshold from RM 35,000 to RM 25,000, bringing more Malaysians into the formal tax system while maintaining progressivity.
2. Expenditure Restructuring for Development
Transform Budget Composition
Malaysia should restructure government expenditure to shift from 80% operating costs to 65%, thereby increasing development expenditure from 20% to 35% of the total budget.
•Civil Service Modernization: Implement comprehensive digital transformation to achieve 5-8% efficiency gains while maintaining employment levels and service quality.
•Subsidy Targeting: Replace blanket subsidies with targeted assistance for the bottom 40% of households, potentially saving RM 6-10 billion annually while better protecting vulnerable groups.
•Performance-Based Budgeting: Link budget allocations to measurable outcomes and establish 3-year rolling budget frameworks for improved planning and accountability.
3. Debt Management and Fiscal Discipline
Restore Fiscal Credibility
With Malaysia's debt-to-GDP ratio currently at 65%, exceeding our self-imposed 60% ceiling, immediate action is required to restore fiscal credibility.
•Malaysia Future Fund Establishment: Create a sovereign wealth fund similar to Singapore's model, initially capitalized with RM 50 billion from oil revenue surpluses and asset monetization.
•Debt Reduction Pathway: Implement a clear trajectory to reduce debt-to-GDP ratio to 55% by 2030, creating substantial fiscal space for future challenges.
•Independent Fiscal Council: Establish an independent body to provide fiscal oversight, sustainability analysis, and policy recommendations, enhancing transparency and accountability.
4. Tax Policy Competitiveness
Enhance Economic Competitiveness
Malaysia should gradually reduce the corporate tax rate from 24% to 20% by 2028 while maintaining revenue through base broadening and enhanced compliance.
•Anti-Avoidance Measures: Strengthen transfer pricing enforcement and implement minimum tax provisions for large corporations.
•Investment Incentive Optimization: Streamline and target incentives toward high-value activities such as research and development, digitalization, and green technology.
Learning from Singapore's Success
Singapore's fiscal excellence stems from four key principles that Malaysia can adapt:
1.Constitutional Fiscal Discipline: Singapore's balanced budget requirement provides a strong anchor for fiscal policy
2.Innovative Revenue Generation: The Net Investment Returns Contribution mechanism transforms reserves into sustainable revenue
3.Expenditure Efficiency: Outcome-based budgeting and performance management ensure maximum value from public spending
4.Professional Reserve Management: Long-term investment strategies generate substantial returns while preserving capital
While Malaysia cannot directly replicate Singapore's model due to different economic structures and political systems, we can adapt these underlying principles to our context.
Economic and Social Benefits
Implementing these recommendations would yield significant benefits:
•Enhanced Fiscal Sustainability: Reduced vulnerability to external shocks and improved crisis preparedness
•Increased Development Investment: More resources for infrastructure, education, and innovation
•Improved Economic Competitiveness: Lower corporate tax rates and streamlined incentives
•Better Social Outcomes: More targeted and effective social protection programs
•Strengthened Institutions: Enhanced transparency, accountability, and governance quality
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