Economist: Rules to instil fiscal discipline needed

KUALA LUMPUR: Malaysia needs to introduce fiscal rules which would impose more discipline on the government, said an economist.

Dr M. Sohrab Rafiq, assistant vice-president, Khazanah Research and Investment Strategy, Khazanah Nasional Bhd said the country may not be optimising its fiscal policy by expanding fiscal expenditures during boom times.

"The productivity of a country and how it competes on the international stage determines the living standards of Malaysians.

"One way to improve the standard is to focus on investment which is lacking here. So it is critical," he said after presenting a paper on "Fiscal Policy in Good and Bad Times" at the Malaysian Institute of Economic Research, National Economic Outlook Conference 2012-2013 recently.

Rafiq said although government investment spending tends to have larger multipliers than government consumption spending, Malaysia has not used its spending to improve long-run productivity, which has resulted in more concentration on government consumption than investment.

"As the economy grows, government spending has been rising as well. An optimal condition suggests that when the economy is growing, it doesn't need further support from the government, therefore it shouldn't expand its expenditures.

"But the opposite happens here. Essentially, you want to come to a situation when the economy is not growing, the government should spend, so during good times, you want the government to save while in bad times, to spend.

"For example, when a Mercedes Benz car is bought for a minister, that's classed as government consumption. This sort of spending is not productive and not good for the economy's long-term health," he said.

The effects of fiscal policy on economic activity in emerging market countries are very little known or not understood at all, he pointed out.

"There is very little theoretical or empirical research in fiscal policy here and it has become increasingly procyclical since the 1997/98 Asian financial crisis," he said, adding that procyclicality in fiscal policy distorts the effectiveness of fiscal actions. Bernama