What is Sustainable Growth in Country’s Debt?

 In Budget 2023, the total debt service charges (DSC) was estimated at RM46.1bil. As a percentage of total government expenditure, the DSC is expected to be at 15.4%. This is already higher than the self-imposed 15% limit that Malaysia has adhered to. Yet, the DSC ratio for Budget 2024 is even higher to 16.4%. The DSC in absolute terms will increase by 8% or RM3.7bil to RM49.8bil.

With total federal government debt continuing to rise, Malaysia’s DSC is only expected to grow over time, as failure to reign in budget deficits will only see the country continuing its debt dependency.

Although the budget deficit is expected to be lower in 2024, running a budget deficit means the government does not have enough revenue to pay for all its operational and development expenses. So what revenue expansion is feasible? We should examine some non controversial taxes for implementation.

The government estimates a budget deficit of RM85.4bil for 2024, which suggests that the government will have to raise almost a similar amount to finance almost the entire net development expenditure (DE) of RM89.2bil. This will see the federal government debt rise to RM1.23 trillion, translating to a debt-to-gross domestic product (GDP) ratio of 62.4%, 0.4 percentage points higher than this year’s level of 62%.

Under the Public Finance and Fiscal Responsibility Bill, 2023 (PFFR), which was approved by Dewan Rakyat, the statutory debt-to-GDP ratio is expected to marginally surpass the ≤60% target as the ratio is expected to be at 60.1% this year and 60.6% next year as seen in Figure 1.

Under the PFFR bill, the government recognised that it needs to spend at least 3% of GDP for DE to ensure economic growth.

Based on the data in the accompanying table, the government spent between 3.5% and 4.1% of nominal GDP between 2018 and 2022 and is expected to spend 5.2% of nominal GDP in 2023, and this will drop to 4.5% in 2024. Overall, between 2018 and 2024, Malaysia’s DE is at about 4.1% of its nominal GDP. 

The short answer seems to suggest so, as Malaysia’s debt expansion more or less mirrors the growth of nominal GDP in absolute terms with the last six years’ average nominal GDP growth at 1.07 times of growth in federal government debt as seen in Figure 2.

Outside the federal government debt, Malaysia has RM221bil in the form of committed guarantees and another RM142.2bil in the form of other liabilities.

Under committed guarantees, the key debts are debts held by transport agencies and they include Danainfra Nasional (RM82.9bil); Prasarana Malaysia (RM42.9bil); and Malaysia Rail Link (RM34.9bil). These three alone account for RM160.6bil or 72.5% of the total committed guarantees.

Although the government intends to pare down its exposure under other liabilities, the numbers over the years have remained relatively flat.

So, what is the threshold for borrowings? If you follow the Reinhart and Rogoff (2010) thesis when debt in advanced economies exceed 90% of GDP, there is a dramatic worsening of growth outcomes. But their threshold (90%) is contentious on statistical errors and combining data across countries. The World Bank suggests a threshold of 77%. In emerging markets, that threshold is 64% which suggests every additional percentage point of debt above that will slow GDP by 0.02%. So, in essence, we are close to the World Bank’s threshold of 64% (of GDP) and we must seriously examine reducing borrowings and/or increasing revenue.

References:

Unsustainable growth in country’s debt, Pankaj C. Kumar, The Star, 28 October 2023

Debt-to-GDP ratio: formula and what is can tell you, Will Kenton, www.investopedia.com 

3 July 2023