Transparent fiscal discipline

The unveiling of the national budget tends to upstage everything else. Not many people in Malaysia are aware that two days before Budget 2024 was tabled in the House of Representatives on 13 October, the chamber had passed a bill to improve discipline and transparency in how the government manages fiscal policy and public finances.

The Public Finance and Fiscal Responsibility Act is a vital component of Malaysia’s ongoing fiscal reforms, but once the details of next year’s budget had been announced, there was little chance of the legislation becoming a hot topic. There is ample time for that to happen, though. The bill must go through the Senate between late November and mid-December, and will probably come into force next year.

Meanwhile, it is important for people to understand that the law will be at its most effective when the business world and civil society are familiar with its objectives and provisions. Because it took so long for the bill to reach the lawmakers, there is much work to do to reacquaint the public with it.

The first public announcement of a fiscal responsibility law came when Budget 2019 was tabled in November 2018. This was six months after a general election that ended Barisan Nasional’s decades of dominance as the ruling party.

Discipline

In his Budget 2019 speech, Lim Guan Eng, finance minister at the time, said the government would implement institutional reforms that promoted transparent fiscal discipline, and these included tabling a fiscal responsibility law by 2021 ‘to avoid reckless mega spending that engenders mega debts’.

Lim was not wrong about the law’s broad purpose but he did not come close to explaining how it could make a difference. For a definitive take on this, we should turn to the International Monetary Fund (IMF), which provided technical assistance when the Malaysian government was drafting the bill.

In its 2013 book Public Financial Management and Its Emerging Architecture, the IMF defines fiscal responsibility laws as ‘legal frameworks that embed in law an agreed-on set of policies, processes or arrangements intended to improve fiscal outcomes, discipline, transparency and accountability by requiring governments to commit to fiscal policy objectives and strategies that can be monitored’.

It adds: ‘These legal frameworks can be part of budget system laws, but such laws frequently have a much wider scope encompassing the whole public financial management process. In the past, however, budget laws have often neglected the fiscal policy process and have thus generated the need for many countries to develop separate fiscal responsibility laws.’

Four big targets

The Covid-19 pandemic delayed the introduction of the law by two years, but it is finally set to happen soon.

The law provides for the responsibilities, accountability, governance and transparency of the government in managing public finances and fiscal risk, specifically in relation to revenue, expenditure, borrowing and debt.

Likely to get the most attention are the four fiscal targets listed in the act’s first schedule: annual development expenditure incurred of at least 3% of GDP, a fiscal deficit ceiling of 3% of GDP, debt level not exceeding 60% of GDP, and financial guarantee capped at 25% of GDP.

If these targets are not met, the act requires the finance minister to submit a fiscal adjustment plan for the approval of the House of Representatives.

The act will also cover the finance minister’s reporting obligations and the rules on the Fiscal Policy Committee.

Curiously, though, the act will apparently not include sanctions, although finance ministry documents in 2021 and 2022 included sanctions as part of the proposed fiscal responsibility framework.

With or without sanctions, the act should serve as a warning that the law should never be subordinate to political and selfish calculations, especially in the management of public money and the economy.

But we too have a part to play. Here is a reminder from another IMF book, called Promoting Fiscal Discipline: ‘Fiscal responsibility laws cannot buy credibility. Credibility ultimately depends on society’s consensus and support for prudent fiscal policy.’