How will expenditure rationalisation support fiscal consolidation?

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Expenditure Rationalisation as a Key Driver for Fiscal Consolidation

The Malaysian government's strategy to achieve its medium-term fiscal deficit targets relies primarily on expenditure rationalisation, given the limited scope for new revenue measures. This approach aims to reduce the fiscal deficit by controlling and optimising government spending. While specific details on the types of expenditures to be rationalised are not explicitly outlined, the overarching intention is to manage the nation's finances more prudently over the coming years.
Focus on Expenditure Control for Deficit Reduction

The government has set a fiscal deficit target of 3.2 per cent of GDP for 2020, a slight increase from previous projections. Looking ahead, the Medium-Term Fiscal Framework (MTFF) projects an average fiscal deficit of 2.6 per cent of GDP for the period 2021-2022. Achieving these targets, particularly the projected 2.6 per cent for 2022, is considered challenging by analysts. The absence of significant new revenue-generating initiatives for 2020 underscores that expenditure rationalisation is the principal mechanism expected to drive this deficit reduction.
Revenue Growth Projections and Potential Upsides

While expenditure control is central, revenue growth is also projected to increase. The MTFF targets total revenue at 15 per cent of GDP, with an estimated 15.2 per cent for 2020. For 2021 and 2022, revenue growth is anticipated to average 4.2 per cent annually, a notable increase compared to the 2.3 per cent average growth seen between 2016 and 2020. Any unexpected positive developments, such as more effective tax collection or the introduction of new taxes, could potentially ease the pressure on the need for expenditure rationalisation.
Broader Context of Fiscal Consolidation Challenges

The commitment to fiscal consolidation is acknowledged, with the budget deficit having shown a gradual decline since 2009, falling from a high of 6.7 per cent to the projected 3.2 per cent for 2020. However, the prospect of reaching a balanced budget within the next three years is viewed as a difficult undertaking. This difficulty is compounded by the prevailing global economic and market uncertainties, as well as the volatility of commodity prices, which can impact government revenues and fiscal planning.

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How will expenditure rationalisation support fiscal consolidation?

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