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Can government deficits and debt be good for Malaysia?

Those who complained about government debt don’t understand the simple concept of one’s assets are other’s debts and one’s debts are other’s assets.


This works exactly the same in public finance.


Government borrows money by issuing bond to the private sector (investors) and in return investors own the bond as an asset and will receive half-yearly interest payments from the government until the bond matures.


Government bond (debt) is private sector’s asset.


When the government reduces its debt, by repaying more than taking new debts, there will be fewer debts for private sector to buy/own.


Pension fund, retirement fund, insurance and takaful companies which are among the biggest goverment bond investors will have to resort to riskier assets such as equity and corporate bonds as supply of safe assets (government bonds) become limited due to government’s effort to reduce its own debt.


The same concept applies to (government) budget balance (surplus/deficit).


One’s spending is other’s income, one’s income is other’s spending.


Government spending is private sector’s income, government’s income is private sector’s spending (tax).


When government registers a deficit budget in one particular year, that means government is spending more than it raises revenue, in other words, government is giving more money to the private sector (households and firms) than it collects taxes from the private sector in that particular fiscal year.


On the flip side, if government registers a budget surplus, that means government is raising revenue more than it spends, in other words, government is collecting taxes from households and firms more than it gives back to the private sector.


Which one of the scenarios will benefit us?


Government budget surplus or government budget deficit? Government collects more taxes from us or government spends more for us?


I don’t know about you guys but personally I don’t want government to tax my hard earned money more than it spends on me.


What if the government saves by reducing its deficit and debt, and private sector too saves by spending less and saving more?


Malaysia’s economic growth won’t reach its full potential if every sector in the economy saves.


Somebody needs to spend to get the economy going.


When government saves, private sector has to dissave and in turn will take up more debt for example higher household debt.


When government dissaves, private sector can reduce its liabilities and starts deleveraging and fix its balance sheet especially households.


When the federal government ran a budget surplus during the 90s when Anwar Ibrahim was the finance minister, our country as a whole ran a deficit in current account.


Private sector especialy businesses debts skyrocketed as government saved.


When the Asian Financial Crisis hit us, private sector experienced a long painful deleveraging era and when the finance minister resorted to tight fiscal measures – bigger spending cuts the economy contracted badly, people lost their jobs, factories closed, some lost their homes and many hardships experienced by the private sector, business and household.


The economy didn’t really recover until the government reversed its course by spending more and increasing budget deficit and taking up more debt after the failed tight fiscal policy.


As long as the private sector deleverages and saves, government needs to run budget deficits for the economy to reach its full potential.


Government deficits and debts also give an opportunity for the private sector to fix its own balance sheet that is reducing its own debt.


EPF, KWAP, insurance/takaful firms need and demand safe assets to be invested in which is none other than government bonds.


That means government needs to issue more and more bonds to fulfill their demands.


Since EPF is offering an alternative shariah account for the future retirees, government will need to issue more shariah-compliant government securities such as government investment issues (GII) to meet potential demands from EPF in the near futures.


Government finance doesn’t work like household finance.


Just because you need to save, doesn’t mean government has to.


Malaysia is in control of its own monetary sovereignty (Bank Negara controls monetary policy) unlike Greece who surrendered its monetary policy decision making to the European Central Bank (ECB) when it decided to join the monetary union (Eurozone) many years ago.


That’s why Greece is what Greece is today.


Malaysia will never go bankrupt like Greece.


Let us start embracing the fact that controlled and sustainable government deficits and debts are good for us the private sector and the economy as a whole.


Don’t listen to the politicians who know nuts about public finance.


#Bajet2017 #Budget2017



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