Four consecutive years of fiscal deficit does not seem to hindergovernment spending. Aided by higher palm oil and petroleum prices,domestic liquidity remains ample to finance future government expenditureunder the forthcoming 2002 Budget.

Nonetheless, investor perceptions remain a constraint to further increasesin the deficit.

Malaysian Institute of Economic Research executive director Dr MohamedAriff Abdul Kareem said: "The higher prices obtained for crude palm oiland petroleum have a direct impact in expanding the Government's taxrevenue, thereby resulting in a potentially smaller budget deficit.

"A deficit within five per cent of the gross domestic product isacceptable." He added that "the buoyant commodity prices have alsoincreased consumers' disposable income to stimulate private sectorspending. Hence, there is less need for the Government to intervene in theeconomy".

"While a lower GDP resulting from slower growth may reflect a higherfiscal deficit in percentage terms, there is no cause for alarm as theGovernment doesn't have any difficulty financing it.

"Domestic liquidity is high and the Government can still raise moneyabroad as Malaysia's foreign debt is still within manageable limits. Ourforeign credit rating has also improved." Mohamed Ariff said whileMalaysia must attempt not to pumpprime the economy for too long as it wasa stop-gap measure at best, the Government could not afford to balance thebooks for the next year.

"The Government has to stimulate the economy and take the driver's seat. Acombination of reduced taxes to free disposable incomes and an increase ingovernment expenditure would be necessary." Expectations were for a fiscaldeficit of about five to six per cent of the GDP, he said.

Islamic fund-manager Metrowangsa Asset Management Sdn Bhd chief executiveofficer and managing director Dr Ghazali Atan said: "Expectations are forthe Government to limit the deficit to no more than seven per cent of theGDP. A fiscal deficit of six to seven per cent of the GDP should besufficiently stimulative.

"Much depends on the strength of private sector spending and investment.Judicial use of tax cuts as incentives must be made up by an increase inprivate sector investment and consumption.

"The environment for consumption and investment must first be right forthe budget deficit to work and improvement in crude palm oil and petroleumprices will benefit the financing of the Budget." He said that a fiscaldeficit at seven per cent of the GDP was not impossible to finance.

14 August 2001Business Tiimes