Centre for Market Education CEO Carmelo Ferlito, in a statement released today, said that the ceiling is a weak tool which lacks effectiveness and may cause further harm to the populace.
His statement is in reference to the ongoing negotiation between US President Joe Biden and Republican opponents to raise the US debt ceiling and prevent a default.
“Obviously, the agreement will avoid the spreading of a global financial crisis; however, the agreement also reveals the contradiction of having a limit by law (the debt ceiling) which lawmakers can change at their discretion,” Ferlito argued.
Such a mechanism, he said, raises concerns about the efficacy of the debt ceiling as a tool to curb irresponsible deficit spending.
Worse, it may leave ordinary citizens to bear the consequences of irresponsible spending in terms of inflation and unemployment.
Excessive debt harmful
Ferlito warned of the immediate consequences of issuing additional debt which usually pushes up interest rates.
“This has two consequences: on the one hand, the supply of loanable funds rises (savings are attracted by higher interest rates).
“On the other hand, because of the increased interest rate, demand for investments in the private sector decreases: utilisation of savings by the government to finance its deficit will crowd out utilisation of savings for private investment, generating slower economic growth,” he elaborated.
There is also a risk of unconstrained spending whereby governments often resort to expanding the money supply to finance their deficits.
“The increase in the quantity of money allows politicians to support spending policies without imposing new taxes and this is the actual cause of inflation,” he added.
Such policies, he said, not only result in inflationary pressures but also fail to generate sustainable employment, as the structural changes in relative prices caused by inflation exacerbate unemployment in the long run.
Malaysia has been grappling with a soaring government debt, which has risen from RM687 billion in 2017 to RM1.12 trillion in the first quarter of 2023.
This mounting debt burden makes it increasingly challenging for the government to service its debt, jeopardising the nation’s future in terms of limited growth opportunities and potential inflationary pressures.
Balanced budget vital
The situation in the United States, said Ferlito, serves as a valuable lesson for Malaysia.
He cited Nobel Prize-winning economists James Buchanan and Richard Wagner, stating that “budgets cannot be left adrift in the sea of democratic politics”.
“They (budgets) require external constraints that impose coherence and form on decisions regarding size and distribution,” the two economists said as quoted by Ferlito.
Elected officials and bureaucrats need an external and “superior” rule that can mitigate persistent demands for increased public spending without corresponding tax reductions.
Therefore, it is crucial to subject deficit spending to an external rule – which is simple, straightforward and clear – that is not easily modifiable by lawmakers.
Additionally, he argued, it should incorporate an automatic adjustment mechanism in the event of projected budget outlays exceeding tax receipts.
“For example, if the projected balanced budget proves in error and a budget deficit beyond specified limits occurs, federal outlays shall be automatically adjusted downward to restore projected balance within a period of three months.
“Eventual surpluses, instead, should be used to retire existing debt,” he suggested.
Ferlito said that it is imperative for Malaysia to introduce an automatic debt control mechanism that transcends direct control from policymakers.
Such a mechanism would compel the government to reduce spending during deficits and prioritise debt reduction during surplus periods, particularly when the national debt has ballooned over the years.