Geoffrey Williams of the Malaysia University of Science and Technology said the government should ensure that the debt is financed at the lowest cost and is not crowding out funds for use by the private sector.

He was responding to auditor-general Nik Azman Nik Abdul Majid, who had described the government’s practice of relying on new loans to finance the repayment of loan principals which have matured as “worrying”.

“Half of the new borrowings were used to pay loans which have matured, when they should be paid with surplus revenue,” Nik Azman told reporters at the Parliament building yesterday following the tabling of the Auditor-General’s Report on the Federal Government Financial Statement as well as the 2020 Federal Ministries and Departments Compliance Audit.

Williams said, however, that using new loans to repay maturing loan principals was a reasonable method if there were lower financing costs on the new loans, or if the final amount owed was lower.

But, he said, there were risks that debt financing may take up an even larger portion of the federal budget, taking away spending for other items or priorities like health and social welfare.

The government may run into this risk if the total loan principals owed after taking these newer loans remained the same while additional borrowing was still being taken on, he said. This would, in turn, end up increasing total national debt.

“The government will then be committed to continuing repayment costs in the long-term.

“For example, 16.5% or RM39 billion of the 2021 budget in Malaysia is used to finance debt. This is higher than in 2019, when it was 12.5% or RM32.9 billion.

“This could be used for something else, such as health or social welfare, if there was less debt,” he said.

He said this would mean that at times of crisis, the government would have less fiscal space and may push the burden onto the people, for example, through EPF withdrawals.

Williams also noted that Malaysia ran a deficit budget even during “normal” times, making debt financing through surplus revenue “undoable”.

He said, however, that Malaysia’s debt was still manageable with a relatively modest debt-ratio. “Financing is still manageable if the economy can recover.”

Meanwhile, Carmelo Ferlito of the Center for Market Education (CME) warned that higher government spending through an increase in borrowings may lead to a misallocation of resources and could result in inflation.

“Government borrowing and spending can also alter the structure of relative prices, because with its spending, the government may cause prices to move in a direction that is not necessarily dictated by consumption choices in the market,” he said.

Ferlito said increased government borrowing would push interest rates up and crowd out private investments, which would suppress opportunities for entrepreneurship and development.

“The government has spent beyond its means and the central bank has kept interest rates extremely low. This has created an abundance of money supply.

“When money supply grows more than output and when the spending is not covered by revenues, then inflation appears,” he said.