The bank’s lead economist for Malaysia, Apurva Sanghi, said two other fiscal reforms – the enactment of the Fiscal Responsibility Act (FRA) and pension reforms – had not received much attention.
He said the FRA was a major missing piece in Malaysia’s “macro armour”, linking revenue and spending to “keep the fiscal ship steady”.
“The FRA requires tax expenditure statements to cut down on wasteful tax breaks. It sets out four rules on debt and deficits, pushing for more responsible fiscal spending, and more,” he said in a post on X.
However, Apurva said the current debt ceiling set by the FRA might be too high and could benefit from a review or adjustment to align better with practices in other countries.
He said the current ceiling of 60% of the gross domestic product was somewhat lenient compared to the 45% in some other countries.
“The FRA is vague on what triggers ‘escape clauses’ during crises like pandemics or disasters, the allowed deviations, and the return path to normal. Enhancing such clauses would help.
“Instead of relying solely on a fiscal policy council comprising the prime minister, deputy prime minister and other ministers, an independent secretariat, like those in Brazil, Chile or the European Union, could better ensure unbiased oversight of FRA compliance,” he said.
Apurva also said the proposed pension reform phases out the “defined benefits” (DB) scheme for new civil servants, replacing it with a “defined contribution” (DC) scheme. This should make pension spending more sustainable.
Under the DB scheme, the state covers retirement income, with civil servants getting a slice of their pre-retirement salary at 60%.
“But this won’t be available to new recruits. DC schemes shift the retirement saving responsibility to employees. This makes it easier for the state to handle unfunded liabilities,” he said.
Apurva believes that the main risk for Malaysia would be transition costs.
“The government still has to pay out under the old scheme, while contributing to the new DC scheme. Plans on how this transition will be managed are unclear at present,” he said.
He said many countries, including Hong Kong, China and India, have moved from DB schemes to DC schemes, while Singapore has always had a DC scheme covering both public and private sectors.