The document discusses the challenges faced by the Malaysian economy due to high government expenditure and rising national debt, highlighting a budget deficit that has worsened from 3.1% of GDP in 2007 to 6.7% in 2009. It details the negative impacts of rising household debt and public debt on economic growth, calling for foreign investment to improve budget balance. Furthermore, it outlines how excessive government spending can lead to lower GDP growth rates, increased interest rates, and potential economic crises if not managed effectively.

1. 1. The consequences of high government expenditure and rising debt on Malaysian
Economy.
1.1 Executive Summary
Based on the article, the chief economist of Malaysia Rating Corporation Bhd
(MARC), Nor Zahidi said that there are few major problems that may affect Malaysia’s
future growth. Firstly, he pointed out that Malaysia’s budget deficit is one of the problems for
concern. Although Malaysia’s budget deficit rose from 3.1% of GDP in year 2007 to 6.7% of
GDP in year 2009, a balanced budget can on year 2020 still remain as an unpredictable
situation. Besides that, high level of the federal government guarantees also another risk that
Malaysia facing. He said that national debt of Malaysia increased sharply from
RM55.7billion in year 2005 to RM172billion in 2014. Furthermore, Nor Zahidi pointed out
that another problem Malaysia concern is household debt. As the article states that household
debt remained high compared to household income and a relatively low GDP per capita.
Apart from that, if household debts keep increase in advance, Malaysia’s future growth may
affect.
Based on the journal analyse that public debt has a negative impact to economic
growth over the period 1991 to 2013 in Malaysia. Besides, the other indicators of debt burden
which included budgeted deficit, external debt service and government expenditure, also have
an impact on economic growth. As the journal shows that the other indicators of debt burden
will have a negative relationship with economic growth in Malaysia. Therefore, there is a
need to invite foreign investors to invest so that Malaysia can improve its budget balance in
order to stabilize the public debt.

2. 2. Discussion of topic chosen with the aid of diagram
The topic that we have chosen is the consequences of high government expenditure
and rising debt on Malaysian Economy. The government expenditure consists of government
consumption, investment and transfer payments. Government spending policies is being
setting up to achieve the budget targets, adjusting taxation, and increase public expenditure.
These public tools are very effective in influencing economic growth. Moreover, we
differentiate the government expenditure into four types of economic sectors, which are
education, health, defense, and housing expenditure. Three of this classification, namely
education, health, and defense, are insignificant in affecting economic growth. Only the
expenditure on housing sector significantly affect the economic growth. Diagram 1.0 below
had shown the total Malaysia government spending from year 2014 to January of 2017.
From the diagram above, we have noticed that the government expenditure in
Malaysia has increased from RM45377 million to RM46893 million in Year 2016, and
slightly declined to RM44921 million in January 2017. The main reason to the increment of
government expenditure in Year 2015 mainly because of a backdrop of political turmoil,
dwindling government revenues, a collapsing ringgit and slower growth prospects. The
central bank is also unlikely to lend any support to growth through accommodative monetary
policy as it struggles to support the depreciating ringgit.
In year 2016, the government spending has reached higher of 0.9% than the
expectation from Malaysia budget 2016 mostly on the back on higher civil servant salaries.
Our Prime Minister Datuk Seri Najib Razak has announced the government will give a
special assistance of RM500 to all the estimated 1.6 million civil servants under Budget 2016
(Budget 2016: Civil servants to get special assistance of RM500, 2015). The 700,000
government pensioners would also receive a special payment of RM250. Both payments of
totalling almost RM1 billion will be made in January 2016. The increment of transfer
payment does not affect our country’s GDP but it does rise our government expenditure
tremendously.
Diagram 1.0

3. 2.1 Consequences of rising government expenditure towards Malaysia’s Economy
2.1.1 Low GDP growth rate
Some studies find a positively related relationship between public sector growth and
economic growth of a country. In the context of Malaysia, there seems to be some evidence
that government expenditure did not lead to the growth of GDP. The present structure of
government expenditure is not very conducive to economic growth. One of possible reason is
that Malaysian government has been used these expenditures excessively which lead to
increased taxes or borrowing to finance the government expenditures, and this may hinder the
overall economic performance (Hasnul, A.G., pg11). When government investment spending
growth exceeds its trend-growth, the effects of government investment spending is negative
towards the economy growth. Thus, the growth rate of real GDP is enhanced by smaller
government expenditure.
In Year 2015, Malaysia’s GDP grew at a 5 % annual rate and it is lower as compared
to 6% in Year 2014. The lower oil crude prices has a major impact on the growth rate on
GDP due to the fact that Malaysia is one of the largest crude oil exporter in the world.
Therefore, government has established several measures to reduce the budget deficit by
cutting government expenditure. According to the World Bank, the government has managed
the downturn in commodity prices thanks to a 20.5 percent depreciation in the Ringgit
(Malaysia’s GDP growth beats expectations in 2015, 2016).
In Year 2016, Malaysia’s GDP has only achieved an annual growth rate of 4.5%.
About 92% of real GDP for 2015 was attributed to domestic demand and it is expected to
continue for the next two years. Slower growth in domestic demand is caused by the
slowdown in private expenditures, both for investment and consumption. The slowdown in
private investment is more prominent mostly due to weakened investment flows globally.
2.1.2 Explanation of government debt
When government spending desires exceed their receipts from taxes and other income
sources, it has a budget deficit. It can be financed by borrowing from public sector or from
external governments. Diagram 1.10 had shown Malaysia government debt to GDP from
1990 to 2015. In December 2016, Federal Government’s debt has reached RM630.5bil,
which represents 54.4% of gross domestic product (GDP).
Diagram 1.1

4. Government debt as a percent of GDP is used by investors to measure a country
ability to make future payments on its debt. A high debt-to-GDP ratio indicates an economy
that produces and sells goods and services is insufficient to pay back debts. Government may
borrow in the domestic and international markets to finance government expenditure and
domestic investment to finance its deficit. From 1990 until 2016, government debt-to-GDP in
Malaysia averaged 48.44%, reaching an all time high of 80.74 % in 1990 and a record low of
31.80% in 1997. From 1990 to 1997, the impact on financial crisis on Malaysia in a
devaluation of ringgit lead to a large reduction in GDP of 7% in 1998. This economic
contraction was mainly due to sharp decline in investment and moved the economy into a
recession (The Economist, 2007). Thus, new set of policies were introduced by Malaysian
authorities, the National Economic Recovery Plan (NERP) with the aim of regulate the
international trade of the local currency and the outflow of foreign money.
In 2009, 96% of national debt consist of domestic debt, overtook external debt as a
source of financing its debt. For example, the national debt is mainly domestically financed,
with the government administered pension plan, Employees Provident Fund (EPF) being the
largest holder of government securities (“Gross borrowings expected to decline,” 2010).
However, external debt in Malaysia continue to rise and reached all time high of RM
908,704.13mil in the fourth quarter of 2016 after introducing a new definition in debt
reporting which include external offshore loans, public enterprise and private sector. Najib
stated that the external debt based on new definition, showed the level of Ringgit
denominator security debt held by foreigners comprises two-thirds of the increase of external
debt (Rahmin R, 2015).
2.1.3 Outlook government debt towards Malaysia’s economic growth
When expenditures exceed the level of income generated by the government, the
Malaysia is said to be facing budget deficit. High budget deficit will reduce the economic
growth due to crowd out effect in loanable fund market. In order to finance the deficit,
government can borrow money from domestic or external parties to finance the deficit.
Malaysia had fiscal deficits in past decades, due to the reason of expansionary fiscal policy
that stimulate increase in consumption. In recent years, there is a large increase in public debt
mainly because of the vision 2020 objective to make Malaysia a developed and high-income
country by 2020.
However, high government borrowing will lead to higher interest rates. This is
because government is competing with private borrowers for a fixed supply savings. To
reduce debt load, government will increase the taxes and decrease spending. When external
debt increases, investors may lower down their expectations of returns in anticipation of
higher and progressively more taxes that are needed to repay the debt. This discourages new
domestic and foreign investment as investors may be worried about the capabilities of
Malaysia to pay its debts to the creditors. Also, creditor will ask for higher interest rate as a
safety and profitable measures for them to keep financing the deficits. Hence, when lenders
stop lending, consumption and investment will fall. According to Carmen and Kenneth, a
country with more than 60% external debt out of GDP experiences lower GDP growth rate
per annum by 2%. This is due to the reason that the debt is denominated in a foreign currency
which is fluctuating over time based on the economic condition of the creditors’ countries.
To conclude, Malaysia’s high budget deficit and heavy external debt will lead to the
collapse of commodity price. If debt continue rising, new industries suffer losses and
corporate will go bankrupt, rising unemployment rates and GDP, and banking crisis.

5. 3. Identify and highlight economic concepts exhibited in the article.
In the SunDaily post, Chief Economist Nor Zahidi Alias said that “Malaysia’s budget
deficit fell to as low as 3.1% of gross domestic product (GDP) in 2007 but rose to 6.7% of
GDP in 2009 during the global financial crisis.” (Kok, 2016)
3.1.1 Government Budgeting and Fiscal Policy
A budget deficit is an indicator of financial health (Investopedia, 2015). Budget
deficit present when government spending is exceed the total revenue from all sources. The
term budget deficit is commonly used to refer to government spending rather than business or
individual spending. Government deficit also referring to national debt and the impact of
budget deficit to GDP is predicted to be negative if the deficit crowds out public savings and
encourages resource outflow, while an increase in the budget deficit implies that the
government increases its borrowing from the private sector, and that the government is
borrowing money from its own citizens as well as from international investors through the
financial markets (BizWatch, 2016).
Based on figure above, it shows that Malaysia is running a budget deficit from year
1998 until 2015. For this reason, the Malaysian government has tightened it is fiscal policy
with the fear that the economy of the country would become worse. The fiscal policy was
mainly implemented to reduce the current account deficit and inflationary pressure arising
from the depreciation of the Malaysian currency. However, the government implemented the
fiscal expansionary policy to stimulate the economy. The fiscal measures included
construction activities, establishment of funds to support small-and medium-sized enterprises,
a higher allocation for social sector development and a reduction in taxes. The government
also allocated more funds for socio-economic projects to cushion the impact of the crisis.
Special funds were also established or expanded to provide credit to priority sectors at
concessionary rates (Finance, 2016).
An expansionary policy is a macroeconomic policy that seeks to expand the monetary
policy to encourage economic growth or combat inflationary price increases. It will involve a
higher government spending or lower tax. In economic theory, higher government spending
will increase aggregate demand and lead to higher economic growth. For example, Malaysian
government has increase it is spending up to 55% of GDP. (Suzy, 2017). Besides, Lower
taxes will also increase the disposable income of consumers and lead to a higher levels of
consumer spending. This also increases the aggregate demand and could lead to higher
economic growth. The initiative taken by government is increasing the range of income tax
payable from average monthly income of RM3000 to RM3500.

6. From this diagram, we can see that AD1 shifts to AD2 resulting
the effect of Y1 increase to Y2 and causing P1 increase to P2.
The reason for the increase in real GDP because high
government spending in the market which more money is
flowing back into households as income, thus household having
more disposable income to spend. However this causes inflation
from P1 to P2, this is because higher demand in the economy
and when demand increases people are purchasing more output
than what the economy capacity is and thus bidding up prices of
the existing production.
3.2 Aggregate Demand
Aggregate demand for an economy is divided into four components: consumption,
investment, government spending, and net exports. Changes in any of these components will
cause the aggregate demand curve to shift. The aggregate demand is defined in the equation:
[AD = Consumption + Investment + Government Spending + (exports-imports)]
Being a component of aggregate demand, it would stimulate the economy, as the increase in
Government Spending has a direct impact on total expenditure in the economy, causing a
boost in the economy in the short-run
Similarly, The Overnight Policy Rate (OPR) was reduced to 3.00% from 3.25% in
July 2016 to ensure that the domestic economy continues on a steady growth path amid stable
inflation. Consequently, the weighted average base rate (BR) of commercial banks was
lowered to 3.60% as at end-September 2016 (end June 2016: 3.83%). Similarly, the weighted
average lending rate (ALR) and savings deposit rate of commercial banks decreased by 15
basis points to 5.27% and 11 basis points to 0.96%, respectively (end-June 2016: 5.42%;
1.07%). Following the OPR cut, interest rates on fixed deposits of 1-month to 12-month
maturities eased between 2.87% and 3.07% as at end-September 2016 (end-June 2016: 3.08%
and 3.29%). Below are the interest rates of commercial banks (BNM, 2016).

7. In addition, this suggests that Malaysia would need a continuous improvement in its
budget balance in order to stabilize the public debt. Unless immediate action is taken, there is
little hope that the budget deficit will decline significantly in 2014. For example, expenditure
is made in proportion to the revenue accruing to the public treasury, and a balance is always
preserved. To improve the budget deficit, the Malaysian government needs to monitor each
type of expenditure, such as the expansion of the production and trade facilities, to increase
production and lead to an increase in employment, land and capital resources. The
introduction of goods and services tax (GST) in April 2015 is also meant to increase tax
revenue in order to soften the high budget deficits (Shira, 2016).
3.3 Review on Aggregate Supply
However, in the long run we might expect to see the effect of Cost Push Inflation,
Cost-Push inflation is defined as an increase in production cost causing rising price from
businesses to compensate for their profit margin. In this case, the increasing in government
spending has increased output and thus increasing production, as a result of this more
resources is being used up and causing prices on raw materials or labour to rise .Thus
increasing cost of productions for firms. An example relating the article would be farmers are
able to receive more money and spending it in the market; this would then increase the
demand in the market giving firms an incentive to increase production by buying more raw
materials and hiring more labours to produce more goods. Shown in Figure below
From this diagram, we can see that SRAS1 shifts to SRAS2 as
resources become more scarce/expensive firms now are less
willing and able to supply thus in the short run the supply curve
shifts to the left, resulting the effect of Y2 back to Y1 causing
price to increase even higher.
3.4 Conclusion
Malaysia is running a budget deficit from year 1998 until 2015. Malaysia have
implement expansionary policy in order to decrease the amount of debt. The effect of the
expansionary policy that implemented by the Malaysian government through increasing
government spending is increasing the aggregate demand causing the aggregate demand shift
to right, it also causing the total output of economy increase. In others words, when
government increase its spending, it will cause more money flow back to household as
household disposal income. Hence, income increase causes the expenditure to increase. This
whole process has achieved a stable economic growth.

8. 4.0 Conclusion
In the conclusion, there are some consequences of high government expenditure and rising
debt in Malaysia. First, we find that the government expenditure increased will cause the
reducing of GDP growth rate towards the economy. This is because when the government
investment spending high, government income will decrease. Thus, Government has
introduced GST to boost the income of the country. Moreover, when government debt
increases, it will face budget deficit. This is because government increased borrowing cause a
higher interest rate but lower the private sector. When the percentage of investors is decreases,
the consumption and investment also decrease. Therefore, budget deficit will faced by
government.
One of the main reasons that cause the government expenditure increase is because
Malaysia lack of allocation of resources. Therefore, when the government spending higher,
the budget deficit also higher. If the budget deficit increases, the economic growth will
decrease. This will cause government increase taxes in order to reduce the debt load.
However, many investors will stop to invest in Malaysia if government increases their taxes.
In other words, Malaysia will suffer a lot of crisis if the debt continue rising.
Moreover, Malaysia may implement step-by-step to stable the economic growth with
several methods. Firstly, government may use expansionary policy that encourages the
economic growth. This not only can lower taxes, and also increase the disposable income of
consumers in order to lead higher levels of consumer spending. Furthermore, Malaysia
should continue their improvement in budget balance in order to stabilize the public debt.
One of the methods to improve the budget are to monitor different type of expenditure in
order to prevent exceed used. Besides that, the effect of cost push inflation can stabilize the
economy through increasing government resources and cost of productions for firms.

9. 5.0 Citation
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Finance, M. o. (2016, November 11). Retrieved from Malaysia Budget:
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Gross Borrowings Expected to Decline. (October 15, 2010). The Star Online. Retrieved
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growth: the case of Malaysia. Retrieved March 14, 2017 from
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http://www.investopedia.com/terms/b/budget-deficit.asp
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