[759] Of government debt and misplaced concern

Immediately after the tabling of the Ninth Malaysia Plan (tag), Malaysiakini and a few other bloggers harped at Malaysian government debt. Currently standing at about 45% of GDP, they point that with RM220 billion government spending, the debt will increase to nearly 50%. The problem here is that, usually, people worry but budget deficit, not debt per se. Due to the size of government debt, talking about it does not usually make sense. Therefore, I strongly feel those that think otherwise are parroting Malaysiakini’s sentiment instead of having their own opinion.

The difference between government debt and budget deficit is simple but it is amazing how easily laymen manage to get the two mixed up. So, what is the difference between the debt and the deficit?

Budget deficit or surplus is the difference between government expenditure and government revenue. Government debt on the other hand is the sum of all annual budget deficits. I need to stress that budget deficit is not trade deficit. I haven’t heard Malaysians getting the two mixed up yet but I did hear some Americans making that mistake. Perhaps this is because the US is running both budget and trade deficits. So, it might be easy for those unfamiliar with economics to get the two terms confused. In Malaysia, we have a budget deficit while enjoying a trade surplus. Regardless, the two deficits are totally different matter altogether.

Debt is not necessarily bad. For instance, if you got yourself into debt because you applied for a study loan, that’s a good debt. That’s investment and that will enable to you get a good return. If you got yourself into debt because of your credit card and merely for the sake of fueling your immediate consumption, that’s bad debt. Similarly, getting into debt setting up tangible and intangible infrastructures is good. Such spending has future returns. Getting into debt because the country wants to finance subsidy however is bad. The latter happened in Indonesia last year; the end result was a huge capital outflow. The key point is here return.

Some people argue that this debt will get Malaysia into trouble. Ironically, or hypocritically, the same some people failed to come up with the same reasoning when it comes to fuel subsidy. Supporting subsidy is like throwing money into a black hole. It gives very little economic returns while artificially encouraged consumption. In short, unsustainable. This kind of spending is the one that we need to curb, not those of infrastructure investments that will give back returns in the future.

In economics, there is a concept of intertemporal. It gives us the ability to borrow future income and use it now. The trick is to have reasonable certainty that investment done with future income right now would offer a higher return in the future vis-a-vis cost.

And it gets weirder. When the budget deficit reached 5% a couple of years back, nobody gave a damn. That was a huge issue but nobody gave a damn! Now, people worry about the debt which is supposed to be a small issue. We should worry more about budget deficit rather than the debt itself. But in reality, the opposite is occurring. This is a proof of misplaced concern – we need to prioritize our concerns.

At the same time, getting into debt is usual for a lot of countries. Our northern neighbor, Thailand, for example, according to Wikipedia has debt about 46% of GDP. The United States has about 60% while France has a staggering 70%. But we don’t hear about many people talk about debt – people talk about fiscal or budget deficit instead. Do a search on the internet and see whether Alan Greenspace Greenspan talked more about budget deficit or federal debt. And many of these people that placed too much emphasize on debt size would be very surprised on how much the Japanese government owes.

Just like inflation, I feel many laymen have a real misunderstanding on macroeconomic concepts. Still, I do admit, having no debt is good, like Singapore. Regardless, the crux here is that we should worry more on the budget deficit instead of the debt.

Finally, mildly touching the Ninth Malaysia Plan, I don’t think Penang needs another bridge. I would prefer a larger rail system to a new bridge. Another problem is the government’s fixation with 30% equity for Bumiputra. I heard months ago that the government would impose some sort of Bumiputra equity quotas on foreign firms operating in Malaysia. I’m not sure how that policy has a direct connection with the Ninth Malaysia Plan but I do want to see Malaysia to have a more liberal policy instead.

One that makes me a little bit soft on criticism is the fact that reforestation projects are included in this plan. That would bring in a considerable amount of carbon credits for Annex 1 parties of the Kyoto Protocol’s Clean Development Mechanism. So, I’m a bit satisfied that the environment is finally receiving much needed attention.

Nonetheless, all these are plans. What important is the implementation. At the same time, anything could happen within the next five years.

erratum – Singapore has debt 102% of GDP according to Wikipedia.