In recent years, Malaysia has observed a notable increase in its national debt as a percentage of GDP. The projected escalation from 2023 to 2028 is concerning, potentially reaching 69.97% in 2028. Moreover, there was a substantial rise in debt from 67.72% to 69.31% of GDP in 2020. The mounting burden of the national debt has given rise to significant concerns about its potential implications for the nation’s economy.
Singapore, a developed country, faces an even more significant challenge with its government debt-to-GDP ratio, offering valuable context for Malaysia’s situation within the ASEAN region. As of the fourth quarter of 2022, Singapore’s ratio reached 167.80%, and it remained essentially unchanged at 167.70% in the first quarter of 2023. Does this mean that the country will be plunged into economic predicaments? While Malaysia’s debt-to-GDP ratio is lower than Singapore’s, higher national debt is still a subject of concern.
There may be a number of economic repercussions from rising debt levels. As the debt-to-GDP ratio rises, it could result in greater interest payments, taking money away from worthwhile investments and critical public services. Additionally, a greater debt load can lower investor confidence and raise borrowing rates for both the public and private sectors.
The impact of larger government debt on the economy depends on how the borrowed funds are used. The nation can reap enormous benefits when the debt is used to fund worthwhile projects like R&D efforts, renewable energy projects, or expenditures in education and skill development. These investments have the potential to promote innovation, strengthen human capital, and increase the country’s competitiveness on the international stage.
In addition to funding infrastructure projects like roads, schools, and hospitals, public debt can also be directed towards strategic industries, technological advancements, and support for small and medium-sized enterprises (SMEs). By doing so, the government can create a robust ecosystem that fosters entrepreneurship, boosts job creation, and drives economic growth in the long term.
Furthermore, investing in social safety nets and healthcare systems can positively impact the economy. These initiatives can lead to a healthier and more productive workforce, reducing the burden on the healthcare sector and increasing overall labour productivity.
One crucial aspect to consider is the quality of investments. Merely pouring funds into projects without proper planning, implementation, and oversight can lead to cost overruns, delays, and even corruption. Therefore, ensuring transparent governance, accountability, and efficient project management is essential to maximize the benefits of public debt-funded investments.
Conversely, suppose the borrowed funds are used for unproductive purposes, such as financing unnecessary bureaucratic expansions or inefficient subsidies. In that case, it can exacerbate the debt level and place a strain on the overall economic health. Inefficient allocation of resources can lead to mismanagement and a waste of valuable financial assets that could have been put to better use in addressing pressing societal needs.
The government should adhere to prudent fiscal policies to safeguard against the adverse effects of public debt. This includes implementing debt sustainability frameworks, regularly monitoring debt levels, and having clear strategies to reduce debt over time. Conducting rigorous cost-benefit analyses before initiating projects can help ensure that public investments generate substantial returns and contribute positively to the economy.
In a nutshell, prudent borrowing decisions are inextricably tied to the effects of rising governmental debt on the economy. Prioritising productive investments can create a positive feedback loop of economic prosperity, greater tax income, and debt reduction. These investments should support growth, innovation, and human capital development. Conversely, rash spending on wasteful projects can deepen economic problems and obstruct a country’s development. The government may make the most of public debt to ensure its population’s successful and sustainable future by practising caution, openness, and accountability.
Amri Sulong and Dr Mohd Shahidan Shaari are lecturers at Polytechnic Seberang Perai and Universiti Malaysia Perlis, respectively.