Government Debt – Of Surplus and Deficit

Somehow, the debate regarding government debt is heating up since last week. No surprise there.

The best part of this whole story is, there is a petition, asking for people to ‘crowdfunding’, in order to pay off government debt. The intention is nice. But in reality, it is similar to asking some money from your father to buy a present for his father’s day.

First, let me introduce by how government financing works. For the government to spend, there are few ways:

  1. Through revenue collection – This is straight forward. The government collects money through income taxes, consumption taxes (such as GST), petroleum taxes, and etc. With the money collected, they will use it to spend.
  2. Through debt financing – So the government issues bonds, and banks/corporations/retirement agencies buy those bonds.
  3. Through loans – Similar to how you apply for a housing loans. You go the bank, and apply for that loans. In the end of the day, you will pay the loans, plus interest.

Now. Logically speaking, you would say “we should only spend when you have the money.” I would agree on that statement on certain extent. The reality is, the government financing doesn’t really work that way. The government should keep spending to make sure the economy is functioning. (Read Keynesian Economics).

The next question is, should the government run a fiscal surplus (where they save more than they spend), or fiscal deficit (where they spend more than they save). That goes back to my previous point where the government ‘should keep spending’ to keep the economy running.

In the case of Malaysia, the only time when we had a fiscal surplus was back in the 1994-1998. This was because the country’s economic growth was booming at 9% per annum in the early 1990s. So the need to save more than you consume at this moment is fine, in order to cool down the economy.

Malaysia Government Surplus_DeficitScreen Shot 2018-05-27 at 11.14.13 PM

Theoretically speaking, having a fiscal surplus means the government is holding on to their money, instead of pumping them in into the economy. There are other macro effects on this:

  1. For the government to reach to a fiscal surplus, there are two ways: (i) Higher taxes, or/and (ii) lower spending.
  2. Lower spending – When the government decided to run a fiscal surplus, this could mean the government will hold on to investing in the public segment (trains, highways).
  3. This could dampen growth numbers. If the government doesn’t spend, the economy will slow down.

Having a fiscal surplus is not really a bad situation to be in. Singapore’s fiscal management is good example, where they accumulate surpluses for few years, and then spend it later. This is why I think Singapore’s fiscal spending policy is probably the best system to practice, but I doubt we will use that framework in the future.

One common mistake is that, people feel it is a bad idea for government to borrow. To be frank, government debt is not the same as household debt. Government borrow to fund its investments (which will benefit the economy in the future). Households borrow to fund mortgages, car loans. These are two separate concepts.