The sustainability of budget deficit and public debt in Malaysian economy: The government intertemporal budget constraint

Abstract

Malaysia has been in a budget deficit for over a decade. Prolonged budget deficits may hinder Malaysia’s economic growth and could expose the country to financial and economic instability. An excessive budget deficit could also continue to increase the Malaysian government debts over time. If the debt reaches the unsustainable level, this could lead to sharp adjustment, if not a crisis. This paper empirically evaluates the fiscal sustainability of Malaysia using intertemporal budget constraint framework. Specifically, this paper evaluates the capability of the Malaysian government in managing their budget deficit and public debt in the long run while remaining solvent using quarterly time-series data spanning the years 1990 and 2015. The estimation techniques (Unit root, Multivariate cointegration test, and OLS) were employed to ensure the robustness of the results. The findings from the analysis indicates that the fiscal stance in Malaysia is weak sustainability. This finding suggests that reducing the size of government spending may improve the fiscal budget deficit to undergo changes in the overall strategy. The findings suggest that this process has, in fact, been sustainable and point to prudent public sector policies by the fiscal authorities.