Unhealthy to raise debt ceiling above 55% of GDP, economist warns

PETALING JAYA: An expert has warned of worsened economic problems if the government were to take up former prime minister Najib Razak’s proposal to raise the statutory national debt limit to above 55% of gross domestic product.

Carmelo Ferlito, an economist with the Institute for Democracy and Economic Affairs (IDEAS), said such a raising of the debt ceiling would not drive the economy on a healthy recovery path.

“How will we sustain deficit spending? What if we artificially push demand in a direction not indicated by the market?” he asked.

Speaking to FMT, Ferlito called for an economic action plan with longer term benefits.

He said Putrajaya should look towards opening the country’s borders, at least to countries in Southeast Asia, to enjoy a bigger and more integrated market.

He also repeated his call for the sales and services tax (SST) to be replaced with a “reformed” goods and services tax (GST) as part of Putrajaya’s tax reforms.

In a previous interview, Ferlito suggested a 10% GST rate for luxury goods, a 3% rate for “key development items” related to culture and education, zero rating for basic goods regularly consumed by the lower-income group and 6% for other items.

He said income tax rates could be reduced at this time.

He also called for reforms that would see government-linked companies (GLCs) opened up to the market so their activities could be rationalised.

He agreed with other critics that numerous political appointments to GLCs by the new government seemed to work against this direction.

Another economist, Yeah Kim Leng of Sunway University, said Putrajaya must ensure that its total liabilities remain between 60% and 80% of the GDP and its debt servicing burden below 20% of the nation’s yearly revenue.

“On both metrics, we are close to the upper limits,” he told FMT.

He warned of a shortage of funds for social and development spending if the government were to spend 20% of its revenue to service debts.

“If the debt level is high, the government will have less room to manoeuvre should there be a second Covid-19 wave or another global, regional or national economic crisis,” he said.

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