Ok, so its budget season now for the government. This budget has the ability to make or break the fragile recovery Malaysia is currently in right now. However, I am confused as to what Tengku Zafrul, our finance minister is saying in this piece here. Specifically, his comment on

“The news report, quoting Tengku Zafrul, reported that Budget 2021 is seen as going against economic theory which espouses the need to cut expenditure when income declines. The opposite reportedly has to be done for Budget 2021 because the government needs to spend more as the nation contends with the impact of the Covid-19 pandemic.”

Tengku Zafrul, I am not sure what you are talking about here. What economic theory in what universe are you talking about? I am not sure what is the context of this, but I am very concerned about the ministry’s mindset in approaching this recession.

Cutting expenditure when income declines. I agree from a company point of view, but this is definitely not true for the economy as a whole.

Let’s start from a basic premise. For a company, if the income of your clients decline, naturally the company will cut their expenditures to cope with the decline in demand for its goods and products. That is true and it makes sense. But they do that because they have no other choice. They can’t magically increase their revenue when times are bad. The most they can do is cut their cost and ride out the bad times.

Now, for the country as a whole. I don’t think any economic theory suggest that a government should spend less when we are in a recession. If anything, there are loads of economic theory out there that support government spending during times of recession, and cutting back on it during the good times. 

The logic is straightforward. During times of recession, private businesses and workers suffer because businesses are not doing well and workers risk losing their jobs and income. The private market is seen as weak, and governments have to step in to spur economic activities. They do that by one, increasing the amount of money spent on the economy whether through welfare programs or infrastructure projects and two, reducing interest rates so that people spend their money and businesses can borrow at a cheaper rate.

Now, if I get Tengku Zafrul’s economic theory right, by right, they should cut their expenditure when the economy is not doing well, which comes from income declining. That is not how the budget has been formulated before this. Past budgets in 2008/2009 and 1998/1999 promoted increased government spending on the economy exactly when incomes were declining. 

I really hope he was misquoted in this article as I find it very hard to believe that the Ministry can get such a basic economic theory wrong.