Towards a Sustainable Fiscal Position for Malaysia

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The financial crisis of the last decade has sparked discussions on the stability of the financial system amidst the current interest rate regime and the sustainability of increasing debts that widen the gap between the financial and real sectors. Economic development now requires more than just GDP growth; it must also consider social equity, environmental conservation, inclusive development, and fair income distribution. The recent pandemic has further highlighted these priorities and the need for shared risks and returns. This analysis focuses on Malaysia's fiscal situation, pinpointing areas for improvement in the tax system and public sector financing to enhance revenue generation and government expenditure. The proposed alternative fiscal framework advocates for a simpler, fairer tax system based on the ability to pay, alongside interest-free public financing that encourages broader public participation. Leveraging Malaysia's robust Islamic finance framework, the reform emphasizes risk-sharing principles that align the financial and real sectors. The recommended fiscal policy changes aim to alleviate public debt, expand fiscal space, enhance financial inclusion, reduce income disparities, boost employment, and ultimately foster social solidarity in Malaysia’s diverse society.