The Malaysian Government remains flourishing the nation’s economic
growth despite the challenges and uncertainties in the global economy. Malaysian
economy is predicted to increase between 4.5% and 5.5% based on the prospects
of a better global economy in 2013. Based on Budget 2013 of Malaysia, the
Government prudently managing the economy by increasing the Gross Domestic
Product (GDP) and this is where the fiscal policy steps in.
Fiscal policy can be
defined as the changes in government spending and tax collections to achieve
non-inflationary domestic output and full-employment. How does fiscal policy
affected the GDP? According to the Budget 2013, prepared by our Prime Minister,
the government is proposing that the annual income tax of an individual to be
reduced by 1 percentage point for each grouped exceeding RM2,500 to RM50,000. Next,
knowing that cost of higher education is a financial burden to the parents, the
government proposes that the current tax relief of RM4,000 to be increased to
RM6,000 per person. Government is trying to reduce the tax in order to
encourage the consumers to consume more, hence increasing the consumption.
Plus, a reduction in tax also shifts the aggregate demand curve to the right.
The government is allocating
a total expenditure of RM251.6 billion to Operating Expenditure and Development
Expenditures, RM201.9 billion and RM49.7 billion respectively. Both
expenditures are for the implementation of the country’s development projects,
with focus on the well-being of citizen. Compare to Budget 2012, the
expenditures have increased by RM18.8 billion. Clearly, the government planned
to increase their expenditures to cause the unemployment to fall and the
employed workers will have income to spend, resulting in aggregate demand to
increase. Thus, the aggregate demand curve shifts rightwards.
The fiscal policy that the
government is applying is the Expansionary Fiscal Policy, where the government
combines expenditures increasing and reduction of taxes to produce the desired initial
increase in consumption and eventual rises in aggregate demand, from AD1 to
AD2. (Diagram 1)
The shifting of AD curve results in raising the GDP and tax revenues automatically rises. When the tax revenue rises, the budget deficit moves slightly to the right, which means that the amount of government’s revenue will eventually exceed its expenditures. (Diagram 2)
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