diture (spending). There are three possible stances of discretionary fiscal policy, namely neutral, expansionary and contractionary. However, how the Malaysia government set fiscal policy? The policy response is depend on the economic situation, either it occur a recessionary gap, inflationary gap, budget deficit or surplus. For instances, expansionary fiscal policy will be use during recessions, which is tax cuts and increased government spending in order to increase demand and economics growth while contractionary policy will be use during booms, which is increased taxation and lower government spending to reduce demand and reduce inflation.
Here are some examples of how the Malaysian government has set fiscal policy. In a recession, the government may decide to increase borrowing and spend more on infrastructure spending. The idea is that this increase in government spending creates an injection of money into the economy and helps to create jobs. There may also be a multiplier effect, where the initial injection into the economy causes a further round of higher spending. This increase in aggregate demand can help the economy to get out of recession.
For example, in year 1997 and 1998, the Malaysian economy had faced with a sharp global recession. Therefore, Malaysian government had set an expansionary fiscal policy in year 1998 to overcome the recession. The fiscal measures included a selective increase in infrastructure spending, introduction of tax incentives to support private and domestic sector, such as tourism and small and medium enterprises (SMEs), a higher allocation for social sector development and a reduction in taxes. Government has increasing the development expenditure of RM7 billion into agriculture, education and housing area development; and a RM 5 billion in the infrastructure projects. (Ministry of Finance 2001, Bank Negara 2002)
In addition, government can also implement the tax cut policy in order to overcome recession. Tax cut in service tax, sales tax, excise tax, export duties, import duties, income tax or an increase in transfer payments, for example, unemployment benefits or welfare payments will increase disposal income, therefore increase the purchasing power of households. Reducing in the corporation tax will also raise the ability in the investment. Hence, aggregate demand will increase and this will close the recessionary gap therefore increase economic growth and reduce unemployment.
Other than that, expansionary fiscal policy also helps to reduce budget deficit. For example, in order to reduce the budget deficit in 2012, which is 4.7% at GDP, a prudent fiscal policy was implemented by Malaysian government. It is aim to promote domestic economic activity and providing support to the economic transformation plan. In order to achieve the objectives of full employment and sustained economic growth, government had emphasis on the growth of private sector investment and consumption in the 2012 Budget. Hence, these will increase the aggregate demand by increase the government expenditure on goods and services on spy satellites, school, highways and the list goes on.
Furthermore, as a part of the Government's efforts to increase aggregate demand, a large amount of fund was allocated for various forms of incentives and subsidies in order to support the private consumption. For instance, some financial assistance programmes had been introduced such as the cash assistance of RM500 to households with monthly income of less than RM3, 000 as well as the SARA 1M
