Financing of Penang state, 1960-72 : an enquiry into Malaysia's federal-state fiscal relationship
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Date
1976-08
Authors
Tan, Siew Hooi
Journal Title
Journal ISSN
Volume Title
Publisher
Universiti Sains Malaysia
Abstract
This study adopts an ex-post analysis of the Federal-State
fiscal relationship in Malaysia, over the period of 1060-1972, with specific reference and emphasis on Penang. The impact of this relationship on the states' financial positions is discussed critically.
The subject of intergovernmental relations in Malaysia has
long been neglected by Malaysian academicians and government bodies. There is hardly any economic literature or studies made on this topic. The lack of research in this area and a special interest in the subject which I believe touches the 'root' of the problems of financing state
governments have prompted this study to be undertaken.
This study shows that the then existing Malaysian Federal-State
fiscal relationship has resulted in vertical and horizontal
fiscal imbalances. The rederal Government controls most of the productive
sources of revenues leaving the states with non-productive
revenue sources. This problem is further aggravated by widespread
interstate fiscal disparities in the country. In Penang, the lack of
natural resources reduces its ability to raise revenue. The State's
domestic revenue lags continuously behind its current expenditure.
With rising development and current expenditures, Penang will continue
to face financial constraints, though Federal grants have been used to
bridge the fiscal gaps of the states. However, the fiscal adjustment
system is not effective in solving the problems of imbalances.
The defects of the present fiscal adjustment system call
forth various improvements as envisaged by the present study. These
include introducing tax supplements, tax credits and deductions,
using an objective criterion to allocate the unconditional grant, and
changing the status of the National Finance Council, (NFC). The last
suggestion should have the top priority over the others because the
existence of an impartial and independent body would ensure further
changes to the system. Otherwise, the decision to change would have
to rest upon the Federal Government, which is unlikely to take any
positive steps towards making changes in the near future. This is
because it has placed national development and poverty eradication as
its prime objectives. Changes in the fiscal arrangements, which
could reduce its role in the economyv are unlikely to be favoured in
this context.
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Keywords
Financial