Malaysia's 13th general election, scheduled for May 5, is shaping up to be the tightest race in the country's near 60-year history. Behind the divisive rhetoric between the ruling Barisan Nasional (BN) coalition and opposition Pakatan Rakyat (PR), neither camp has formulated a viable, long-term solution to one of the country's most deep-seated problems: fiscal imprudence.

Malaysia's struggle with public finance management is nothing new. With the exception of a brief period in the mid-1990s, Malaysia has long maintained a fiscal deficit. Last year the country carried one of the region's largest budget shortfalls at 4.5%, while private economists estimated that figure ballooned to 10.5% when the debts of non-financial state enterprises were taken into account. It has also done little to reign in public debt, which officially sits just under the country's legal debt ceiling threshold of 55% of gross domestic product (GDP).

Although Malaysia's deficits are not inherently irresponsible, they do reflect a concerning trend of "hidden" public debts. This includes contingent liabilities, such as government guarantees on debt and off balance sheet borrowings, which have more than doubled since prime minister Najib Razak took office in 2009.

This debt surge comes largely from government entities that fund massive transportation and infrastructure projects. It is not inconceivable that these liabilities may eventually find their way on the federal balance sheet. Additionally, the government's revenue stream, which has remained unimpressively low in recent years, is too heavily reliant on state oil company Petronas, which is responsible for almost 35% of federal revenues and faces declining profits.

Underpinning these structural issues is a government proclivity towards subsidies and cash handouts, particularly when a national election is on the line. As BN recovered from the political shock of the 2008 election that saw PR cut into its parliamentary majority, Najib presided over budgets saturated with voter-friendly measures.

The 2013 budget, for instance, provides bonuses to over 1.3 million civil servants, cash for low-income families, smart phone rebates, and income tax cuts. These measures reflect the political reality that prudent fiscal management does not carry votes among an electorate increasingly worried by the rising cost of living.

PR leader Anwar Ibrahim and Najib are thus competing for the hearts and minds of Malaysia's electorate by promising to deepen their pockets, shower them with gifts and reduce their tax burdens.

Anwar unveiled his election manifesto on February 25, outlining an agenda replete with a number of election sweeteners, including free secondary education, lower car prices, a higher minimum wage and a greater share of oil revenues for potential swing states Sabah and Sarawak.

Najib revealed his electoral platform on April 6, announcing his own brand of populist pledges. He promised to raise annual cash handouts for poor households from US$165 to almost $400, build 1 million new affordable homes for low income earners and similarly subsidize car prices. Najib also delayed the implementation of a new goods and services tax, which would expand the tax base and ease the country's fiscal dependence on oil and gas revenues.

The potential electoral payoff for these populist promises makes it risky for either side to advocate for more prudent fiscal management. However worrying this election cycle has been from a fiscal perspective, one policy prescription has emerged that could drastically alter Malaysia's financial future if actually implemented.

PR has campaigned on reforming the country's longstanding quota system that favors majority Malays over minority Chinese and Indians, promising instead to implement a system based on socio-economic need. Eliminating racial preferences in public contracts could conceivably yield more efficient and useful government investments and free-up revenues for the high subsidies PR says it will implement if elected.

More importantly, this reform could reinvigorate Malaysia's laggard domestic competitiveness and empower truly disadvantaged segments of society. If enacted fairly and transparently, it would also signal to foreign investors that business in Malaysia no longer runs on cronyism and race-based preferences. In turn, an improved investment environment could position Malaysia to better compete for much needed foreign investment in the region and ease pressure on the government to drive growth.

To be sure, Najib has taken strides to roll back some of BN's archaic policies that have long benefited Malays over other ethnic groups. In 2009, for instance, he overturned a long-standing requirement for certain companies to sell at least 30% of their shares to Malays.

But the prime minister has stopped short of addressing the bulk of preferential racial policies that infuriate ethnic Chinese and Indian Malaysians, particularly those in education and the tender of government contracts. Najib's United Malays Nasional Organization is still the most influential party component in BN, essentially guaranteeing that Malay interests will continue to guide the coalition's policies. Regardless of Najib's own ambitions to level the national playing field, institutional impediments may prove too powerful to overcome.

Neither BN nor PR instills much confidence in the country's medium-term fiscal future. Malaysia's electoral politics, as witnessed in the various populist measures being offered by both coalitions, fail to reward fiscal prudence and instead encourage shortsighted economic measures. But if the next government fails to reform race-based preferences in the economy, the country will risk falling even deeper into financial mismanagement.

Liam Hanlon is a political analyst at Cascade Asia Advisors, a research and strategic advisory firm focused on Southeast Asia. He may be reached at This email address is being protected from spambots. You need JavaScript enabled to view it.

This piece was originally published in The Interpreter, the blog of the Lowy Institute for International Policy. (Copyright 2013 Cascade Asia)