The man slated to take over Malaysia’s government later this month hasn’t said much about his economic philosophy. But with the announcement of a 60 ringgit (US$16 billion) stimulus package yesterday, one thing is clear: Najib Razak is no free-market reformer.

Najib, who is currently deputy prime minister, called yesterday’s package “unprecedented in the nation’s history.”

For an expenditure of roughly 9 per cent of 2008’s GDP over two years, that’s no exaggeration. Malaysia will raise debt to fund this largesse. The fiscal deficit is now projected to reach a whopping 7.6 per cent of GDP, up from 4.8 per cent.

Malaysia is following in the fiscal footsteps of the US, Australia and Japan, but that doesn’t make it smart.

The “stimulus” from all this spending will likely be limited. Most of the money will be spent on loan guarantees, infrastructure and public sector expansion, rather than on tax cuts that could stimulate productive growth.

State-owned investment company Khazanah, for instance, will be handed 10 billion ringgit. Pet projects such as “green investments” and the state-run automaker will also see cash handouts. The government itself will hire 63,000 workers.

This is effectively a restatement of Malaysia’s old, government-knows-best policies. It’s the opposite of what Malaysia really needs, which is to ditch this thinking and shift to a business climate that encourages private investment and entrepreneurship. The government predicts GDP could shrink 1 per cent this year.

Yesterday’s fiscal expansion is also a political risk for Najib and his ruling coalition. Malaysian voters, fed up with the government’s racial politics and lacklustre economic growth, handed opposition parties roughly one-third of the national parliament last year and victories in two subsequent parliamentary by-elections.

If Najib’s package doesn’t work, the voters may protest again at the polls.

The Wall Street Journal