KUALA LUMPUR (Feb 15): Last weekend, the Advisory Committee for the finance ministry set up by Prime Minister Datuk Seri Anwar Ibrahim underlined its primary agenda, which includes advising the finance minister on how to reduce the federal government’s ballooning operating expenditure (opex).
As the federal government seeks to lower its fiscal deficit, opex reduction is one of the necessary steps, aside from expanding its revenue base, and managing its rising spending on blanket subsidies.
Much attention has been given to the expected targeted petrol subsidy, as the current blanket subsidy mechanism caused total subsidy bills to jump to RM80 billion last year, amid elevated oil prices.
However, when one talks about government opex, the elephant in the room is in another form: civil servants’ emoluments and pensions that have grown year after year.
In 2010, RM58.2 billion or 38.4% of total opex of RM151.6 billion went to paying the salaries and benefits of public sector workers.
By 2021, that number grew to a whopping 52.3% or RM114.9 billion, and is expected to rise to RM115.2 billion in 2022 (40.5%) and RM119.8 billion in 2023 (44%), according to the Fiscal Outlook and Federal Government Revenue Estimates 2023.
It is noted that federal government opex is funded entirely from its (the federal government’s) revenue. In 2022, the government benefitted from strong oil prices, wherein Petroliam Nasional Bhd (Petronas)’s dividend was raised to RM50 billion, from the initially projected RM25 billion .
From 2010 to 2022, despite opex growing by 87% (from RM151.6 billion to RM284.7 billion in 2022), emoluments and pensions paid to government workers grew faster by 98%.
The World Bank, in its Malaysia Economic Report February 2023, said rigid expenditures, namely obligations related to salaries, pensions and interest payments, “remain high and are expected to increase in 2023”.
The increased spending on these items, together with the decline in revenue, remain constraints to the government’s fiscal space and pose a challenge to long-term fiscal sustainability, the multilateral bank said.
“The growing trend in opex, particularly in structural expenditure, crowds out funding of development projects, making it more difficult to achieve development goals,” it said.
“In addition, the already high debt level (61% of GDP as at end-June 2022) limits the government’s ability to increase its borrowings to fund development spending,” the bank stressed.
Pension system for future hires needs to be redesigned
Datametrics Research and Information Sdn Bhd managing director Pankaj C Kumar, when contacted, pointed to the long-term impact of a bloated opex on the federal government’s budget.
In order to make any changes to the already well-oiled running salary and pension scheme, Pankaj said the government needs to be honest about whether the civil service is too bloated.
“As far as the pension system is concerned, the government has to think of ways on how to restructure them instead of ballooning to the level that it cannot sustain it.
“It will become a burden to the future generations as well. So all these questions require very deep thoughts and political will. But it still needs to be done at some point,” Pankaj told The Edge.
However, cutting or drastically making changes to public sector salaries and pensions could be politically and socially destabilising for the country, said Dr Yeah Kim Leng, professor of economics at Sunway University Business School.
“Of course, these rigid expenses cannot be cut back drastically without impacting the employment situation in the country. It has to [be] managed in a prudent and compassionate manner,” said Yeah, who is also a member of the Advisory Committee.
“The government has to be tactful and needs to find a balance in innovative ways so that it does not reduce the support for civil servant employees in terms of their long-term retirement security,” said Yeah.
In order to reduce future pension liabilities, it is crucial for a new scheme to be laid out in the nearest term, he added.
“It is a legacy system that the government has inherited, and it has to deliver on its promises. Because it is unsustainable in the long term, the system has to be redesigned. What has been committed can continue; going forward, the government has to come up with a new system for new employees so that future liabilities can be reduced,” he said.
Pankaj added that the government could have natural attrition over a period of time.
“For every two persons retiring, the government should just hire one more. That way, the number of civil servants will stagnate and come down. Because in this age, a lot of it can be done by automation,” he pointed out.
Both Pankaj and Yeah agreed on moving towards a retirement scheme for the public sector that is similar to the Employees Provident Fund, as it is the most viable and sustainable option to relieve the government of its pension burden for years to come.
