KUALA LUMPUR (July 20):The government’s austerity drive is a necessary move to reallocate financial resources for the subsidy bill that is likely to hit RM80 billion this year, according to economists.
Nonetheless, the need for austerity measures in order to reallocate the existing budgeted expenditures also indicates there is a need to address the problem on the other side of the equation—ballooning blanket subsidies.
While economists conceeded that the government’s action was reactionary to its fiscal deficit, they said it is vital for Putrajaya to curb inflation pressures by continuing to fund its subsidy bill, which has reached a record high as a result of high commodities prices and the Russian-Ukraine war.
The consensus view is that the austerity initiatives can be undertaken by cutting down unnecessary expenses among the ministries and bringing down public expenditure by deferring new projects.
“Clearly our fiscal space is narrowing and it is getting very uncomfortable. However, there is very little way forward. The government will have to undertake austerity measures — as announced by Minister in the Prime Minister’s Department (Economy) Datuk Seri Mustapa Mohamed on Sunday (July 17) on deferring or cancelling projects that have yet to commence,” said Malaysian Institute of Economic Research (MIER) senior research fellow Dr Shankaran Nambiar.
While there is concern over the plan to put new projects on hold, MIDF economist Abdul Mui’zz Morhalim expects the government to prioritize high-impact spending and fiscal programmes. Hence, infrastructure projects, particularly with a high multiplier effect on the economy and government programmes to assist the rakyat (for example subsidies and cash handouts) will continue.
On the other hand, Abdul Mui’zz also expects to see a review and possible reduction in operating expenditure, including a hiring freeze.
Besides a hiring freeze, Sunway University Business School professor Dr Yeah Kim Leng said Putrajaya could also cut its supplies and services expenditure — currently budgeted at RM30.4 billion or 13% of the RM233.5 billion operating expenditure allocation — which he noted covers purchases and procurement, expenses on meetings, gatherings and official events; expenses incurred during the delivery of government services; as well as domestic and overseas travel, among others.
The Ministry of Finance has targeted to achieve at least 5% savings from the remaining operating allocation for the year 2022 via its austerity measures.
Is the austerity drive addressing the symptom or cause?
The economists also highlighted that instead of addressing one of the main causes of the large subsidy bill — blanket subsidies — the government has opted to target the symptom — the government’s fiscal deficit.
Finance Minister Tengku Datuk Seri Tengku Zafrul Abdul Aziz has said that the top 20% income group (T20) took up 53% of fuel subsidies, as opposed to 15% by the bottom 40% group (B40).
Pointing out that the austerity drive is only addressing a symptom of the government’s large subsidy bill, Yeah said fiscal realignment — in the form of subsidy rationalisation — is necessary to alleviate the subsidy cost burden bearing down on the government’s coffers.
“The government’s subsidies have shielded the public from higher costs, offset higher inflation to lower than 3% compared to about 8% or 9% in developed economies, but they must ensure that spending is efficient. Overspending on subsidies is unproductive, and the subsidy bill has ballooned larger than the [Budget 2022] development allocation [of RM75.6 billion].
“Targeted subsidies have to be implemented gradually and they should help both businesses and households. Currently, the primary challenge is the rising cost of living caused by inflation, and bringing it under control,” said Yeah.
Commenting on the larger-than-budgeted spending on subsidies this year, MIDF’s Abdul Mui’zz said he is cognisant of the need to prioritize the allocation of support and assistance to those who are in need, as this will ease the strain on the government’s finances by reducing unnecessary incentives to well-to-do and higher-income groups. In the end, any potential savings can be used to finance subsidy spending and other expenditures.
Abdul Mui’zz, however, believes the government will be able to finance its subsidy bill on the back of its expected fiscal revenue improvement this year.
“Tax collection will increase on the back of stronger economic activities and oil-related income will be higher than budgeted, in view of the higher oil prices,” he said.
Going forward, as the economy is on a stronger footing, Abdul Mui’zz said the policy setting of both monetary and fiscal policies will be normalised.
“In the medium term, the government shall remain committed to its fiscal consolidation agenda. Fiscal space needs to be improved to prepare against any possible eco nomic shocks in the future. Apart from the spending rationalization, we expect this will include exploring ways to strengthen fiscal revenue and reduce reliance on debts,” Abdul Mui’zz added.
Minimal impact seen on economic growth from the austerity initiatives
While accepting that the austerity drive to fund the subsidy bill at the expense of public expenditure will hurt economic growth, economists said it is necessary to prevent the country’s fiscal position from further deteriorating.
“This is austerity on government expenditure, which you would rather have, than a more fragile fiscal space, which would be far more disadvantageous,” said MIER’s Nambiar.
Meanwhile, UOB senior economist Julia Goh opined that the austerity initiative will not have a large negative impact on the economy if the government implements it via cost-saving measures and diverts some development spending — considering 2022’s development expenditure of RM75.6 billion is 22% higher than last year’s RM62 billion.
“Despite the headline GDP [gross domestic products] growth of 5% in the first quarter, this was mainly driven by private consumption, while public in vestments contracted.
“It is true that development expenditure is important to improve the country’s medium-term economic potential. In any case, the government has allocated a large sum of RM75.6 billion for development expenditure this year. Even if they divert RM10 billion from development spending. the allocated amount of RM65 billion is still a sizeable amount. So it isn’t that the government is not spending, it is about optimising expenditure and spending more efficiently,” Goh added.
Sunway University’s Yeah concurred and said that when the economy is growing, fiscal policy should either be neutral or mildly contractionary as the government can reduce spending, with the private sector driving the nation’s economic growth engine.
Besides the austerity measures that will be implemented to buffer the large subsidy bill, Yeah suggested that the government can also resort to income from government-linked companies’ (GLC) dividends such as Petroliam Nasional Bhd (Petronas), that are benefitting from the economic recovery.
On top of that, he said asset sales could also be used as a tool to increase revenue to cope with the spending-revenue gap.
“If the asset could be unlocked and at the same time contribute towards increased private economic activity, this would catalyse more investments and create more economic activities to unleash the private sector,” Yeah explained.
Meanwhile, MIDF’s Abdul Mui’zz does not see any sharp contraction in development expenditure for the upcoming 2023 budget.
“As we don’t view this as a strict fiscal austerity measure, we anticipate [that] the fiscal consolidation will not involve a sharp reduction in development expenditure in the upcoming budgets. For a start, the possible reduction could come from reduced special allocations for the Covid-19 Fund. For other expenditures, both operating and development spending shall be prioritized based on its degree of effects to the growth sustainability and stability and the country’s future competitiveness, and with focus to improve the rakyat’s well-being going forward,” said Abdul Mui’zz.