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PENANG INSTITUTE

Utter Economics

A Budget with Dubious Benefits

The 2017 Budget seems bright and shiny, but scratching the surface reveals serious grounds for concern.

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The Prime Minister announced the 2017 Budget on October 17, 2016 in parliament. The Budget Speech can be seen as a strategic plan for the upcoming year and always marks an important milestone in Malaysian politics.

Next year's budget deficit is expected to be three per cent of the GDP vs. 3.1% 2016. Nevertheless, a balanced budget is unlikely to be achievable in the foreseeable future due to the large expenditure on the civil service. Out of an operating expenditure of RM214.8bil, RM77.4bil is for Emoluments, and RM32bil is for Supplies and Services. These collectively are 51% of the total operating budget, or 42% of the total budget.

Such a large proportion of expenditure being spent on Emoluments and Supplies and Services indicates that to balance the budget in the long term, there needs to be significant efficiency gains from the civil service and federal government contractors. An analysis by population shows that Malaysia is highly overserved by civil servants. There are 1.6 million civil servants in Malaysia or approximately 5.5% of the population. This is in contrast to Singapore, whose civil servants make up only 1.4% of the population.

Let’s use another means of comparison. Germany, which is also a federation, has a total of 4.18 million civil servants at the Federal, Landers and City level, collectively working in an economy that has a GDP of US$3.63tril. Applying the same German ratio of GDP to civil servants on Malaysia, which has a GDP of about US$375bil, would mean that Malaysia would only need about 430,000 civil servants.

While Singapore and Germany are highly efficient countries, having a civil service close to four times larger than them indicate that there are immense opportunities for efficiency gains in Malaysia. A reformed civil service will not only help address the budget deficit but also release talent and labour into higher paying private sector jobs since the unemployment rate in the country is low.

As household debts as a proportion of GDP are over 85% in Malaysia, the budget’s plan to extend higher debts to civil servants (e.g. computer and motorcycle loans) may not be sustainable in the future. In fact, Malaysian households require debt consolidation to reduce the debt burden, instead of greater reliance on debt for consumption.


Affordable Housing for First-Time Home Buyers

Home ownership has always been an important issue faced by lower- and middle-income groups in Malaysia, since increasing property values move faster than income growth. Under the 2017 Budget, the government will build more affordable houses to ease the burden on lower- and middle-income Malaysians. In addition, the exemption of stamping fees on transfer instruments and loan facilities will be applied on first-time buyers of houses not exceeding RM300,000 to assist in reducing the cost of first home ownership. It may encourage more people, particularly the younger generation, to buy houses.

The government’s cash assistance programme (BR1M) has also increased by 12.5%-20% for households with monthly income below RM4,000. However, the weakening global economy, the depreciation of ringgit and the implementation of the Goods and Services Tax (GST) resulted in rising cost of living – the main concern among average Malaysians. Hence, there are doubts that government handouts are enough to compensate for the rising cost of living. The question remains: Are lowerincome groups able to save enough money to buy a house?

Based on the Household Income and Expenditure Survey 2014, the average monthly income for the bottom 40% (B40) households is RM2,537, while their average monthly expenditure is around RM2,104 (including GST). With monthly cash assistance of RM100, the B40 will have savings of only RM533 a month. After considering 100% stamp duty exemption and 10% down payment to buy a house, they can only afford houses priced at RM60,000 and below. It indicates that B40 income households can scarcely afford to buy their first house. At the same time, the middle 40% (M40) households with an average income of RM5,662 and an average monthly expenditure of RM3,774 will have savings of around RM1,888 and will therefore not be able to afford houses priced above RM220,000.

Limiting the sale of affordable houses priced at RM300,000 and below to firsttime home buyers may therefore help a little; however, most first-time buyers are unlikely to be able to secure the down payment to buy a house since they have probably just joined the job market and do not have high salaries.


Cuts in Public Universities Budget

With the 2017 Budget, funding allocation for major public universities is cut even further. Compared with the 2016 Budget, the overall funding of the Ministry of Higher Education and public universities for 2017 was reduced by 9.3% and 18.4% respectively. The operating budget of public universities has been reduced by about 19% from RM7.6bil in 2016 to RM6.1bil in 2017. Half of Malaysia’s 20 public universities faces huge cuts in combined operating budgets ranging from over 10% to over 31%, with Universiti Kebangsaan Malaysia taking the biggest hit (Figure 1). Among these 10 universities, five are Malaysia’s top universities in global university rankings. Cutting the budget and the pressure to independently generate more income would sidetrack these institutions from achieving their main goals of teaching, research and competing for better positions in global rankings.

The lower allocation would force universities to reduce research staff and limit research sources. Limited resources would also have an effect on talent retention and the quality of teaching; funding cuts would slow down R&D activities and undermine high quality research. It will be difficult for public universities to do more with fewer resources and therefore hinder their ability to improve standards. Thus universities may need to seek external funding, which would be time consuming and competitive. In addition, university tuition fees as an alternative source of funding may rise and affect lower- and middle-income groups significantly.

Source: 2017 Estimated Federal Expenditure, Ministry of Finance Malaysia.

In fact, cutting allocation for education may affect future growth and the development of the country, since the country needs technological innovations to move towards high-income nation status.

Source: Akamai Technologies, State of the Internet Report, Q1 2016.


Internet Speed

Improving broadband penetration and speed is an essential measure in enhancing digital literacy. The 2017 Budget therefore aims to double the speed of broadband connection from five Mbps to 10 Mbps – at the same subscription price. By 2019, the speed will have doubled from 10 Mbps to 20 Mbps at just half the current subscription rate. This is an important improvement. The quality and consistency of network connection has always been a matter of concern for students, businesses and households.

However, according to the Akamai’s State of the Internet Q1 2016 Report, Malaysia recorded an average connection speed of 6.4 Mbps – much lower than the speed provided in Singapore (16.5 Mbps). Malaysia’s average peak connection speed may be 46.3 Mbps, but only 68% of Internet users enjoyed the speed of four Mbps and above compared to that of Thailand (96%), Singapore (91%) and South Korea (97%). The speed of the connection is surprisingly lower than in Thailand for categories 10 Mbps and 15 Mbps and above.

Due to the unavailability of data, the disparity of broadband penetration between urban and rural is unclear. Nevertheless, ordinary users do experience that the quality of network is rather poor in some less-developed areas. This includes Penang – which has the fourth largest proportion of high-skill employed persons in Malaysia after Putrajaya, KL and Selangor.

Immediate attention is needed from the government if penetration coverage and speed is to be improved, and wide disparities in broadband speeds between urban and rural areas may delay Malaysia from achieving developed nation status. High density network infrastructure should be expanded to provide stable and smooth connectivity in both urban and rural areas. Access to the Internet has to be at affordable prices for all households.

Additionally, the 2017 Budget aims to build a digital economy and is allocating RM162mil to foster the e-commerce ecosystem and Digital Maker Movement.

Furthermore, a Digital Free Zone will be set up with appropriate online and digital services to facilitate Internet-based innovation and cross-border e-commerce. However, not all businesses will benefit from this plan and some relocation of companies can be observed already, resulting from the locational concentration in building a digital ecosystem.

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