Budget 2012 reveals Malaysia’s structural problems

The public sector budget defines the role of government. Citizens have to decide how big they want their government to be for it to articulate sufficiently well what it must do for the people. This, in essence, is what a budget is all about.

By Chan Huan Chiang

Heavy handed or the “invisible hand”?
The main economic purpose of government is to ensure the delivery of public goods—these being goods that would not be equitably accessible if left to the free market to supply. Believers in the free market prefer to leave the economy to Adam Smith’s “invisible hand” and let the economy make its own supply-and-demand adjustments. Others think that policy instruments need to be wielded if a nation’s social goals are to be achieved.

Malaysia’s budget – a quarter of the GDP
Today, just as it was 40 years ago, Malaysia’s public budget is roughly a quarter of the nation’s gross domestic product (GDP). In actual fact, the public budget crept steadily upwards from 1967 through to 1981 when it was nearly half Malaysia’s GDP. By the early 1990s it was back to the quarter mark and has remained roughly there ever since. Dipendra Sinha’s study in 1998 found no statistical link between Malaysia’s GDP and how much the government spends. The data also showed no causal links between the rate of economic growth and the rate of increase in Malaysia’s government spending [1].

The size of government in economies around the world is shown in Figure 1. It says little about big and small governments being dependent on the stage of development or economic success. Western economies tend to have larger governments, which may help explain why countries like Ireland, Italy, Greece and Spain are currently in trouble. The US appears to have only a small government but the source of this data explains that only the federal budget has been counted. Inclusive of state government budgets, the US would be closer to Japan at around 40% of the GDP. Singapore is also small because much of the government service there is made up of public enterprises, while Hong Kong has long been an example of a free market economy.

Figure 1: How large is the government in the economy?

How the Malaysian government spends money has become the subject of public debate in recent years. The operating and development expenditures of Malaysia’s public budget from 1976 through 2012 are shown in Figure 2. Over the past 35 years, both the government’s operating expenditure as well as the public wage bill (emoluments) rose on a compounded growth rate of 10% per year, while development expenditures grew slightly slower at 8.8% per year (these rates are not adjusted for inflation).

Figure 2: The Budget – Operating and Development Expenditure, 1976-2012

Source: Bank Negara Malaysia Monthly Statistics Tables 3.1 and 3.1.2. ; 2011 and 2012 numbers are added in from news sources.

As can be seen, the government’s operating expenses have increased slightly faster than the development expenditure. This is normal as in the early stages, there were fewer private investments in the economy because both local entrepreneurship and local capital market were lacking. The government invests more when it has better access to external funding than to private investors. As the economy matures, investments can be left to the private sector. Public money then begins to move to the domestic social agenda such as health, education, public amenities and income distribution. At this point the government is not building infrastructure for these but is concerned with ensuring quality public delivery and standards.

The collective choice
Even though the proposed 2012 public budget is roughly divided between operating expenditure and development expenditure on an 8:2 ratio, it is more convenient to see the individual components of public allocation as part of the whole RM231bil budget, so that financial obligations and social priorities can be better compared, as shown in Figure 3.

Development expenditures are allocated to education, transport and public utilities (three per cent to four per cent share each), which are given slightly more emphasis compared to trade, industries, agriculture and rural development, housing and communications (less than one per cent to two per cent share each). Only very small amounts go to domestic security and national defence (two per cent of the total budget) and to general administration of government (one per cent share).

Figure 3: Operating and development budget proposed for 2012

The government’s wage bill – a quarter of Budget 2012
Salaries of government employees, on the operating expenditure side, constitute almost a quarter of the entire public budget. Pensions and gratuities of retired government employees add another five per cent to the budget. There has been talk about the bloated civil service and the additional strain that pension payments make on the operating expenditure. Emoluments of government employees have become more compared to the development budget. However, compared to the total operating expenditure, the proportion made up by emoluments plus pensions and gratuities has remained about the same over the past 35 years, averaging 36%.

Today, Malaysia has 1.2 million public servants making up about 10% of the country’s labour force. Through the 1990s, the number of government employees increased on average about 1.5% a year but over the past decade the size of the civil service has grown by 2.7% a year, which is much higher than the current rate of population growth of only 1.3% a year. Malaysia’s civil servants make up four per cent of the population which is about twice the proportion that of Thailand, Philippines, Indonesia and South Korea.

It is actually the number of civil servants and NOT the wage bill of public employees that merits concern. The structure of Malaysia’s civil service is very hierarchical, as Table 1 shows. Worse still, the median salary level (half of all those employed above this salary level and half below) – pay grade D – is a monthly salary that is barely RM1,000 a month! Civil servants on average are thus not at all well paid; the wage bill is high only because there are so many civil servants.