It is a cautionary tale for the ages.
In 2018 South Africa announced a halt to salary hikes for its civil servants. Payments for government servants had reached 35% of total government expenditure1 and if left unchecked, the government was afraid that the spending would push public finances off the fiscal cliff.
The same situation applies to Malaysia. For many years, the largest component of government operating expenditure has been civil servant salaries or emoluments;2 and over the last 10 years, its growth has far outpaced other expenditures. In 2008 the emoluments stood at RM41.0bil, or 27% of total expenditure. The figure was forecasted to grow to 34% or RM81.3bil by 2018.3
It is the same trend for pension and gratuity payments. In 2008 the government paid out RM10.0bil in pension and gratuities but these payments were forecasted to reach RM25.8bil in 2018. Pension payments are highly correlated to emoluments because a civil servant today is a pensioner tomorrow. As such, both groups enjoy concurrent salary hikes and cash assistance. Together, emoluments and retirement charges constitute a sizeable chunk of operating expenditure. In 2008 they ate up 33% (RM51.0bil) but were forecasted to hit a whopping 46% or RM108.0bil by 2018. This was despite the retirement age being raised progressively from 56 to 604 over the last 10 years.
This unprecedented rise is primarily due to the previous two governments’ generous pay adjustments, and cash perks to government servants; and to a rise in the ranks of the civil service. This was probably done to preserve urban Malay voter support prior to the 12th general election (GE12) in 2008 and post-GE12, to lure them back and retain their support.
Let’s examine the trend of emoluments and pension payments over the last 10 years – between the years of 2008 and 2018. This period covers the final year of Tun Abdullah Badawi’s administration and from 2009 onwards, the tenure of Datuk Seri Najib Razak.
Between 1991 and 2007, there was no pay increase for civil servants save for a rise in certain allowances.5 All that changed in May 2007 when Abdullah announced a huge rise in salaries and allowances for more than one million civil servants and 557,033 pensioners.6 This cost the government an additional RM8.0bil annually.
Abdullah was fighting for political survival and felt a need to shore up support ahead of GE12. The full effect of these hikes was only felt in 2008 – emoluments grew by 26% from RM32.6bil in 2007 to RM41.0bil. Pensions too rocketed upwards by 25% from RM8.3bil to RM10.0bil on the back of these rises.
During Najib’s tenure, he took it a step further by announcing multiple hikes in salaries and increases in allowances for every year during his administration, with the exception of 2009, 2011, 2015 and 2017. He also announced special annual and/or Hari Raya bonuses in each year of his tenure.
When Najib took over as finance minister in 2009, emoluments and pension payments stood at 33.7% of total operating expenditure or RM52.9bil; by the end of 2017, it was at 45% or RM99.8bil.
There were no pay hikes in Najib’s first year as prime minister.7 However, that ended in 2010, when Najib first raised salaries; but he limited them to the police, and medical and dental lecturers in public universities (which cost the taxpayers RM633mil) and a RM500 cash handout for all 1.24 million civil servants (RM640mil). These hikes largely explain why emoluments rose 9% from RM43.0bil to RM46.7bil. Similarly, 590,000 pensioners were paid a RM500 cash handout which cost RM295mil. Pensions and gratuities rose by 13.5% from RM10.1bil to RM11.5bil. This pushed up the total of emoluments and pensions to 38% of total operating expenditure, higher than 2009’s 34%.
But by 2012, Najib was as unpopular as Abdullah was in the latter’s final year. With elections just around the corner, Najib resorted to the same playbook as his predecessor. He filled the 2012 Budget with generous hikes in salaries and Colas8 that cost RM4.8bil. In addition, RM1.9bil was spent on a minimum bonus of RM500. As a result, emoluments gained 20% from RM50.1bil to RM60.0bil in 2012.
The 667,000 pensioners were not left out – they received increments of between RM720 to RM820 as well as a special cash assistance of RM500, which was disbursed in August 2012. These raises were partially responsible for total pensions increasing to RM14.1bil, 16% higher than RM13.6bil in 2011. Together, the emoluments and pensions totalled 36% of operating expenditure.
No increments were given during the post-election period in 2013, except for a special monthly incentive of RM200 for 125,700 military personnel and a revision in allowances for 65,000 military reserves.
There were two main reasons for the emoluments increasing by 10% from RM61.0bil to RM66.7bil in 2014. The first was from the full effect of multiple salary hikes under the new Transformative Remunerative System for 1.4 million government employees announced in March 2013. The other was from a half-month bonus with a minimum payment of RM500. On top of that, pension payments were given an automatic annual increase of 2% from 2013 onwards. Pensions grew 24% from RM14.8bil to RM18.2bil that year.
There were no salary hikes for 2015, but the total for pensions and emoluments stood at 41% of operating expenditure, the first time it crossed the 40% mark.
By 2016, election fever was once again in the air, prompting Najib to turn to the civil service for support. He raised the minimum starting salary to RM1,200,9 43,000 contract employees were also offered permanent jobs and he improved 252 schemes of service for another 406,000 civil servants. He also gave the 1.6 million civil servants an additional annual increment on top of their usual annual one, which cost the taxpayers another RM1.1bil.
Pensioners were not forgotten and the government set the minimum pension rate at RM950 a month for those with at least 25 years of service, which benefitted almost 50,000 pensioners.
Despite the increases, emoluments for 2016 only increased by 4% from RM70.0bil to RM73.1bil because these measures were only implemented in July 2016. Pensions rose 11.4% from RM18.9bil to RM21.0bil. By now, emoluments and pensions took up 45% of total expenditure.
In 2017 emoluments increased by 5% from RM73.1bil to RM77.0bil, mostly from the full-year effect of the July 2016 salary adjustments. Meanwhile, retirement charges rose 6% for 2017 to RM22.8bil, compared to 2015’s 4% rise due to the fullyear effect of the minimum pension for 780,000 pensioners. Emoluments and pensions reached 46% of total expenditure.
Knowing that this was his last chance before the imminent election, in the 2018 Budget, Najib gave a special payment of RM1,500, with RM1,000 to be paid in January 2018 and RM500 before Hari Raya 2018. Pensioners received a special payment of RM750, with RM500 in January and RM250 ahead of the Hari Raya celebrations.
In April 2018, barely two years after his last salary revision in 2016, Najib dangled another carrot – an additional annual salary increment – in front of 1.6 million civil servants. There was a catch, though; the adjustment would only be effective post-election, in July 2018.
But alas, Najib lost the elections and the new government postponed his last salary hike.
Why are the government’s finances in such bad shape? Prime Minister Tun Dr Mahathir Mohamad laid the blame solely on Abdullah and Najib for attempting to buy the loyalty of the civil service by dispensing generous salary hikes.10 Abdullah did it once in 2007, but Najib did it five times in nine years!
Another reason for the fiscal blowout is the practice of paying bonuses. Abdullah started this when he gave a RM500 cash handout to 860,000 support staff in his final budget in 2008. Najib, however, took it one step further by making it a permanent annual affair throughout his nine years.
He began by announcing a single month’s bonus in 2010. For 2011 and 2012, the total bonus was still one month, but it was split equally between one announced during the budget and another for Hari Raya. However, from 2013 onwards, the total cash handout started diminishing.
While the half-month annual bonus was maintained from 2013 to 2015, the Hari Raya bonus was limited to only RM500. For 2016 and 2017, the total payout was even less – the previous half month bonus was reduced to just RM500, but the RM500 Hari Raya bonus was retained.
The rise in the number of civil servants (and pensioners and their beneficiaries) too is another cause for concern. When Mahathir vacated the Prime Minister’s Office in 2003, the civil service numbered at only one million. In March this year, the number had expanded to 1.6 million, with another 100,000 positions still vacant. Concurrently, the number of pensioners too has been escalating, from 590,000 (2010) to 836,000 (2018).
An interesting nugget in the 2018/19 Economic Report was the fact that about 67% of the emoluments for 2018 was to pay for the salaries of 834,000 teachers, doctors and nurses.
The federal government had been aware of the fiscal time bomb threatening the nation, and already in March 2007, during Abdullah’s administration, the Retirement Fund (Inc.), better known as KWAP, was set up to assume the government’s fiscal obligations for civil service pensions. KWAP’s fund size has grown tremendously, from RM42bil in 2007 to RM141bil in 2017. However, by that latter date, only 502 employers comprising 193,684 members were under the scheme, constituting just 12% of the total civil service workforce.
It is hoped that the Mahathir administration is now prudently managing Malaysia’s purse strings, rather than trying to remain in power by buying the loyalty of civil servants and mortgaging the future of the nation.
1https://www.iol.co.za/business-report/economy/how-much-does-government-spend-on-civil-servant-salaries-17615778. 2Salaries, overtime payments, allowances and financial benefits. 3All data quoted here are from various Economic Reports and Budget Speeches, unless otherwise specified. 455 to 56 in 2001, 56 to 58 in 2008, and 58 to 60 in 2012. 5Globalization and National Autonomy – The Experience of Malaysia. 6https://www.thestar.com.my/news/nation/2007/05/22/salary-increase-for-governmentservants-from-july-1. 7Najib took over as finance minister in September 2008 and Prime Minister in March 2009. 8Cost of Living Allowances. 9which benefitted 60,000. 10https://www.msn.com/en-sg/news/national/pak-lah-and-najib-left-us-a-bloated-civil-service-says-dr-m/ar-BBQjSIR.