Penang’s Finances Staying Strong

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Since 2008 Penang has experienced fiscal surpluses in its financial account; it achieved as large a sum as RM61.7mil in fiscal surpluses, or 0.1% of Penang’s GDP in 2017 (Figure 1).

In the last five years or so, the state has been prudently managing its finances despite the annual threat of projected budget deficit. The state’s actual public expenditure turned out to be lower than its estimated expenditure since 2011. This also shows that the state government is mindful of what it spends on. For example, the actual public expenditure for 2017 was recorded at RM1bil; this is about 55% lower than the projected public expenditure.

Based on chief minister Chow Kon Yeow’s announcement of Budget 2020 last November, Penang is estimating for a smaller budget deficit of RM273.5mil in 2020 compared to RM395.7mil in 2019 – a reduction of about 31%. This is largely attributed to a smaller estimated expenditure on operational activities and development projects in the state government, with a projected drop of 12% but a slight increase of 2.7% in operating revenue collection.

Out of RM792.7mil of total estimated operating expenditure, fixed contributions are again projected to make up over half of the total operating expenditure, and are expected to decline by about 22% in 2020. Transfers to development revenue in particular is estimated to contribute to the decline in this category, where the amount is to shrink by nearly 35% from RM230mil in 2019 to RM150mil in 2020 (Table 1).

Emolument is expected to grow moderately in 2020 after a spike in 2016 and 2018. However, it will constitute a larger proportion of the total estimated operating expenditure compared to the last two years – about 23% will be contributed by emoluments in 2020, up from 14.1% and 19.9% in 2018 and 2019 respectively. Although fixed contributions and subventions make up the largest share of operating expenses, a substantial sum of this component is to be transferred to the development account to support state development projects. Other expenses include government aids to be distributed through state programmes. For example, the State Social Welfare Department will disburse an estimated value of RM8mil to the people in 2020.

Public Wage Bill

Despite the fact that the share of operating expenses is estimated to decline in 2020, Malaysia, on the other hand, still maintains its operating expenditure of above 80% in the past ten years, with emoluments constituting more than one-third of total operating expenditure (Figure 2).

The sizeable civil service could be a key factor affecting high expenditure on emoluments. For comparison, Singapore also spent a large percentage of its operating expenses on civil service.1 However, this is not completely due to its sizeable civil service. The Singaporean government benchmarks its civil service remuneration package with the private sector in hopes of attracting equally qualified talents to join its civil service.

In Penang the state government is estimated to spend about 23% of its operational cost on the civil service in 2020. Due to the unavailability of detailed state civil service data, it is difficult to make a conclusive inference about the state’s expenses for this category. However, to ensure a sustainable government budget and a more effective public service delivery, streamlining the level of public service competence by attracting high-qualified workforce while keeping the state’s public wage bill at a reasonable rate, is necessary.

Emphasis on Development Expenditure

Penang is estimating for a larger budget being allocated for development-related activities in 2020; about a quarter of total government expenditure is for development purposes, with the remaining budget being for operational activities (Figure 2). This composition closely resembles the structure of government expenditure in Singapore, where at least 20% of government expenses are spent on development activities.

Penang’s development budget is largely spent on maintaining its public infrastructure, including new development projects through state agencies. In 2020 about 57% of the estimated development expenditure will be disbursed by the State Finance Office, followed by the Chief Minister’s Office and State Secretary Office (19.7%). A large proportion of the estimated budget will be spent on the development of Penang Hill (RM15.4mil), special economic projects (RM9.9mil), low-cost housing plans (RM8.6mil) and land acquisition (RM5mil), to name a few.

Apart from the state budget, the government also exercises public-private partnerships in infrastructure development projects. For example, to ensure smooth traffic flow, the Penang state government entered into an active collaboration with the private sector to execute the strategies recommended in the Penang Transport Master Plan (PTMP) totalling RM46bil. This project includes building two light rail transits (LRTs), a third link, a bus rapid transit (BRT), a monorail and three paired highways.2

The private sector will finance some of the projects through the land reclamation of three man-made islands in the southern region of the Penang Island through the Penang South Reclamation (PSR) scheme.3 On top of this, the state government is also hoping that the federal government will take into account the allocation for transportation projects in the 12th Malaysia Plan (12MP), to be released this year.

Federal Grants Allocated to the State

To finance state expenses, the state government collects revenue in the form of quit rent, entertainment duty, permit and license, service delivery, fines and penalties, and grants from government agencies; these constitute the state’s operating revenue.

Based on the latest data made available by the Ministry of Finance, total actual federal grants to Penang increased by 8.5% to RM239mil in 2018 from RM220.3mil in 2017. Of this, about 48% were for state road maintenance, followed by grants for concurrent jurisdiction for matters related to social welfare, scholarships, drainage and irrigation, town and country planning (13.8%), and grant based on population (10.3%) (Figure 3). This composition is used to spend on the operational activities of the state government.

For development revenue, the state receives about RM13.52mil or 5.7% of total federal grants based on the level of state economic development, infrastructure and well-being (Figure 3). This amount is allocated to support state development projects in addition to development revenue collected by the state. Other sources of state development revenue comprise sales and hire purchase of low-cost houses, raw water fee and loan repayment from MBSP, PDC and PBAPP.

Highlighting Penang2030

through Budget 2020 The core focus of Penang’s Budget 2020 is to work committedly towards achieving “A Family-focused, Green and Smart State that Inspires the Nation” as deliberated in Penang2030. The four main themes of Penang2030 are to: (1) increase liveability to enhance quality of life; (2) upgrade the economy to raise household incomes; (3) empower people to strengthen civic participation; and (4) invest in the built environment to improve resilience.

Strengthening the state’s digital infrastructure has become the key action agenda for the state government by 2030. Digital Penang Corporation has been established to facilitate the implementation of digital projects; to act as an advisory body on the direction of the state’s digital development; and to develop the Digital Transformation Plan for Penang. Establishing 5G network architecture and Smart Trade Facilitation Platform are among the action plans currently undertaken by the state government.

Human capital development remains the key focus of the state government. The German Dual Vocational Training (GDVT) programme will continue to be supported by the government through subsidy. The state government is also working closely with the federal government through the Northern Corridor Implementation Authority (NCIA), Malaysian Investment Development Authority (MIDA), and Career Assistance and Talent (CAT) Centre to provide education enhancement programmes to the B40 group.

Ong Wooi Leng heads the Socioeconomics and Statistics programme at Penang Institute. Her work lies in labour market analysis and socio-economic development.



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