The State of the Nation: Economic Report: 68 sen of every RM1 earned goes to salaries, pension, debt service charges in 2021 and 2022

This article first appeared in The Edge Malaysia Weekly, on November 1, 2021 - November 07, 2021.
The State of the Nation: Economic Report: 68 sen of every RM1 earned goes to salaries, pension, debt service charges in 2021 and 2022
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FOR the third year running in 2022, more than 60% of the federal government’s annual revenue will go towards paying its emolument, pension and debt service charges bill, data appended in the Fiscal Outlook 2022 report shows. In other words, more than 60 sen of every ringgit earned goes towards paying these three sizeable “overhead type” expenses that need to be paid even if nothing is produced.

While this is partly due to lower government revenue with Covid-19 hitting tax collection, the speed at which debt service charges and the civil service pension bill have been growing annually in the past decade — several times faster than the average growth in revenue — had already pushed the trifecta of emolument-pension-debt service charges from about 40% of total federal government revenue between 2001 and 2009, to above 50% of federal government revenue by 2015.

The number reached 57% in 2016 and continued rising even before Covid-19 hit revenue collection. Including projections for 2022, debt service charges would be growing at an average rate of 8.2% a year in the 10 years between 2012 and 2022 and an average rate of 8.2% a year over five years (2017-2022).

The amount needed to pay the civil service pension bill, meanwhile, would be growing at 7.14% on average every year over the same 10 years and an average of 4.24% a year over five years. While the 10-year and five-year compound annual growth rates for civil service emoluments are slower, they are still more than double the average rate for revenue growth.

Based on the amount tabled in Budget 2022 on Oct 29, emoluments comprise 37% of projected federal government revenue while pension or retirement charges made up 12%. Debt service charges, meanwhile, account for 18.4% of federal government revenue for 2022. Just a decade ago, in 2012, the ratio was 29%, 6.8% and 9.4% respectively, or 45% altogether.

Civil servant emolument and pension payments to retired public servants are at least largely spent within the economy, boosting local consumption.

The size of debt service charges, however, needs greater policy attention. At RM43.1 billion, the estimated debt service charge for 2022 is bigger than all three of the annual allocations for the special Covid-19 Fund (RM38.019 billion in 2020, RM39 billion in 2021 and RM23 billion in 2022).

That annual recurring amount is sizeable relative to Malaysia’s 32.7 million population, including 2.69 million non-citizens. If that RM43.1 billion were to be distributed to the country’s 32.655 million citizens alone, every man, woman and child would stand to receive about RM1,319.80.

Last year’s debt service charges of RM39 billion were as large as the revised Covid-19 Fund allocation for 2021 (the amount was originally tabled at RM17 billion in November 2020) and just ahead of the RM38 billion spent in 2020. Based on numbers tabled in Budget 2022, debt service charges looks set to rise above RM46 billion in 2023 and close to RM50 billion in 2024, back-of-the-envelope workings show.

Other components of operating expenses such as subsidies and social assistance (7.4% of projected federal government revenue) as well as grants and transfers to state governments (3.4% of federal government revenue in Budget 2022) may not be easy to trim as well.

The only room for manoeuvre left is supplies and services (13% of federal government revenue in Budget 2022) and “other” operating expenses (2.2% of federal government revenue in Budget 2022). Not surprisingly, Finance Minister Tengku Datuk Seri Zafrul Aziz said easily 80% to 90% of operating expenses are “fixed”.

Perhaps thanks to outsized social allocations under the Covid-19 Fund, the ballpark amount for subsidies and social assistance under the “usual” operating expenditure was revised lower to RM16.7 billion for 2021 this year from RM18.85 billion when Budget 2021 was initially tabled — despite petrol subsidies being substantially higher than what was initially anticipated. The amount for 2022 is pencilled in at RM17.35 billion or 7.4% of projected federal government revenue.

As the Covid-19 Fund is not expected to continue after 2022, revenue reforms need to happen fast so that the government has more than enough resources to not only pay its bills but also generously invest in talent and the people’s well-being on top of building up the country’s competitive advantage. Malaysia cannot talk convincingly about sustainability if most of the money it earns continues to go towards paying regular bills.

 

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