Cover Story: Unsustainable cost of civil service

This article first appeared in The Edge Malaysia Weekly, on April 17, 2017 - April 23, 2017.
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MUCH has been said about the size of our civil service and the cost of maintaining it. You know there is a serious problem when even ministers and former senior civil servants start to speak about it publicly.

It was Minister of Finance II Datuk Seri Johari Ghani who recently reignited the debate on the sheer size and funding obligation of the public sector. He pointed out that the pay and pensions of Malaysia’s 1.6 million-strong civil service have started to eat into the government’s operating budget.

In an interview with a Chinese newspaper, Johari said Malaysia had one of the highest ratios of civil service to population in the world with one civil servant to 19.37 people. This is staggering compared with Singapore’s 1 to 71.4 people and Indonesia’s 1 to 110 people.

After his comments, Minister of Youth and Sports Khairy Jamaluddin publicly warned that Malaysia’s pension system could be strained by 2050 as the financial obligation grew.

And then, former Finance Ministry secretary-general Tan Sri Mohd Sheriff Kassim weighed in with his suggestion that the government downsize the public service now rather than be forced to do it when a crisis strikes, like what happened in Greece.

Here are some facts to ponder over:

•    Public-sector emoluments (comprising salaries, various allowances and financial benefits) have surged 138%, from RM32.58 billion in 2007 to the RM77.42 billion estimated for 2017. This works out to a compound annual growth rate (CAGR) of 9.04% over the past 10 years.

•    While emoluments have more than doubled, government revenue has only grown 57% from RM139.89 billion in 2007 to an estimated RM219.73 billion for 2017, at a CAGR of 4.62%.

•    In 2007, emoluments ate up 23% of government revenue. Today, it is eating up 35% of revenue.

•    Emoluments, as a percentage of operating expenditure, are at a record high of 36.04% this year. Just 10 years ago, they were only 23.29% of operating expenditure.

•    Emoluments as a share of the total government budget (comprising operating and development expenditure) have grown to 29.46% for 2017 compared with 18.05% of the overall federal budget allocation in 2007. Simply put, for every RM10 the government spends, RM3 goes towards salaries.

The pace at which emolument costs are growing is scary. In the last 10 years, the steepest annual increase in emoluments was in 2008 —up 25.89% to RM41.01 billion. Another double-digit rise was seen in 2012, when emoluments rose 19.68% to RM60.02 billion.

Salaries and wages make up the lion’s share of emoluments, yet there is also a sizeable amount of allowances and financial benefits paid out to public-sector staff. Then, there are additional costs incurred by the hiring of contract workers.

Salaries and wages alone have grown 91% over the last seven years, from RM29.71 billion in 2010 to an estimated RM56.76 billion in 2017.

From disclosures in Malaysia’s annual budget expenditure, the total number of full-time federal employees has remained stable in the last five years, rising from about 1.31 million in 2013 to about 1.39 million in 2017. But these numbers do not take into account the contract and casual staff.  If you include everyone and anyone who takes a salary from the federal government, the total number would be far larger.

Generally speaking, there are two types of civil service contracts: full-time with all the nice benefits and pension, and those that are renewed annually.

The public sector also broadly divides its employees into three categories: officers who are part of the ongoing operations of the government; support staff who perform administrative functions to support the officers; and daily casual workers.

Looking back, 2012 and 2013 must have been good years for civil servants as total allocations for salaries and wages rose over 16% per year. Recall that the country went to the polls in 2013. Coincidentally, the salaries and wages allocation for 2017 has also risen by double digits — 11.03% — to RM56.76 billion. The next general election has to be called by August 2018.

The cost of maintaining public-sector staff is also consuming a larger share of the federal government’s overall budget. Emoluments for this year, as a percentage of operating expenditure, are at a record high of 36.04%. Ten years ago, they accounted for merely 23.29% of operating expenditure, breaching the 30% mark in 2014.

Emoluments as a share of the larger overall budget (comprising operating and development budgets) have grown to 29.46% for 2017. Ten years ago, these were at a comfortable 18.05%.

What is worrying is that the federal government’s revenue collection has not kept the same pace as its staff costs. In the last 10 years, revenue has only grown 57% from RM139.89 billion in 2007 to an estimated RM219.73 billion for 2017. It grew for five consecutive years until 2014, when RM220.63 billion was collected. It then started to trend lower with government estimates for federal revenue at RM212.6 billion in 2016 and RM219.73 billion in 2017.

In fact, revenue collection has been under pressure in recent years. The good old days of high crude oil prices and easy oil-related revenue are long gone. The government’s debt obligations too have been growing.

Additionally, the government’s total budget allocations have not grown at the same pace as emolument allocations over the years. Budget allocations have risen only 45.6% over the last 10 years, yet the share of allocations for operating expenditure has been growing at the expense of development expenditure.

Those who say that Malaysia’s civil service is not as bloated as it seems are quick to point out that other countries often exclude the military and police in computing the ratio of civil servants to population.

It is noteworthy that over 78% of Malaysia’s civil servants are frontliners in crucial public functions, including teachers, doctors, nurses, police officers and the military. It is no coincidence that the federal ministries with the largest staff count and budgets are the Ministry of Defence, Ministry of Home Affairs, Ministry of Health and Ministry of Education.

Still, it raises the question of whether Malaysia needs such a large workforce for public services. Consider the fact that 515, 380 people are currently employed in primary and secondary education services. This makes up 37.2% of the civil service.

Politicians and civil servants have long known that the rising number of public-sector employees would one day pose a problem. Nevertheless, many have been reluctant to speak out on the issue for fear of alienating the civil service.

As one long-time political observer points out, in Malaysian politics, apart from race and religion, the third taboo topic is the civil service. “The 1.6 million people employed by the government are a secure vote bank. If you add their families to the picture, you’ll see why the civil servants are so important to those who want to be re-elected to power.”

It is not surprising then that Prime Minister Datuk Seri Najib Razak has been ever mindful of looking after the civil servants. Throughout his eight-year administration, there have been almost yearly announcements of salary hikes or  bonuses for both civil servants and pensioners.

For a glimpse of what future taxpayers have coming, The Edge Malaysia did a simple financial projection to get an indication of what the emoluments and pension bill could look like in the next 10 years and beyond. The projections are based on the historical rates in which emoluments have risen in the last decade. We concede however that our projections are limited by the fact that there is no public data on the public-sector salary scale as well as the demographic structure for an indication of retirement and attrition rates.

Based on our modelling, Malaysian taxpayers can expect to pay RM184 billion for emoluments and RM63.9 billion for pensions a year by 2027.

The question is, can Malaysia afford such a big bill for public-sector cost?

Invariably, taxes will have to rise in order to keep up with operating costs. If more taxes cannot be raised, then what is likely to be sacrificed will be the development expenditure, which will have long-term ramifications, given that there will not be enough funds to upgrade infrastructure and improve social services delivery.

In our interviews with civil servants, we asked: Is there awareness in the civil service that emoluments are straining government finances? Are there efforts to manage these costs within each department or ministry?

Many civil servants say they are aware of the problem but it remains in the background on a superficial level. “We all know that the government is in cost-cutting mode. But to most of us, this just means that we have to save on things like events, flight tickets and overtime payments. The government has a standing order that no new positions can be created but we can replace those who have resigned or retired, that’s all,” says one civil servant at a federal ministry.

A career civil servant points out that since the 1970s, there has been a lot of talk on how to optimise the public sector and make sure that things are working as efficiently as possible within the constraints. But the difficult decisions tend to be postponed.

“The tough decisions are typically left to someone else to deal with later. It’s a problem but not something that has urgency,” he says.

What is never ever talked about is trimming the size of the civil service. “Nobody ever gets fired unless you get caught doing something very bad. In most cases of under-performance, people just get transferred or put into cold storage.”

These remarks allude to the eternal allure of having a public sector job: security of tenure. However, whenever the spotlight is turned on the size and efficiency of the civil service, one of the first solutions to be bandied about is trimming the staff size. From the outside, it does seem like a quick fix and even one that is long overdue.

Yet, civil service insiders say it is easier said than done. Unsurprisingly, civil servants tend to get defensive whenever “outsiders” say the service is bloated and inefficient.

As one former staff member points out, the  civil service is not a monolithic creature. “Not every part of the government is bloated. Within a ministry, there are overstaffed departments  and there are short-staffed ones. It’s not like all civil servants are sitting around doing nothing all day.

“I think whoever is up there needs to look holistically to fill the gaps and redeploy staff. For now, whenever there is a shortage, the stop-gap measure is just to hire contract or casual staff. We have enough people; it’s just whether or not they are fully utilised.”

There are also overlapping of functions between different ministries. Many have long complained that the Prime Minister’s Department, which is the fifth largest federal ministry by staff count of over 33,000, has many departments and agencies that perform functions that should rest with existing ministries.

Examples include the Land Public Transport Commission (overlapping with the Ministry of Transport); the Malaysian Administrative Modernisation and Management Planning Unit (which could overlap with the Public Service Commission); and the National Security Council (which could well come under the functions of the Ministry of Home Affairs).

If policymakers and politicians remain unconvinced that this is a problem, look no further than what has happened in Greece. The country is still reeling from the implosion of public-sector debt obligations due to the financial strain stemming from a large civil service and indiscriminate public-sector spending to pump up private consumption.

As some politicians are fond of pointing out, Malaysia is not Greece. But that’s no comfort, especially if nothing is done to manage the rising costs of running a government.

This problem can be nipped in the bud by making some tough decisions. Ultimately, it requires political will. If nothing is done, there will be a heavy price to pay and this may happen sooner than we think.