This article first appeared in The Edge Malaysia Weekly on October 7, 2019 - October 13, 2019

MALAYSIA has been spending more than 95% of every ringgit it earns annually on operating expenses (opex) for some years now with spending outgrowing the pace of revenue growth. That leaves little choice but to borrow to fund most of the development expenditure, which was projected to slide 0.4% to RM54.7 billion in 2019 from a revised estimate of RM54.9 billion for 2018 (though above the RM46 billion allocated in Budget 2018 under the previous administration).

When tabling Budget 2019 last November, the government said it took a zero-based budgeting approach and saw substantial savings from cutting non-essential expenses, improving procurement processes and rationalising programmes, roles and agencies. Without the RM37 billion refund of taxes owed to people and businesses by the previous administration, opex was estimated to decrease to RM222.9 billion for 2019 from RM235.45 billion in 2018. The year-on-year decrease was also helped by RM9.7 billion of opex (transfers for LRT construction, gas pipeline projects and maintenance payments) being reclassified as development expenses for 2019.

In conjunction with the tabling of Budget 2020 — the Pakatan Harapan government’s much-awaited second annual budget — this Friday, we take a closer look at the details of what comprises opex in estimates for Budget 2019 to gauge just how much more money can potentially be saved.

In the following charts, we provide a breakdown of the key opex items that made up 80.3% of expenditure in Budget 2019 compared with development expenditure that accounted for only 19.7%.

Emoluments of RM82.045 billion

The largest opex item was emoluments for the civil service, projected at RM82.05 billion or 36.8% of opex in Budget 2019. The absolute amount is up from the revised estimate of RM81.3 billion for 2018 and actual spending of RM77.04 billion in 2017. These are the so-called headline numbers seen in the “Federal Government Operating Expenditure by Object” table in the annual Economic Report released by the Ministry of Finance with the annual budget.

What is not usually given to the press is the annual expenditure report, which shows that only 74.2% or RM60.89 billion of the total amount allocated for emoluments in 2019 is actually for salary and wages. Another RM17.47 billion or 21.3% of the allocation for emoluments is actually for fixed allowances. The remaining amount includes an estimate of RM985.9 million in overtime allowances and RM869.8 million in other financial benefits. Could there be further opex savings here should these items be streamlined?

Assuming that the RM1.64 billion for statutory contribution for staff is the government’s contribution to the Employees Provident Fund (EPF) as the employer of non-pensionable civil servants for 2019 alone, the allocated amount indicates that at most, only 22.5% of civil servants are not pensionable, given that RM1.64 billion is only 2.7% of the amount allocated for salary and wages. The employer’s statutory contribution rate for EPF is 12%.

In analysing whether the civil service can be downsized (Issue 1285, Sept 23), The Edge detailed which ministries employ most of the 1.6 million civil servants and which five spent the most on contract staff in 2018 and 2019.

Retirement charges of RM26.56 billion

Of the RM26 billion allocated for retirement charges this year under Budget 2019, only 78% or RM20.27 billion was for pension payments. Another RM4.92 billion or 18.9% was for gratuities, which is the lump sum paid to civil servants upon retirement. The gratuity formula is 7.5% times the months of service times the last drawn pay.

The remaining 3.1% or RM810.63 million was cash in lieu of leave not taken. It is understood that civil servants can be compensated in cash for up to 120 days of accumulated leave when they retire, up from 90 days previously. Will the government follow companies in capping the accumulation of leave to lower the number of days and encouraging staff to take their annual leave in the name of better work-life balance?

Granular expenditure estimates for 2019 also show that RM3.7 billion of the allocation for retirement charges was for retired army personnel. Other allocations include RM2.28 billion for retirees from the police force, RM102.88 million for retired members of the administration and parliament and RM21.75 million for retired judges. It is worth noting that there is an annual under- provision of RM557 million to RM4.1 billion, being the difference between estimates and actual spending on retirement charges between 2009 and 2019, a compilation of official data shows. The detailed breakdown of actual expenditure is not immediately known from the annual expenditure report, although several headline numbers are provided.

Debt service charges of RM33 billion

The RM33 billion debt service charge estimated in Budget 2019 for this year was likely counted only on direct government debt, which was just under RM800 billion as at end-June. The RM33 billion is 11.5% the estimated federal government revenue of RM231.81 billion (normalised by excluding the RM30 billion Petronas special dividend).

Going by the 10-year compound annual growth rate of 7.88%, debt service charges would be between RM35 billion and RM36 billion for 2020, back-of-the-envelope calculations show. This is assuming federal government debt is not paid down and more borrowings need to be taken to fund the expected budget deficit of 3.2% to 3.5% of GDP next year.

Supplies and services of RM29.068 billion

A closer look at details of the supplies and services bill of RM29.068 billion reveals that close to one-third of the allocation or RM9.4 billion was for legal services and other paid professional services, including hospitality. The professional fees, coupled with the RM6.2 billion for maintenance services and repair works as well as RM5.3 billion for supplies and other materials takes up 72% of the total supplies and services bill. The remaining allocation includes RM5.3 billion for communications and utilities, RM2.46 billion for rental expenses and another RM2.67 billion for other expenses such as the supply of materials for maintenance and repair works (RM940.6 million), travel and living expenses (RM908.3 million), food and beverage (RM678.9 million) and transport of goods (RM137.4 million). There may be discrepancies in the itemisation, which was translated by The Edge from a report in Bahasa Malaysia.

Grants and transfers plus others

The amount of subsidies and social assistance was projected at RM22.27 billion in Budget 2019 but the details of subsidies and aid programmes are actually found under grants and transfers that were allocated about RM50 billion, according to The Edge’s estimates based on details disclosed in the federal government expenditure estimates for 2019.

The RM50 billion (consistent with official expenditure estimates) is different from the RM7.57 billion estimated for grants and transfers to state governments and RM12.97 billion for grants to statutory bodies as listed in the “Federal Government Operating Expenditure by Object” table in the 2019 Economic Report. This is because other items, including subsidies, are also included.

Budget 2019 had assumed that subsidies and social assistance would decline to RM22.27 billion from the revised estimate of RM28.13 billion for 2018 and actual spending of RM22.35 billion in 2017, mainly due to the introduction of the managed-float system for RON95 petrol and diesel retail prices as well as the restructuring of Living Aid Assistance. Bantuan Sara Hidup was allocated RM5 billion and estimated to benefit 4.1 million recipients. It remains to be seen how allocations change for 2020, taking into account the planned targeted petrol subsidies system that has yet to be implemented.

According to details in the 2019 expenditure estimates, the RM17 billion allocated for Treasury general services includes RM10.72 billion for subsidies and cash assistance and another RM2.21 billion for subsidies on loan repayments. It is not known what loans are being subsidised (see table for details of other allocations under Treasury as well as other ministries for grants and transfers).

The RM11.75 billion allocated to the Education Ministry for grants and transfers in 2019 includes RM6.88 billion for the operation of the 20 public universities, RM1.26 billion for six teaching hospitals and RM3.8 billion for special programmes under the ministry. Of the latter, RM1 billion was for boarding school food aid, RM400 million for contract staff emoluments at institutes of higher learning, RM289 million for additional food plans (rancangan makanan tambahan), RM148 million for textbook aid, RM115.64 million to uplift Bahasa Malaysia and strengthen the English language as well as RM80 million for preschool food aid (see table).

It would be interesting to see how the current administration will improve on what was done in Budget 2019 when the details of Budget 2020 are revealed. Providing granular details of actual spending would be one way it can trump its predecessor’s in terms of information transparency.

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