Speaking with StarBiz, Socio-Economic Research Centre executive director Lee Heng Guie said the possible deferring and cancellation of projects would likely impact domestic demand and overall growth prospects over the medium term.
PETALING JAYA: The austerity drive that was announced by the government may be a double-edged sword for the RM1.4 trillion economy, say experts.
On the bright side, the move to cut federal government expenses amid ballooning subsidies, may bring the national fiscal health to a slightly better position.
However, by introducing such a move at a time when the economy is expected to hit a soft patch in the second half of 2022, it may further slow down the country’s economic growth, according to the experts.
This has raised doubts on whether the official economic growth target for 2022 at 5.3% to 6.3% is achievable.
On July 17, it was reported that the government would be taking measures to save public expenditure by postponing or not going ahead with any project that has yet to commence.
Minister in the Prime Minister’s Department (Economy) Datuk Seri Mustapa Mohamed was reported to have said the austerity approach would enable money to be channelled for the welfare of the people, apart from assisting in the country’s economic recovery.
Mustapa said the austerity drive was in response to a directive issued via the Malaysia treasury circular – guidelines on public expenditure savings.
Speaking with StarBiz, Socio-Economic Research Centre executive director Lee Heng Guie said the possible deferring and cancellation of projects would likely impact domestic demand and overall growth prospects over the medium term.
He raised concerns that the austerity drive would be undertaken by the government despite the rising business costs and other headwinds such as the shortage of workers this year.
Nevertheless, Lee opined that the deferring and cancellation of projects were necessary, given the country’s high budget deficit and debt levels.
“Considering the tight fiscal space and the increasing subsidies burden as well as increased cost of projects, this necessitates rescheduling and reprioritisation of projects (between critical and non-critical) to keep fiscal deficit and debt manageable.
“There are lessons to be learnt from some emerging countries that keep on borrowing money to finance the projects that could strain their budget deficit and result in unsustainable debt.
“We have to plug in leakages and manage finance responsibly,” he said.
It is reported that under the government’s July 14 circular, ministries, departments and agencies are required to restructure their allocations to achieve a target of at least 5% savings from the remaining operating allocation for this year.
The directive by the government came as the expenditure for assistance and subsidies are projected to reach RM77.7bil in 2022, exceeding the RM31bil allocation approved in Budget 2022. It is worth noting that the government has not seen a subsidy bill as high as RM77.7bil since the country’s independence.
Centre for Market Education chief executive Carmelo Ferlito was critical of the plan to impose austerity measures.
Centre for Market Education chief executive Carmelo Ferlito was critical of the plan to impose austerity measures.
He said it was “short-sighted”, as there would be no actual cut in expenditure, but rather a shift from infrastructure expenditures to subsidies.
Such a move will likely make inflation worse and cut long-term development prospects, according to him.
“A true austerity plan should look at a rationalisation of expenditures, mostly cutting current expenses rather than development plans, which are key for a long-term sustainable growth plan. Subsidies are going to make inflation worse. To be a true and effective austerity plan it should aim at reforming the structure of current expenditures,” he said.
Meanwhile, Malaysia University of Science and Technology professor Geoffrey Williams said the austerity plan would not slash government expenditure or fiscal leakages.
“In economics, we call this a ‘paper clip’ strategy. The idea is to make small savings, by reusing paper clips for example, across many people or departments to multiply to big savings. But it will not save much and with a RM332bil budget and RM78bil subsidies bill, it will make no difference,” he said.
The economist said the austerity drive would not be able to raise enough money to help fund subsidies.
“If the government wants to divert the savings to other ‘welfare’ projects then it should identify what they are. It must also put in safeguards to make sure that the leakages from the PenjanaKerjaya scheme are not repeated,” he said.
Malaysia University of Science and Technology professor Geoffrey Williams said the austerity plan would not slash government expenditure or fiscal leakages.
The austerity drive may distract the government from bigger reforms and may cause grievances among civil servants if it affects their working conditions or cuts necessary budgets, according to Williams.
Public service quality might decline as a result, he said.
Williams urged the government to reform the “entire system” to manage the country’s subsidy bill, including via a targeted subsidy approach.
“The biggest subsidies are on petrol and the solution is tiered pricing to subsidise only small volumes, which mostly go to the lower income groups. This will reduce the petrol subsidies considerably and release funds for other social support priorities,” he said.
Asked whether the austerity drive would affect Malaysia’s projected economic growth, Williams said it “would not make it better”.
“The 5.3% to 6.3% gross domestic product target is at risk because of worsening external economic conditions and higher interest rates. The Chinese economy contracted by 2.6% in the second quarter, for example, and Singapore’s growth was flat. The austerity plans will not make it better,” he added.
