The details of salary revision for civil servants were announced yesterday and were broadly in line with our earlier expectation. While the Government did not approve the Cuepacs’ request wholesale, the total amount of additional expenditure of the Government is higher than the original proposal. Consequently, we see a bigger impact on consumer spending by 1.1ppts and 2ppts respectively in 2007 and 2008, resulting in higher GDP growth of 0.5ppts and 1ppt respectively. However, we also see fiscal deficit of the Federal Government rising significantly. Although financing of the deficit is not an issue, the country may subject to downgrades by international rating agencies due to its lack of commitment in bringing down the deficit level.
Cuepacs’ proposal not accepted wholesale … As highlighted in our report dated 8 May, we had already expected some discount to the Cuepacs’ proposal due to financial constraint at the Federal Government level. To re-cap, the Cuepacs had proposed a broad-based salary revision ranging from 10% for higher ranking officers to 40% for lower income employees. Instead, the Government announced that the approved salary revision is between 7.5% and 35% as the following:
(i) 35% increase for Support Group II (Grades 1 to 16), the lowest category of public
(ii) 25% increase for Support Group I (Grades 17 to 40);
(iii) 15% increase for the Management and Professional Group (Grades 41 to 54); and
(iv) 7.5% increase for the Premier Grade of the Public Sector (Jusa).
Nevertheless, civil servants should welcome the announcement that the new salary scheme will become effective on 1 July, in line with our earlier expectation. Again, the Government may still opt to stagger the implementation in 2007 (i.e. back-dating the revision in lump sum payments) but the actual impact could begin to filter through the economy as soon as the confirmation of new salary scheme due to “announcement effect” (i.e. households factoring in higher future income) … but total spending turns out to be higher. Even though the Government did not adjust the salary scheme for civil servants as per Cuepacs’ request, the total amount of additional expenditure of the Federal Government is higher than the original proposal. The higher amount of expenditure is due mainly to an additional 20% increment for police and army workforce, a 100% increase in the Cost of Living Allowance (COLA) and a revision to pension payments for retired civil servants. The Prime Minister said the salary revision will cost the Government additional RM3.4bn in 2007 and RM6.8bn in 2008, while the COLA payments will result in additional spending of RM0.6bn in 2007 and RM1.2bn in 2008. All in all, the Government will need to bear an additional operating expenditure of RM4bn this year and RM8bn from the year 2008 onwards. This is significantly higher than the earlier sum of RM5bn estimated by the Cuepacs.
Bigger impact seen on economic growth.
With the higher amount of spending on emoluments, pensions and COLA payments, we can expect bigger impact on the Malaysian economy arising from multiplier effect of the collective monetary adjustments for civil servants. Using the Marginal Propensity to Consume (MPC) ratio 0.45 in 2006 and an import leakage assumption of 10%, the entire salary revision (RM8bn per annum) could generate an additional RM5.4bn of consumer spending per annum. The additional consumption could lift private consumption growth by 1.1ppts and 2ppts respectively in 2007 and 2008. After applying the respective deflators, the entire salary revision scheme will contribute an additional 0.5ppts and 1ppt respectively to real GDP growth in 2007 and 2008
A higher Deficit may occur for Malaysia in futures....