KUALA LUMPUR (Aug 17): The planned salary increment for Malaysia's 1.6 million civil servants is a fiscal challenge that is not insurmountable, and could be balanced by the government’s strategic measures.

The overall fiscal outlook remains manageable, said Universiti Malaya’s Business and Economics Faculty Deputy Dean (Development) Dr Goh Lim Thye.

Goh said while the increments are necessary to address the lower public-sector salaries versus the private sector, they could inevitably add pressure to the national budget and the government’s fiscal deficit targets. 

“However, the government has several strategies in place to manage this impact effectively. First, it’s important to note that not all 1.6 million civil servants will automatically benefit from the pay rise. 

“The recent adjustment in the exit policy, reducing the period for underperforming civil servants from 36 to 18 months, emphasises the government’s commitment to rewarding performance. The increments will be selectively distributed, ensuring only those who meet or exceed performance expectations will benefit,” he told Bernama.

In addition to performance-based increments, other measures including broadening the tax base, reducing subsidies, and cutting non-essential spending have been designed to generate additional revenue and reduce expenditure, creating the fiscal space necessary to accommodate the increments while still aiming to achieve the 4.3% deficit target for 2024 and 3.0% by 2025, he said.

“By linking pay rises to performance and implementing broad fiscal reforms, the government is demonstrating that it is possible to meet its deficit goals while still investing in its public-sector workforce. This approach ensures that fiscal discipline is maintained, and the economic health of the nation preserved,” he said.

Higher salaries could be translated into disposable income and purchasing power, which would boost economic activities, particularly in the retail segment.

“The relationship between disposable income and consumption is well established, particularly in the context of Malaysia, whereby an increase in disposable income typically leads to higher consumer spending, which directly benefits the retail sector,” he said.

Citing a Department of Statistics Malaysia report, Goh added that average annual household income grew by 2.4% from 2019 to 2022, while household consumption expenditure rose by 3.7% annually during the same period.

“The marginal propensity to consume (MPC) in Malaysia rose to 0.96 in 2022 from 0.66 in 2019, indicating that households are now spending nearly all additional income. This high propensity to consume suggests that salary increments for government servants would likely result in an immediate boost to retail-sector activities with most of the additional income being spent on goods and services,” he added.

Goh, however, emphasised that the high MPC suggests that most of the income growth is directed towards consumption.

This trend underscores the need for financial literacy programmes and targeted savings campaigns to encourage government servants to allocate more of their disposable income towards long-term savings. 

“Such initiatives can effectively complement salary increments by promoting a culture of saving, thereby ensuring that the benefits of increased income extend into future financial security,” Goh said.

Echoing the sentiment, Universiti Utara Malaysia’s School of Economics, Finance and Banking senior lecturer Muhammad Ridhuan Bos Abdullah said credibility is very important to convince investors and firms of the implementation of fiscal policy.

"One of the important indicators for investors and firms is the growth of the wholesale and retail sector; this indicator is important [when measuring] household spending and the rise in business sales," he explained.

He also emphasised that the Madani Economy policy efforts to bridge Malaysia's fiscal gap also help improve the country's credibility and attract investors.

Meanwhile, the Malaysian government remains committed to fiscal consolidation, with the fiscal deficit expected to improve to 4.3% of gross domestic product by end-2024, and ultimately reach the targeted 3.0% to 3.5% by end-2025. 

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