Improving public finances in Malaysia

THE Malaysian government's move to cut back on public expenditure from Jan 1 should go some way in assuaging public anger at rising costs that came with the cut in subsidies to several everyday items in the last Budget. So, from the beginning of this year, junior civil servants will travel economy class on domestic flights; all federal offices will have to cut back on electricity usage by 5 per cent, presumably by turning up the temperature settings in their air-conditioned offices; renovations of government offices are on hold; and the use of consultants and event management companies is being curbed. The amounts of food, beverages and decorations at government functions are also to be less generous.

Of course, Malaysian leaders did expect a fallout from the inevitable price rises as they attempted to rein in the country's fiscal deficit. The prices of petrol, diesel and sugar have already inched up late last year. The follow- on effect was also expected. Taxi, train and bus fares look likely to go up this year. Electricity tariffs are up by 15 per cent in the peninsula. The next round of private road toll hikes, which had previously been absorbed by the government, will now be paid by road users. Ever sensitive to accusations of being indifferent to the plight of the poor, the government has signalled that it will raise welfare payments to low-income families. They will receive RM650 (S$250) in 2014, up from RM500. Pensioners and lower-middle income groups will also receive extra financial assistance.

On the latest available figures, these cuts will save some RM3.3 billion from Malaysia's annual RM24 billion subsidy bill. On the downside, the reduction in fuel subsidies alone will trigger an almost one percentage point rise in the inflation rate to nearly 3 per cent in 2014, compared with the level in 2013, according to an International Monetary Fund (IMF) estimate. Will Putrajaya be able to ride out the political backlash? Fortunately, so far, protests have been muted. The New Year's Eve protest in Kuala Lumpur did not cause much disruption, despite initial fears. The opposition alliance has also been restrained in its criticism, perhaps because its leaders appreciate the consequences of long-term fiscal deficits and the need to put public finances on a firmer footing.