The State of the Nation: Why PM said DevEx is down even though allocation is near record high

This article first appeared in The Edge Malaysia Weekly on November 13, 2023 – November 19, 2023

THAT Malaysia’s economic growth “could see long-term impact” from a “relative decline” in actual development expenditure (DevEx) was one of three issues in Prime Minister and Finance Minister Datuk Seri Anwar Ibrahim’s Nov 6 statement after chairing the National Economic Action Council (NEAC) meeting, which also discussed the ringgit and ending absolute poverty.

Some eyebrows were raised, given that when tabling Budget 2024 just three weeks earlier on Oct 13, Anwar had pointed out that there was no actual year-on-year decrease in DevEx for 2024 given that the record-high RM97 billion DevEx allocation in Budget 2023 had included RM13 billion for the repayment of 1Malaysia Development Bhd (1MDB) debt papers. Excluding that RM13 billion, 2023 DevEx would have been RM84 billion, lower than the RM90 billion allocation for DevEx in Budget 2024.

Anwar did not elaborate on the “relative decrease” in actual DevEx but said the government will take immediate action to improve the execution of development projects to cut down on cost overruns from inefficiencies, overlaps and delays that have had a negative impact on economic growth.

Here is what we think the prime minister meant by a relative decrease in DevEx.

Those familiar with federal government budgets know actual DevEx spending has often fallen short of what had been initially budgeted; for instance, when revenue falls short of expectations and there is limited room to trim operating expenditure. DevEx also takes a hit when operating expenditure is higher than initially budgeted and fiscal deficit needs to be kept in check. In the decade between 2012 and 2022, actual DevEx only came in higher than initial budgeted figures in 2018.

And while budgeted DevEx figures between 2018 and 2024 showed six straight year-on-year allocation increase in ringgit terms (if one were to exclude the RM13 billion for 1MDB debt repayment in 2023), actual DevEx for 2018 to 2022 came in lower than what was budgeted.

Between the Covid-19-hit years of 2020 and 2022 — when annual federal budgets borrowed more money to spend with the Covid-19 Fund — actual DevEx was lower than the budgeted figures by RM4 billion to RM5 billion per year.

More importantly, DevEx as a percentage of gross domestic product (GDP) has tumbled to low single-digits since 2012 versus the high single-digits in the early 2000s (see Chart 1).

The drop to about 3% levels between 2014 and 2020 is even more significant if one were to compare with 1980 to 1986, when DevEx levels were between 9.2% and 19.7% of GDP. In 2021 and 2022, DevEx remained low at about 4% of GDP. Excluding the RM13 billion for 1MDB debt repayment in Budget 2023, the budgeted DevEx figures for 2023 and 2024 are about 4.5% of GDP, our back-of-the-envelope calculations show.

In terms of the changes in general DevEx allocations between the four key sectors — economic services, social services, defence and security, as well as general administration — economic services continue to receive the largest proportion of DevEx allocation, but there is a decline from before even as allocations for social services increase. Allocation for the defence and security sector have also declined compared with the early 2000s (see Chart 2).

Within the economic sector, there has been a marked increase in “other” allocations since 2009, the largest being in 2023 due to the RM13 billion allocation to repay 1MDB-related debt (see Chart 3).

The “transport” subsector currently receives the bulk of the allocation under the economic sector, a position previously enjoyed by the “agriculture and rural development” subsector in the 1970s and the “trade and industry” subsector in the 1980s.

Under the social sector, education continues to take up most of the DevEx allocation, which only shows its share of the pie but not necessarily the adequacy of funding for essential areas like education or healthcare (see Chart 4).

In 2022, the portion of DevEx given to the “social and community services” subsector was larger than the “health” subsector — which was also the case between 2012 and 2019 as well as Budget 2023. It is not immediately certain whether this has to do with the increase in aid and cash transfers.

What is certain is that only a portion of Putrajaya’s RM81 billion subsidy bill for 2023 — about 4.4% of GDP — comes under operating expenditure.

While it is hard to make specific conclusions on the state of the economy based on these numbers alone, there is a clear drop in Malaysia’s DevEx spending as a proportion of GDP. There is also a general agreement that DevEx is an essential investment in a country’s strategic and underlying strength.

The well-known fact here is that Malaysia has been funding its DevEx mainly using debt due to the lack of revenue leftover after paying for operating expenses. Malaysia’s tax revenue as a percentage of GDP is below the 15% that the World Bank sees as a tipping point in gauging whether a country has sufficient revenue to fund development.

Economic experts have long warned that the lack of revenue leftover after paying for its fixed expenses curbs Putrajaya’s ability to make procyclical economic spending as well as invest more in economic transformation, research plus talent development. It also points to the likelihood of underfunded social safety nets even as the country’s population ages.

There is a limit to debt-funded development, especially in a high interest-rate environment. Putrajaya knows it needs to spend more on DevEx and spend the money better in strategic areas. Its decision and execution of challenging but fiscal positive items like subsidy rationalisation and the implementation of a broad-based consumption tax could have lasting impact on the people’s general well-being and the nation’s longer-term development position.

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