Budget 2025: Falling short on economic dignity

• Capex items – what govt is choosing to spend on & what the country will reap
• Unless SMEs become more productive, wages will remain low for most workers

There is no shortage of opinion pieces and commentary on the 2025 budget. So, what more can I add to what has already been said?

Perhaps a reminder of what a budget, beyond the big flashy numbers, really ought to represent.

We are somewhat mid-way through the current administration, one that had early on signalled its principles in the Malaysia Madani vision – emphasising six core values namely Sustainability, Prosperity, Innovation, Respect, Trust and Compassion. But above that, Prime Minister Anwar Ibrahim stated at the start that Malaysia Madani was an “effort to drive and restore Malaysia’s dignity and glory..”

The 2025 Budget was also tabled just one month shy of Anwar reaching his third year in office with this being his third budget as Prime Minister cum Finance Minister.  This then ought to be the north star of the budget… economic dignity.

The common refrain most commentaries pick on is the limited fiscal space, with never-ending prescriptions of what the government ought to do to reduce the deficit.

Good intentions notwithstanding, we ought to remind ourselves that as far as opex goes (that part that the government must spend on its operations, including salaries and pensions), it simply cannot be reduced in the short term. These are liabilities that must be met no matter the cost. So, the only line items that are of real consequence moving forward would be the capex items – what the government is choosing to spend on, and what the country will reap in return.

I emphasise choosing because choice matters, and the choices made by this administration should be what we measure against the big question – dignity.

Fixing what truly matters

Sustainable wages:

A recent report by Khazanah Research Institute found that only the top 30% of households spend on aspirational goods and services. We cannot have a prosperous economy if 70% of us are just about getting by day to day.

Often, we hear of the mismatch in salary expectations of fresh job seekers and starting salaries. The sad truth is that 60.8% of fresh graduates earned RM2,000 or less in 2010, and by 2021 – a good 11 years later – starting salaries were still RM2,000 or less for 59.6% of fresh graduates. Employers (Ok, boomers!) are quick to point out that Gen Z are just being unrealistic.

But factor in inflation and cost of living expenses and we are essentially telling our younger generation that they are worth about half their previous cohort. Here’s another sobering stat – the average wage of the bottom 50% of wage earners only went up by RM56 annually between 2010-2019. Economically speaking, this is society clearly signaling a depreciation for human capital.

The government tries to manage this by setting a minimum wage, which Budget 2025 proposed to increase to RM1,700 a month effective February 1^st 2025. RM1,700 is still way below what should be deemed a dignified salary, but already there is pushback from employers, as is to be expected.

[RM1 = US$0.227]

The thing that very few commentators seem to consider is that pushing for higher wages can ultimately be detrimental to labour by incentivising companies to automate tasks previously done by low-skilled workers (For evidence, refer to Alesina et al. (2018), Chu et al. (2020), Eckardt and Steffen (2021).

It is a complicated cycle, where the government will need to spend even more on unemployment benefits and reskilling those workers that have been replaced. This should not be the reason to keep people in low-skilled jobs, but it does limit the policy options available to the government.

On the flip side, one should also consider if employers are just penny-pinching. A fairer view will consider that the SMEs that make up 96.9% of our business establishments (based on Department of Statistics Malaysia 2023 data) can’t access much needed capital.

Consider that there was a total of RM5.98 billion in loan applications in the manufacturing sector for September 2024, with RM3.89 billion approved by the banks according to Bank Negara Malaysia’s Monthly Highlights & Statistics update. That is a RM2 billion shortfall in required capital in just one month. It is a similar pattern across different sectors, and across time.

This in part tallies with the rise in alternative fundraising (i.e. peer-to-peer lending, equity crowdfunding, and venture capital) which stood at RM3.8 billion in 2023. The Securities Commission views this as a positive, and rightly so, but let’s also make sure we understand that these are RM3.8 billion worth of required capital that our banks were not willing to fund.

In the case of P2P financing, the risk that banks were not willing to shoulder has now been transferred to the individual investors (who tend to be mainly in the upper middle income and above bracket). That’s a total of RM5.96 billion in capital provided to SMEs by regular folks since the inception of P2P in Malaysia in 2017. 67% of these loans were for RM50,000 and below, and 98% of all loans were for working capital, as opposed to only 2% for the purpose of business expansion. This may be no consolation if you are struggling with your pay check, but chances are your employer is struggling too.

In short, unless our SMEs get easier access to capital, and become more productive, wages will remain low for most of our workers. The budget doesn’t specifically address these issues other than the proposal to reintroduce small and medium banks. The digital banks may perhaps fill these gaps, as several of them have announced the impending launch of their business banking solutions specifically for SMEs.

Unsustainable household debts:

Our household debts stood at RM1.57 trillion as of June 2024, corresponding to 83.8% of GDP, but the finance ministry isn’t too worried. Countries like Australia, South Korea and Canada have household debts that exceed 100% of GDP. But not all debt is created equal.

High wage earners can use debt as a leverage to build more wealth. With more Malaysians taking on second jobs, debt is likely being used to finance basic needs. There have been many attempts to address this issue, and the budget allocates further cash assistance via the BUDI MADANI program. This is just one in a long line of cash assistance programs among other overlapping social welfare programme run by multiple parties. The best-case scenario is these programmes provide some breathing room but only a major programme like a Universal Basic Income can help reset the financial disparity within our society.

The counter to this would be the cost of funding such a programme when our debt to GDP is already close to the self-imposed ceiling. To this, I can only offer the wise words of John Maynard Keynes – “Anything we can actually do, we can afford.”

Tax as an incentive vs tax as a penalty

There’s a popular saying in economics that you get less of what you tax. The concept is rooted in the principle that taxes act as a disincentive for certain behaviors. By imposing taxes on specific activities or goods, the government effectively increases their cost, making them less attractive to individuals and businesses.

1. Dignity at the workplace

Take for example the proposal for a tax incentive for employers who implement flexible work arrangements. Employees are clear that they strongly prefer flexible work arrangements. The research on worker productivity though is mixed. I tend to think of this as the a-wine-a-day research conundrum. For every research that says a glass of wine is good for you, you will be able to find another research that says otherwise. But when you factor in the cost of office maintenance, the cost and time penalty of commuting to work and the penalty placed on parents with care-giving responsibilities, there are so much more upsides to providing a flexible work arrangement by default. In fact, the government should tax companies that do not offer such incentives, rather than offering tax deductions to the (few) that voluntarily provide this option.

2. Increasing productivity by maximising our human capital

Such a tax penalty will also help address hiring women returning to work. Rather than incentivising good behaviour, we should tax bad behaviour. Not hiring a person because she has not worked for a certain period and has a gap in her resume is discrimination. One other concern is the specific tax incentive as it applies for software expenses in ‘implementing flexible work arrangements’. The government should not be incentivising the use of intrusive software for remote employee monitoring.

3. Carbon tax

The introduction of the carbon tax is welcome but also opportune. Carbon taxes are going to hit us one way or another with the introduction of the EU Carbon Border Adjustment Mechanism (CBAM), especially for our steel industry.

If we are going to have to pay, we might as well collect it ourselves. The revenue from this carbon tax is proposed to help fund further research to support decarbonisation. For now, it is hard to estimate the revenue that this will generate as there is no information on the tax rate. Singapore imposes a carbon tax of SG$25/tCO2e currently, but started off at just SG$5/tCO2e. Assuming we introduce a rate of RM5/tCO2e (which is extremely low), this will net us about RM1.4 billion in tax revenue based on 2022 emissions for the energy sector.

Finer details on the carbon tax should be expected soon, but the Federation of Malaysian Manufacturers (FMM) have already raised concern on the potential rise in electricity tariffs. 

Considering that 81% of our electricity generation is still fossil fuel based, I don’t see how energy producers can absorb this without passing on some of it to consumers. The carbon tax can be levied at the production, distribution or consumption stage, and I expect there will be some shuffling about considering the high carbon nature of our energy mix.

Other areas worth mentioning

1. Charge Point Operators get zero love

The EV infrastructure players probably feel a bit left out of Budget 2025. Other than the announcement of a sub-RM100k EV, there was no mention at all on further incentives for building out our EV charging infrastructure.

My colleagues have covered the industry gripes previously, but I take a different view. It is safe to say that a transition to electric vehicles is all but inevitable. That being so, we should be able to anticipate that all these vehicles need to be charged while idle (i.e. overnight, while parked), and not during transit.

The rush to build out EV chargers along highways and within public areas is a bad strategy and I doubt any of these players will see a ROI on their investments. Somehow this seems to escape most people but imagine a time in the future when the most common of cars are all EVs. Everyone is going to expect that they can charge their vehicles overnight, the same way we charge our phones and laptops to have it ready to go again the next day.

We can outfit every parking bay in every condominium and apartment in the country, and still the key problem will be delivering enough energy capacity to charge millions of cars overnight. This is not a charging-pillar issue but an energy production and grid capacity issue.

Ecological fiscal transfer gets a boost

Also in Budget 2025 is an proposed increase in the Ecological Fiscal Transfer Fund from RM200 million to RM250 million, representing a 25% increase. This boost is aimed at supporting state efforts in protecting forests and wildlife. Half of the allocation (RM125 million) will be contingent on the performance of state government expenditures related to environmental preservation. Related to this is also the allocation of RM80 million to train and hire 2,500 forest rangers from the Orang Asli community. A positive step.

Overall, I feel the government is attempting to be bold but is doing it in liberal doses. Will this budget help push the reset button and provide economic dignity for everyone? Not quite. In fact, I think many people will have further concerns on how the subsidy rationalisation will affect them, partly self-inflicted by announcements of the plan, without the actual plan itself in place.