Austerity as the new Normal: For Malaysia?

February 23, 2016

Austerity as the new Normal: For Malaysia?

Can the nation knuckle down to the new normalcy of low commodity prices, sharp currency depreciation and reduced dependence on foreign labour?

by Dr. Lim Teck Ghee

Increasingly the short and medium term outlook is showing that the days of wine and roses are over for the government, businesses and ordinary Malaysians.

Everyone in the country needs to knuckle down to the fact that we are not going to see any quick recovery from the present double whammy of low commodity prices which has drastically reduced oil and gas revenues especially and the accompanying sharp currency depreciation.

Nouriel Roubini and Friends: Brand New Economics

Part of the reason for pessimism is that the global economy whose fortunes we are intertwined with is entering into not a short period but a possible era of sluggish, even mediocre growth. As Nouriel Roubini, the widely followed analyst sees it: “potential growth in developed and emerging countries has fallen because of the burden of high private and public debt, rapid aging (which implies higher savings and lower investment) and a variety of uncertainties holding back capital expenditure.”

He ended his most recent article on”the Global Economy’s New Abnormal” with these words

“Welcome to the New Abnormal for growth, inflation, monetary policies and asset prices, and make yourself at home. It looks like we will be here for a while.” (

Biting the Austerity Bullet as the New Normal

What is being done about this new normalcy in Malaysia? Can the major stake players and holders in our economy and society respond to this creatively and judiciously? Or are we going to see foot dragging and incoherence making for a more difficult transition and dire future?

One of the key strategies of responsible governments during a period of economic downturn or economic deceleration such as the one which we are presently experiencing is to pursue a program of austerity.

Economists define austerity as a state of reduced spending and increased frugality in the financial sector. In our context austerity measures need to include spending cuts, tax increases and other unpopular measures to reduce government expenditure so as to ensure that we do not face a financial and economic crisis in the way that recent governments in Greece, Ireland and Spain have had.

Economic Management by Prayer, Not Austerity

On January 28, the Government was compelled to unveil revisions to the 2016 budget in response to plummeting oil and commodity prices and slowing domestic and global economic growth. In introducing the revised budget, the Prime Minister said that the country would maintain its fiscal deficit target at 3.1 per cent of gross domestic product and announced a series of restructuring steps expected to save the government 9 billion ringgit (US$2.1 billion).

It is important to note that the Prime Minister in his speech did not use the word “austerity” in referring to government cuts in expenditure. This is because no cuts are being proposed to the size of the civil service or salaries of civil servants which comprises the major part of the federal budget. It is planned to maintain the the additional salary increase for civil servants on 1 July 2016 whilst the services of contract staff for the public sector will continue.

Instead of introducing the austerity budget that the current situation calls for, the Prime Minister has introduced a slightly leaner and clearly politically motivated budget aimed at shoring up support for him and the Barisan Nasional government ahead of the next election which some observers now expect to take place in 2017. Although this move may provide the Barisan the edge that it desperately needs to hold on to power, whether it will pay off in strengthening the country’s economic defense during this period of challenge must be in doubt.

Meanwhile another equally disruptive economic factor is now emerging to make the continuation of the free spending status quo in our government budget and policy making look more risky and imprudent.

Reduction in Foreign Labour as Part of New Normalcy

Add to the challenges Roubini has identified the additional Godzilla sized one not found in neighbouring or competing countries. This is the foreign labour element which Government and the business sector have, for the past three decades, consistently ignored, turned a blind eye to, or taken the easy way out in managing.

For the longest time possible much of the profits of the business sector; and many of the comforts and good things that the middle and upper class presently enjoy have come as a result of the easy and relatively cheap access to foreign workers.

This will have to change.

Partly as a result of the need to fill the government’s depleted coffers arising from the sharp fall in Petronas’ contribution to the national budget, government is proposing to substantially increase the levies imposed on hiring of foreign workers. Although that decision has been temporarily shelved following the outcry from key affected industries it is clear that the era of easy access to foreign labour is coming to an end.

In the new normalcy hitting our shore, Malaysians will have to take up the 3D jobs that we have depended on the free flow of foreign workers to perform. It will be a difficult transition but one that seems inevitable. What is also certain is that the reduction in foreign labour numbers in the country will have to mean a more frugal, modest and austere lifestyle and operations for all those addicted to cheap exploited labour.

2 thoughts on “Austerity as the new Normal: For Malaysia?

  1. Have been telling you folks… better start voluntary austerity straightaway… It does not need a genius to see that very hard and uncertain times lie ahead not only for us but in the entire world…

    So why not prepare ourselves now?

  2. Low commodity price is here for a few years although there should be a dead cat bounce once the over over. But fewer foreign labour, I do not see. Higher taxes.and charges will continue as govt need to spend heading into election.

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