Wage subsidies to employers better than giving cash handouts

The devil is in the details as the saying goes. Prime Minister Tan Sri Muhyiddin Yassin announced a whopping RM250 billion stimulus package last Thursday. This is 17% of Malaysia’s 2019 gross domestic product (GDP). The direct fiscal injection, ie, the government dipping into its till and handing out the funds, is RM25 billion or 1.7% of its GDP. While this amount is much smaller and manageable, nevertheless former minister in the Prime Minister’s Department Tan Sri Abdul Wahid Omar said it would push the budget deficit to 6.5% of GDP, from its present 3.5%. Others think the fiscal injection is inadequate.

The questions I will ask are how will it be spent? Is that the best way to spend it?

First, I fully support the need to take a proactive stand to meet and overcome the health crisis that has morphed into an economic crisis and possibly a financial crisis. Second, the priority is to minimise the loss of lives, protect our health and front-line workers who are risking their lives to save others’. Third, the government should minimise the impact of economic dislocation and economic suffering of the vulnerable segments of society. Fourth, the government should not worry about how the stock market reacts. Let the market sort itself out. Fifth, because of the size of the budget and the questionable legitimacy of the present Cabinet and government, it is all the more imperative that the proposed budget be openly debated in Parliament as is done in most countries, and for as much transparency as possible to be made to the public.

A huge chunk of the fiscal injection is used to directly give cash handout to the B40 (households earning less than RM4,000) and M40 (households earning between RM4,001 and RM8,000). Every B40 household will get RM1,600 and every M40 household wil get RM1,000. Singles earning less than RM2,000 will get RM800 and those earning between RM2,001 and RM4,000 will get RM500. Students of tertiary education will get RM200. Pensioners and civil servants of Grade 56 (whose total remuneration is about RM15,000 per month) and below will get RM500 each.

According to my rough calculation, this could cost around RM10 billion. We are not sure if this is on top of the National Caring Aid of RM10 billion to farmers, fishermen etc.

Meanwhile, small businesses from hoteliers to food and beverage operators to retailers are all crying for more help. The government has allocated RM600 wage subsidy to each employee for up to three months provided they are kept on the payroll. But most say it is inadequate especially as they face severe cash flow problems.

The way the government has crafted the package raises a host of questions. Does it help those in greatest need? Is it the most effective way to help the needy and keep the economy intact? Is the principle of sharing pain, ie, the well-to-do should do their part to sacrifice a bit of their income for the needy, adhered to? Are some groups getting more at the expense of others?

It seems the biggest component of the fiscal stimulus is the direct cash handouts to individuals and households. I support that workers in the front line such as health and security personnel should receive extra income for the risks they undertake. Assistance should go to those directly affected, ie, who could lose their job or wages due to the lockdown. Cash handouts should also be given to the self-employed such as hawkers, taxi drivers, fishermen, farmers, gig workers, not forgetting foreign workers.

But why are the over one million civil servants of Grade 56 (whose salary reaches RM15,000 per month) and below and pensioners receiving RM500? They are not affected as they continue to draw salaries even though most, except for essential staff, are not working during this period? Is this a carrot to win their political support for a government that was not voted in by the people. Contrast this with real leadership shown by Pahang State Secretary who announced that 10,000 civil servants are ready to donate part of their salaries to Tabung Covid-19 Pahang.

Also, such cash handouts are inferior to the wage subsidies to employers for economic and administrative reasons. First, administratively it is definitely more efficient and easier to pay directly to the hundreds of thousands of firms or through their Employees Provident Fund (EPF) account, than to the millions of households and individuals. Second, this scheme helps both the firms to stay afloat and also the employees to tide them over hard times. The association of small medium enterprises (SMEs) has said that without adequate assistance, 50% could fold up. According to the Statistics Department, this sector accounts for 98% of total establishments, 65% of employment, and 38% of GDP in Malaysia. In contrast, cash handouts to individuals help them directly and firms only indirectly. However, if half of the SMEs fold up, supply of goods and services would be severely disrupted while demand increases, resulting in inflation.

Countries do not give a 100% wage subsidy, which makes sense. Given the lockdown, the paramount objective is to make sure everyone has access to food and essentials. This is not a time to receive money to spend on discretionary items like new clothes and fancy stuff. Second, the wage subsidy given to companies for their employees can be calibrated on a sliding scale, higher percentage for those with lower income and lower percentage for those with higher income as part of the principle of pain sharing.

In short, this package should be better scrutinised and fine-tuned. It should be debated and passed in Parliament. It should not be used as a tool to win political support.

Source: TheEdgeMarkets