SINCE the global financial crisis in 2008 to 2009, domestic demand, particularly private consumption has been the dominant mover of the domestic economy, supported by accommodative interest rates and easy credit facilities to encourage consumption and investment spending.
And, if stretched households and businesses aren’t consuming enough, the government would step in, even if it will run big deficits to do it regardless of bad or good times.
Malaysia’s national savings rate is at a decade low
Malaysia’s falling gross national savings in the recent decade has raised concerns that the level of savings may not be adequate to support future increases in investment (capital formation) to raise the country’s growth potential.
Lower economic growth would decrease our national income and living standards over the medium and long-term time horizon.
Malaysia has been enjoying a high level of gross national savings in the late 1980s, 1990s and until the mid-2000s. It had dwindled progressively from more than one-third of gross national income in 2005 to 2012 and 30% in 2013 to 26.5% in 2021.
Growth in gross national savings had moderated from 12.6% per annum in 1993 to 2000 to 8.1% per annum in 2001 to 2010 and to 3.4% per annum in 2011 to 2021.
Both public (government) and private savings had registered slower increases.
The slowing public savings rate (a rise of 3.6% per annum; a rise of 4.5% per annum in 2001 to 2010; a rise of 10.6% per annum in 1993 to 2000) was directly attributable to the fall in government savings since the mid-1990s, due to both the unbroken years of budget deficits and a shift in government expenditure away from investments and towards consumption and transfers.
The falling private savings rate mirrors the trend of rising domestic consumerism, which saw private consumption growth increasing by 7.3% per annum during the period of 2011 to 2020.
Accommodative interest rates and reasonable credit facilities have supported credit-fuelled consumption and asset investment.
With the continued reliance on domestic demand to drive economic growth, private consumption share to gross domestic product (GDP) has risen from 46.2% in 2005 to 52% in 2010 and 58.8% in 2021.
Household debt had increased by 9.0% per annum to 93.2% of GDP (RM1.3 trillion) at the end of 2020 from 66.4% of GDP in 2005 relative to moderate income growth, and high indebtedness households have lesser income left to save after paying off expenses and monthly loan repayments.
Some households have continued to dip into their savings to cover expenses. As at end-June 2021, the household debt-to-GDP ratio stood at 89.6%.
Households’ total deposits (savings, fixed deposits and other investment deposits) with financial institutions have grown by 6.7% per annum in 2006 to 2021 to reach 46.5% of GDP (RM718.5bil) in 2021 (46.6% of GDP in 2005), with growth in total deposits moderating from between 10.6% to 11.7% in 2011 to 2012 to between 5.3% to 6.9% in 2013 to 2020.
The growing income inequality, especially among the B40 and M40 households in recent years also caused the falling savings rate as the cash-strapped B40 households could hardly make ends meet, leaving little for savings.
The Covid-19 pandemic has recently dealt households’ net worth incomes and savings a blow.
What can we do?
It is costly for the country if the national savings rate continues to trend lower.
Hence, the recovery of savings rate is a national priority. While we can borrow externally (foreign savings) to supplement domestic savings, the payoff from any investments must raise on our ability to service foreign debt.
It is worrying that public debt had increased by 7.7% per annum in 2015 to 2021 to RM979.8bil or 63.5% of GDP at end-December 2021; total debt and liabilities stood at RM1.3 trillion or 83.6% of GDP at end-December 2021.
Debt service charges had increased by 9% per annum in 2018 to 2022 to reach RM43.1bil in 2022, making up 18.4% of total revenue. This means that for every RM1 revenue collected, 18.4 sen goes to service payments of both domestic and external loans.
The priority now for 2022 and beyond should be to rebuild savings and investing for the future. We need policy action to boost private savings. The government can help or at least not discourage private savings.
The proportion of household budgets that goes towards paying for housing, transportation, education as well as medical care has risen dramatically, leaving families with less money for savings and other necessities.
The strengthening of the social protection system for the vulnerable, including providing affordable housing and healthcare and public mass transit can help the low and middle-income households save money, access better jobs, and improve health.
The tax system must reward greater work efforts and productivity – relying less on labour and capital income taxes and more on consumption taxes that would encourage household savings.
Enhancing retirement savings
As the population ages, it will become a more central aspect of any public programme to bolster national savings.
For businesses, too many taxes, regulatory and compliance costs, notably corporate income taxes and property taxes raise costs and encourage distribution of earnings rather than reinvestments.
These taxes are expected to tilt private investment away from investing in plant, equipment and intellectual property and toward speculative and quick gains investment such as real estate.
The government needs to fix its budget and should not stop saving during the good times and resource boom (especially high crude oil prices).
The federal government’s spending on operating and development expenditures must be closely scrutinised and prioritised to ensure that they are productive (getting good value for money in public spending), and contribute to the expansion of productive capacity in the economy.
It would be better for the government to get leaner and rebuild savings for a rainy day. We need the government to spend prudently and run budget surpluses, and add to national savings, and ramp up investments in productive assets that will boost economic growth and raise our living standards.
Large fiscal space allows it to adopt counter cyclical short-term fiscal stimulus programmes.
The unsustainable deficits and public debt would have a negative effect on households’ savings as they have to pay high taxes to help fund the budget deficit and service the debt service charges.
This means that persistent budget deficits constrain the lowering of future tax rates as it reduces tax revenue collection.
Lee Heng Guie is executive director of the Socio Economic Research Centre. The views expressed here are the writer’s own.