THE extra billions the government will spend by early 2025 on salaries for its 1.7 million employees may lead to higher consumer prices.
Post-Covid complaints of an inflationary economy that led to price gouging have led to a two-fold government response: inject more cash into salaries and warn retailers.
In a growing economy, price gouging is an inevitable reaction to government salary hikes. The administration is forced to spend more than it can collect in tax revenue, commonly known as managing a deficit budget.
The salary increase, while an economic boost, restarts the vicious cycle of price hikes. This may cause the ringgit to lose value, which is a contributing factor to the cycle.
In fairness, traders are not in a position to suppress rising prices.
To stave off price increases, economists will recommend stepping up supplies of goods and services, and reducing gross income to rein in demand. By doing this, the government cuts expenditure on non-development activities, slows its demand for goods and services, and moderately increases personal and commodity taxes, which encourage savings, investments, production and productivity. The government has to manage the economy with a political sensibility sympathetic to the people's needs, the fine example being price controls on essential goods, like petrol, rice and sugar.
Bank Negara combats inflation by raising bank rates, selling securities in the open market, raising reserves and regulating consumer credit. The 15 per cent civil service salary hike, with the seven per cent for top management, demands an additional RM10 billion in government spending. With emoluments at RM96 billion this year, next year's compensation may exceed RM100 billion for the first time, which also absorbs heavier pensions.
The government has resolved to avoid a pension crisis by converting future hiring into the Employees Provident Fund scheme. Still, the pending salary adjustments assure an economic bonanza: retailers anticipating a spending spree are considering price hikes. However, the cabinet is preempting the retailers' instincts: ministries are to monitor prices once the salary adjustments are made.
Experience has shown that monitoring and suppressing rising retail prices with enforcement alone works transiently.
To control prices, economists would have advised a freeze on wages, incomes, profits, dividends and bonuses. However, these measures may infuriate industrialists and workers.
So come 2025, government employees and just about every Malaysian must be educated on how to control their spending. Simply put, they must increase productivity and boost production to keep prices down and inflation low to counter this cash boost.