This article first appeared in The Edge Malaysia Weekly on November 25, 2024 - December 1, 2024

EVEN before the US Department of Government Efficiency (DoGE) formally came into existence last week, fans and critics of both Space X and Tesla billionaire CEO Elon Musk and businessman turned politician Vivek Ramaswamy are poring over everything said, written and tweeted to gain insights into just how the duo — whom US President-elect Donald Trump picked to head the advisory commission — will deliver annual federal government spending cuts of “at least US$2 trillion” (RM8.9 trillion) by July 4, 2026, or in just 19 months.

For perspective, US$2 trillion is about 7% of the US’ US$29 trillion GDP, close to 30% of federal expenditure of US$6.75 trillion for 2024 and an amount that (if realised) would wipe out its US$1.83 trillion budget deficit for 2024 (6.4% of GDP).

In an op-ed in the Wall Street Journal on Nov 20, the duo said DoGE was formed “to cut federal government down to size” and “won’t just write reports or cut ribbons [but will] cut costs” to deliver cost savings for taxpayers. “The two of us will advise DoGE at every step to pursue three major kinds of reform: regulatory rescissions, administrative reductions and cost savings,” they wrote.

Noting that “a drastic reduction in federal regulation provides sound industrial logic for mass headcount reductions across federal bureaucracy”, they also said DoGE would “identify the minimum number of employees required at an agency for it to perform its constitutionally permissible and statutorily mandated functions” and help support the transition of employees “whose positions are eliminated” into the private sector.

They also pledged to fix the “badly broken” government procurement process while taking aim at the Pentagon, which recently failed its seventh consecutive audit.

The Department of Defense’s more than US$800 billion annual budget reportedly includes compensation for military personnel. According to the WSJ, there are 2.3 million civilians working for the federal government, or less than 2% of the nation’s total workforce. The amount spent on annual payroll for civilian personnel was about US$213 billion as at March 2024, which means trimming one-third of headcount may reduce the federal budget by only 1%, back-of-the-envelope calculations show.

While the op-ed made no reference to national debt of US$35.97 trillion and counting, Musk had publicly said the US has to “cut government spending or go bankrupt”, noting that “interest payments on US national debt is higher than the US defence budget and is growing every month”. On Nov 14, he posted on X (which he owns) that “excess government spending is what causes inflation”, in reply to a comment that the US government had spent an average of US$2 trillion more than it makes a year for the last eight years. There were also tweets alleging that “US$900 billion taxpayer dollars [were] wasted” in 2023, citing notes from Republican Senator Rand Paul’s annual Festivus Report, which included US$659 billion in “expensive interest on our national debt”.

Musk’s criticism of government-funded research aside, official numbers show that interest on federal government debt rose from US$659 billion in 2023 to surpass US$1 trillion in 2024, exceeding the defence budget of US$842 billion.

Are there fiscal lessons for Malaysia, which also needs to deal with a debt burden of more than RM1.2 trillion?

Unlike the US, Malaysia does not have a huge defence budget. Debt service charges are, however, making up a larger portion of federal government expenditure and, consequently, the annual budget deficit.

Putrajaya expects to spend 16.1% of its revenue, or RM54.7 billion, on just servicing interest payments on direct federal government debt next year. This amount far exceeds the RM40 billion allocated for economic services, the RM29.9 billion budgeted for social services (which includes education, healthcare and housing) and the RM12.3 billion allocated for defence and security — all under development expenditure in Budget 2025.

In 2023, debt service charges of RM46.3 billion were still smaller than the RM57.2 billion spent on economic services but already more than the RM28.2 billion allocated for social services and the RM12.5 billion allocated for defence and security, official figures show.

“Of course, debt service charges are something to keep an eye on and be managed as part of the overall fiscal policy management,” says Dr Nungsari Ahmad Radhi, chairman of the Khazanah Research Institute.

“Debt service charges are linked to cash flows. What is it as a percentage of total revenues or tax revenues? How much revenue needs to go towards servicing debt? The relative perspective is to have a sense of whether it is trending upwards or downwards as a percentage of GDP or total revenues or tax revenues. Is it growing faster than GDP, [overall] revenue and tax revenue? Both perspectives are important. You must have revenues to service debt and you want [the proportion of debt] relative to revenues to be getting smaller,” he says, noting the importance of keeping track of how much revenue goes to servicing interest payments alone every year.

Keeping a tight watch on how the numbers are doing is key because, “as long as you have deficit budgets, you have to borrow to finance the deficits, and when you do that, the accumulated debt grows and, therefore, the amount necessary to service debt will also grow”, says economist and former politician Nungsari, who is also a member of the Policy Advisory Committee to the prime minister.

“The Fiscal Responsibility Act (FRA) compels the government to reduce budget deficits over time to below 3% of GDP ... This will reduce the rate of debt growth, although accumulated debt will still increase. Once the budget deficit shrinks, the need to borrow also shrinks.”

Meanwhile, Malaysia needs to do two things. First is ensuring that it benefits from development spending or public investments financed by borrowings.

“Is [the spending] allocated to the sectors or projects that build additional capacity for the economy and generate future growth? If [money is] efficiently allocated and sufficient growth is generated, the rate of economic growth will be faster than the rate of debt growth so that the debt-to-GDP ratio declines. More importantly, the generated economic growth will result in growth of revenues, preferably at a rate faster than economic growth itself, [thus] resulting in [a decline of] debt service charges as a percentage of revenues,” says Nungsari.

Second is the need to expand revenue sources and reduce reliance on Petroliam Nasional Bhd (Petronas). “Revenues from personal income tax are already insufficient to service debt. So, it is something to be concerned about. Our options are to be more efficient in spending to generate growth and have tax revenues that are buoyant relative to growth. [There are] not many choices, not easy choices … Theoretically and practically, consumption-based taxes are buoyant.” 

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