The second-round economic package to cushion the impact of COVID-19 on the country should have a slight change of strategy from ‘stimulating’ the economy to ‘protecting’ the productive potential as both the health and economic crises worsen, said Khazanah Research Institute (KRI).

It said the central tenets of this protection strategy should focus on a massive employment-retention programme to ensure households have enough resources to ride out the pandemic in the next few months as firms take cost-cutting measures.

The government is currently working on a second stimulus package, slated to be announced on March 30, 2020.

It will be an addition to the RM20 billion Economic Stimulus Package announced in February.

In the first package, the government introduced one version of the employment retention strategy called the Employment Retention Program (ERP) - an extension of the Employment Insurance Scheme (EIS).

The ERP has an RM600 pay-out to employees who are forced to take unpaid leave.

“It is a good initiative given the likelihood that firms would adopt other forms of labour reduction measures in mitigating COVID-19 shocks and the right way to think about the issue. However, the ERP remains sorely inadequate for a few reasons,” said KRI’s deputy director of research Christopher Choong Weng Wai in a research report entitled: “Mitigating the Economic Shocks of COVID-19: Protect Our Workers.”

This is because the ERP focuses on forced unpaid leave, but there are other forms of labour reduction measures that will be undertaken by firms such as reduction in wages or hours that would not amount to retrenchment or unpaid leave, he opined.

Programme design should consider wage reduction as a potential preference by firms, especially in the context of strong employer-employee relationships in smaller firm settings, which has the added edge of incentivising joint- responsibility between government and businesses in supporting employees.

Second, the ERP doesn’t include the bulk of self-employed and non-standard workers who have not contributed to the EIS.

However, with the extension from just the passenger transportation sector to 19 other sectors of self-employed workers being made compulsory to register with SOCSO’s Self-Employment Social Security Scheme, there is now a way of tracking and channelling cash aid to this group.

Third, the pay-out rate of RM600 is below the minimum wage and constitutes about 26 per cent of the average wage. As replacement income, this amount may not be sufficient to help affected employees, especially low-waged employees burdened with financial commitments and debt obligations.

“(Hence), the two immediate things that the government can do are: first, extend the ERP coverage to employees affected by wage reduction as well as self-employed workers, similar to how it has extended benefits to employees on unpaid leave, and second, use the minimum wage of RM1,200 as the benchmark in calculating the pay-out amounts,” Choong said.

In order to broaden coverage and increase pay-out, this requires fresh injections from the Federal Government into the EIS. The allocation set aside under the first-round stimulus to help employees on unpaid leave is RM120 million.

At a minimum, this amount needs to be tripled in the short- term and further scaled up in the medium-to-long term.

Enhancing employment retention is crucial to ensure that households do not suffer irreversible livelihood losses due to short-term shocks and help them bounce back faster to productive life when the crisis is over, he stressed.

However, finding fiscal space to support a scaled-up version of employment retention could be a challenge. In fact, besides incentivising employment retention, the country also needs a fresh round of injections from the Federal Government expenditure to address a broad range of issues: support frontline workers, expand social assistance and safeguard health.

“However, our fiscal space is currently limited by a budget balance rule or a golden rule, which Malaysia adopts as a fiscal prudence measure. In short, the government can only borrow for development or capital spending and our current fiscal balance cannot be in the negative.”

Unfortunately, Malaysia’s current fiscal balance is low and a significant increase in our budget would see us breaking the fiscal rule. And we cannot do this without removing legal constructs that are put in place to safeguard this rule.

While increasing revenue is not an option now given the drastic drop in crude oil prices and decrease in economic activities would further reduce tax collections, the government can opt to design the economic package to tilt more towards development or capital spending.

“But this means that things like subsidies and social assistance, which would reach firms and households faster, cannot be increased substantively. Again, in the short term, this is not a preferred option to address more immediate shocks.”

The other option is to reallocate resources from the existing budget.

With a total budget of RM297 billion for the year 2020 and given that we are only in the first quarter of the year, this means that we have room to move resources from the non-essentials to the essentials.

Specifically, there is an argument made about defunding uncritical ministries, he said.

“In the short term, there are merits to this idea of reallocating resources and it is our most pragmatic solution for now,” said Choong.

However, for any reallocation or to consider relaxing the fiscal rule to prepare for the medium term to take place, the parliament needs to be convened for approvals.

“But our current political imbroglio might be inhibiting this. The triple whammy of COVID-19, oil price crash and our political impasse are challenging our quest to find fiscal space. At this critical juncture, we have to muster enough trust and non-partisanship to overcome this impasse,” he added.