KUALA LUMPUR – Targeted subsidies are a fair approach to alleviating the financial burden on vulnerable groups while reducing government expenditure, according to economists.
Speaking to Scoop, Socio-Economic Research Centre executive director and economist Lee Heng Guie described targeted subsidies as fairer and more effective than blanket subsidies.
“The current subsidies benefit all income groups, which has prompted the government to start rationalising fuel subsidies, beginning with diesel in the peninsula,” Lee said .
Subsidising those who do not need it is costly for the government and diverts resources from those in need, such as low-income households and vulnerable individuals, he explained. This has made the current subsidies fiscally unsustainable, necessitating the government’s move towards fuel subsidy rationalisation.
Lee highlighted that the government spent RM223.5 billion on subsidies, or 8.9% of the total operating expenditure, from 2012 to 2022. Of this, 71.6% was spent on fuel subsidies, with the rest covering interest rates, agricultural inputs, cooking oil, electricity, toll compensation, transportation, chicken and eggs.
By implementing targeted diesel subsidies alone, the government could save RM4 billion, with overall fuel subsidy rationalisation potentially saving between RM4.7 billion and RM9.4 billion annually, Lee explained. Additionally, targeted subsidy measures for electricity tariffs and floating chicken prices have saved the government about RM4 billion and RM1.2 billion, respectively.
Asked about the relative effectiveness of targeted subsidies versus goods and services tax (GST) exemptions in saving government funds, Lee noted that they served different purposes. Targeted subsidies are part of fiscal management to rationalise operating expenditure, while GST broadens the revenue base, he said.
Despite the savings from targeted subsidies, reintroducing GST, which was replaced by the sales and service tax in 2018, would significantly strengthen the fiscal balance sheet, he added.
Lee acknowledged that the transition to targeted subsidies might lead to increased inflation and living costs, but government mitigation measures like cash aid for households in the M40 and B40 income groups would help ease this burden.
Universiti Utara Malaysia economics professor Prof K. Kuperan Viswanathan said that targeted subsidies would significantly aid those struggling with the rising cost of living. He cited existing programmes like meal support for schoolchildren from low-income families, including the School Milk Programme and the Supplementary Food Plan, as examples.
Shankaran Nambiar, head of research at the Malaysian Institute of Economic Research, noted that targeted subsidies were designed to benefit vulnerable groups.
“Even the T20 income group benefits from the RON95 fuel subsidy, so removing subsidies and compensating those who need them would reduce government expenditure,” he said.
However, he warned that removing subsidies for all income groups could lead to price increases and higher living costs.
Nambiar agreed with Lee that reintroducing the GST and exempting certain goods would increase national revenue, but too many exemptions could reduce tax efficiency.
Last week, Prime Minister Datuk Seri Anwar Ibrahim announced that the cabinet had agreed to implement targeted fuel subsidies, starting with diesel in the peninsula, to ease the financial burden on the most-affected populations. He noted that this move would exclude Sabah and Sarawak to avoid additional burdens on the majority there.
Finance Minister II Datuk Seri Amir Hamzah Azizan is expected to announce the implementation mechanism and date for the targeted diesel subsidy soon. – May 28, 2024
