KUALA LUMPUR, Oct 13 — The government has to formulate a specific approach to tackling the country’s broad-based subsidies and embark on a more effective and targeted subsidy rationalisation to lessen the pressure on the government’s annual budget.
“Looking from the government financial’s capacity, the universal and untargeted subsidies have an adverse impact on the fiscal position and create an unsustainable budgetary,” said the Ministry of Finance (MoF) in its 2024 Fiscal Outlook and Federal Government Revenue Estimates report released today.
The MoF emphasised that a gradual shift from broad-based to more targeted subsidy programmes is crucial, and the shift can be effectively executed by considering various factors, including income level, geographic location, demographics and work status.
“Targeted mechanism can be implemented by improving the current cash assistance programme through consolidating the existing programmes currently undertaken by various agencies.
The mechanism should also leverage the latest technology advancements and adopt digitalisation to minimise operational costs, followed by close monitoring and assessment to achieve the intended results.
In 2022, Malaysia’s total subsidies recorded an all-time high of RM70.3 billion (operating expenditure: RM58 billion; Covid-19 Fund: RM12.3 billion), as compared to an annual average of RM15.2 billion for the past 10 years.
The MoF added that subsidy rationalisation may create more fiscal space for spending on high multiplier impact programmes and projects; thus, a policy intervention supported by close engagement is required to smoothen the transition towards a gradual and targeted subsidy mechanism.
It said that efforts to rebuild and increase fiscal space would have to be driven by both higher revenue collection and efficient resource utilisation.
“The magnitude of broad-based subsidies, mainly for fuel, poses a significant risk to long-term fiscal sustainability, and while subsidies can be used strategically to achieve various economic, social and environmental goals, it is essential for the government to strike a balance between distribution of resources and maximising economic benefit,” it said.
The MoF said the World Bank has highlighted that Malaysia needed to phase out broad-based subsidies and move towards targeted subsidies through a cash transfer mechanism to support vulnerable groups better.
The World Bank also suggested that the mechanism be applied gradually and reviewed periodically to avoid an abrupt subsidy removal that could lead to a sharp increase in inflation.
“The subsidy rationalisation aims to enhance efficiency in the economy and rebuild fiscal space while minimising the risk of economic shocks,” it added. ― Bernama
