AS Malaysia navigates its current economic landscape, the government is taking decisive steps to strengthen its fiscal health.
According to the Finance Ministry, as of the end of June 2023, the country’s economic scenario is marked by a substantial national debt and liabilities of RM1.5 trillion, representing 82% of the gross domestic product (GDP).
This situation necessitates a strategic overhaul, prompting the administration to implement a series of targeted subsidies and introduce new tax measures to address the burgeoning budget deficit and the escalating public debt.
Malaysia’s budget deficit, estimated by RAM Ratings to be 5% of GDP for 2023 and projected to reduce to 4.3% in 2024, has been a longstanding issue, financed primarily through borrowing.
With global interest rates rising, the cost of servicing this debt becomes increasingly burdensome. This presents a looming financial burden that, if left unchecked, can place an undue strain on future generations.
The government’s response to this predicament involves a multi-pronged strategy. Central to this approach is the aim to reduce subsidies and augment revenue by introducing new taxes, such as a capital gains tax and an increased service levy. These measures are part of a broader ambition to expand the revenue base and curtail expenditures.
Transition to targeted subsidies
At the forefront of these reforms is the shift to targeted subsidies to enhance fiscal efficiency and social equity, as exemplified by the planned introduction of the targeted RON95 petroleum subsidy programme.
This policy shift was highlighted by Economy Minister Rafizi Ramli in his opening address at the National Economic Outlook Conference organised by the Malaysian Institute of Economic Research on Nov 27, 2023, emphasising its implementation in the latter half of 2024.
In 2022, Malaysia experienced a substantial increase in its subsidy expenses, escalating to RM55.443 billion. This amount represents a 322% hike compared with the previous year.
A notable 81.5% of this total was attributed to the blanket petroleum subsidy. Recognising the unsustainable nature of this upward trend, the government is keen to implement a more streamlined subsidy system, focusing on the neediest sectors of society while simultaneously reducing the overall subsidy burden.
A pivotal element in this new subsidy framework is the Central Database Hub (Padu), which is poised to play a crucial role in ensuring that subsidies are appropriately targeted, reaching the intended beneficiaries, especially those within the lower-income bracket.
By leveraging accurate data, Padu aims to prevent misallocation and enhance the efficacy of subsidy distribution. The success of this targeted approach promises not just a reduction in government expenditure on subsidies but also a step towards fostering more significant social equity, allowing for the reallocation of funds towards other vital social safety net programmes.
Effective enforcement and public engagement
The targeted subsidy scheme necessitates robust enforcement mechanisms to ensure its success. The government is establishing stringent monitoring systems to guarantee that subsidies are disbursed to the deserving population, which involves implementing comprehensive eligibility checks, efficiently tracking the distribution of subsidies and putting in place measures to prevent fraud or misuse.
Equally important is the role of proactive communication and public engagement.
Given the sensitive nature of these reforms, it is imperative for the government to transparently address concerns and provide clear, accessible information about the changes, including the criteria for subsidy eligibility.
Educating the public about the rationale and benefits behind these reforms is critical to fostering public understanding and support.
Ensuring precision and security
One of the ultimate outcomes of the Padu system is to utilise the database to provide targeted subsidies to the desired population in dire need of food and fuel subsidies, among others.
The effectiveness of the programme hinges on the accuracy and security of the data processed by Padu. Addressing concerns related to data security is paramount in maintaining public trust in the system.
The government’s commitment to fortifying Padu’s data protection measures and enhancing its cybersecurity protocols is crucial in safeguarding personal information and ensuring the correct allocation of subsidies.
Regular audits, system updates and feedback mechanisms are instrumental in preserving the database’s integrity and accuracy.
Adapting to behavioural economic implications
As petrol prices increase, people will likely alter their transportation habits, potentially leading to a greater reliance on public transportation.
Recognising this possibility, the government urgently needs to invest in and improve the country’s public transport infrastructure and services.
Enhancing the efficiency and coverage of public transit systems will make them a more viable and attractive option for the general population. This shift will address immediate transportation needs and support long-term sustainable urban mobility.
Furthermore, the government’s strategy may encourage carpooling as a cost-effective alternative, helping to mitigate individual fuel expenses and reduce traffic congestion. This transition may also lead to a growing preference for fuel-efficient or electric vehicles.
The government can support this shift by offering incentives for adopting such vehicles, aligning with global environmental sustainability trends.
In addition, these reforms will allow Malaysia to foster a more pedestrian-friendly and cycling-centric urban environment.
This can be achieved by developing dedicated bike lanes and pedestrian paths, coupled with improvements in amenities such as parking facilities at LRT stations. Such initiatives will support those opting to walk or cycle, especially for shorter commutes, and contribute to a healthier, more environmentally friendly lifestyle among the populace.
As Malaysia forges ahead with its targeted subsidy policy, the focus must remain on enhancing the accuracy and security of Padu, adapting to the anticipated behavioural shifts among the populace and ensuring rigorous enforcement of the new measures.
By effectively navigating this transition, the government aims to provide equitable subsidy distribution, foster sustainable economic resilience and pave the way for a more sustainable and prosperous future for all Malaysians.
Targeted subsidies or replacing them with more effective social safety nets are always technically and politically complex. A well-designed targeted subsidy can reach the most vulnerable groups.
This bold initiative aims to alleviate income disparity, optimise government expenditures and reduce debt, propelling Malaysia one step closer to realising the vision of a developed nation.
Grace Lee Hooi Yean is the Head of the Economics Department, School of Business at Monash University Malaysia. Nafis Alam is a Finance Professor and Head of the School of Business at Monash University Malaysia. His research mainly focuses on financial regulation, and he is among the top global influencers on FinTech and RegTech. Comments: letters@thesundaily.com
