Many governments all over the world have their own social protection programmes to alleviate hardships faced by their citizens. Some examples of these social protection programmes are direct cash transfers, price control ceilings for essential goods, subsidies for fuel and electricity, and health and education sectors.
In Malaysia, subsidies have been part and parcel of the economy for many years. The rakyat expects the government to continue providing them.
As the government grapples with getting its finances right, trying to balance its revenue and expenditure, there have been calls for the current subsidy system to be reformed. One of the key reforms is to move away from the current costly blanket mechanism that benefits everyone.
Subsidies do not actually make the cost of the items cheaper. What happens is the user only pays a fraction of the cost to purchase those items, while the rest is borne by the government. The portion that is borne by the government is what we refer to as subsidies.
Our subsidy bill, which includes social assistance, has been growing over the years. In 2008, our subsidy bill stood at RM35.2 billion. As of 2022, this had grown to RM67.4 billion. This is almost a two-fold increase.
Subsidies in 2022 accounted for nearly 4% of Malaysia’s gross domestic product (GDP) and made up approximately 23% of the government’s operating expenditure. We could also be using this on development expenditure.
From another perspective, if we consider that the government’s revenue in 2022 was RM234 billion, subsidies consumed almost one-third of that. The government has forecasted RM58.6 billion in subsidy payments for 2023. Despite being lower than the amount allocated for 2022, it is still a huge number.
Malaysia has been spending more than it earns in all but five years since 1970. That’s 48 years of deficits. Running a deficit budget means the government has to borrow. Hence, as at end 2022, the total government debt is RM1.08 trillion. And that’s excluding government guarantees provided to numerous government-owned entities, which if included would push the total government liabilities to almost RM1.5 trillion. The amount is equivalent to the size of the Malaysian economy. Or divide that by Malaysia’s population of 32 million, that’s equivalent to RM46,875 debt for each and every one of us.
In 2022, the cost to service government debt amounted to RM41.3 billion and exceeds what is spent on health, education, transport and housing put together. Moreover, nearly 30 percent of the interest payments ends up in foreign hands.
This (RM41.3 billion) is also equivalent to 20% of tax revenue. In other words, for every ringgit that the government collects, 20 sen goes towards paying the interest on the debt alone.
The government subsidises many goods and services - rice, which is being sold at RM2.60 per kg; hospital services will cost only RM1; primary and secondary education are free for citizens; studying a Bachelor in Medicine and Bachelor in Surgery (MBBS) degree in University Malaya will only cost RM 14,990 for the whole programme; Rancangan Makanan Tambahan (RMT), Bantuan Makanan Asrama, Bantuan Makanan Prasekolah, Skim Pinjaman Buku Teks, Bantuan Awal Persekolahan, Biasiswa Kecil Persekutuan to our children are others.
The biggest chunk of our subsidy expenditure comes from fuel and electricity subsidies. Together, these two items accounted for RM60.6 billion, or over 90%, of the total subsidy bill. Our subsidies for fuel (diesel, petrol and cooking gas) alone came up to about RM50.8 billion (or 77%), while our electricity subsidy amounted to RM9.8 billion (or 14.8%).
After all that is said and done, targeted fuel subsidies could hit the middle-income group (M40s) the hardest. The top 20% income earners (T20) would be better able to absorb the higher fuel costs while the bottom 40% households (B40) will be eligible for handouts.
The rollout of targeted subsidies will be underpinned by the government’s Central Database System (Padu), which is 60% completed with a targeted launch date in January 2024. It takes into account a number of indicators beyond incomes, such as number of households, dependent children according to education levels, location, number of vehicles, records of assistance received from government departments and other information that can help determine the disposable income of each household.
The key is to implement this targeted subsidy scheme gradually, otherwise we may have a rapid rise in inflation!
References:
Targeted subsidies to ease rakyat’s burden, Dr Yeah Kim Leng, The Star, 27 September 2023
Targeted fuel subsidy could squeeze M40s hardest, says experts, Priyatharisiny Vasu, The Edge Malaysia, 28 September 2023
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