What is Wrong with the Current Blanket Subsidy Mechanism?

The problem with some of the subsidies in Malaysia, such as our fuel subsidy, is that they are blanket subsidies. This means everyone, regardless of socioeconomic background, benefits from these subsidies.

For example, RON 95 petrol costs RM2.05 per litre at the petrol stations, with the government subsidising about RM1.50 per litre of the actual cost. This simply means a motorcyclist or a delivery rider, from the lower income group, who consumes 100 litres a month will only get RM150 in subsidy while a well-to-do family with two to four cars consuming 1000 litres a month gets to enjoy RM1500 in subsidy.

Then there’s the problem of unwanted leakages. Foreign cars are coming into Malaysia to fill up on RON-95. This is because the petrol price in Malaysia is generally much cheaper than our neighbours. Therefore, not only are our subsidies inefficient, but we are also subsidising foreigners. 

In 2022, we spent six times more on blanket fuel and electricity subsidies (RM60.6 billion) than on education (RM10 billion) and a whopping 14 times more than on health (RM4.4 billion).

A good way to manage the impact of a possible fuel subsidy reform would be to maintain the Automatic Pricing Mechanism (APM), which has been in place since 1983. The APM helps to set a ceiling price at the petrol pumps regardless of the location, whether it be in Tanjung Malim or in Bangsar.

Therefore, should we proceed with fuel subsidy reform, the APM can be used to manage petrol pump prices in the event of global oil price volatility. This is essentially what we call a “managed float”.

For electricity, the government has already started to implement targeted subsidies to heavy users whereby domestic households who use more than 1,500 kWh a month, will be imposed a 10 sen per kWh surcharge.

The problem with targeted subsidies is enforcement. Leakages are going to happen, when Malaysians are ingenious people! For any scheme to work well it must be simple, easy to implement and flexible to changes. That may not be the case for this planned targeted subsidy. Other ways to resolve this problem is to:

• Levy a higher tax on the top 5% income earners (individuals/companies);

• Widen the windfall tax; and/or

• Widen the base for Sales and Services Tax

The resultant tax revenue is then used to cash transfer to the B40 group.

Reference:

Targeted subsidies to ease rakyat’s burden, Dr Yeah Kim Leng, The Star, 27 September 2023