A gradual increase in petrol prices is the answer to reducing Malaysia’s fiscal deficit compared to targeted subsidies. This is the view of some economists. This exercise will then allow the government to directly assist the lower-income groups.
The approach involves gradually increasing petrol prices every quarter by 20 sen per litre, or to reach RM1 above the market price within the next two years.
Regional comparisons also reveal a reality that fuel prices in some neighbouring countries have gone past the RM5 per litre mark. In Singapore, the price of 95-octane petrol (equivalent to RON95) is S$2.88 or a mind-blowing RM10 per litre compared to Malaysia’s RM2.05.
Malaysia is listed as the country with the 9th lowest fuel price globally. The country is expected to spend RM81 billion for subsidies in 2023. In 2022, it was RM62 billion of which RM45 billion was related to fuel subsidy.
Source: https://en.wikipedia.org
Malaysia’s subsidies bill constituted 23% of the federal government’s operating expenditure in 2022, versus an average of 10% over the previous five years. Fiscal consolidation is defined as policies and plans aimed at reducing government deficits and debt accumulation.
The consequence of this is that inflation will rise, cash transfers to the poor may increase further. This will not be a popular move but will satisfy analysts, credit rating agencies that the Government’s fiscal deficit will come down.
There must be a better way!
Gradual fuel rise (or as some others suggest targeted subsidies) will not solve fiscal deficit. What you need is a “Robin Hood” tax – Tobin tax on forex or widening tax base on “excess” profits to plug the deficit. Don’t dig a hole to fill another one!
Reference:
Raise petrol prices to reduce fiscal deficit, says think tank, FMT, 11 October 2023
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