Subsidy cuts a necessary ‘evil’

The current government must show some serious political will if it wants to thoroughly reform the energy subsidy programme. — AZMAN GHANI/ The Star

WE are an oil producer but large oil producing countries have higher prices at the pump.

When the rationalisation of energy subsidies was mooted, it was not only the government that was fretting over how it can be done.

It would take monumental political will to remove a subsidy most Malaysians have enjoyed for decades. Nevertheless, it is fraught with risk in a country where patronage is often based on cash handouts, directly or indirectly, and political posterity depends heavily on them. Surely, removing diesel subsidies was a necessary step.

The reason for this is just how archaic our tax collection system is. To pay for government purchases, there is an urgent need to increase tax collection since just under 12% of the population pays taxes.

It may not seem like expenditure by the government is influenced by inflationary pressures, but it is.

Government-paid supplies and services face the same price points consumers do, maybe even more if the seller knows the government is paying.

There are also other pressures such as pensions payments, salary increments and the debt service ratio that put a squeeze on government spending.

Much can be done to improve government finances. In all honesty, the money used to subsidise energy and other items can be put to better use.

Energy subsidies may have been a policy decision when the government was trying to lift the incomes of the rakyat. Over time, spending on these subsidies has ballooned with population increase, energy consumption and also leakages.

Today, the per capita income of Malaysians is the third highest in the region behind Singapore and Brunei while our energy costs are the second lowest.

Subsidies have outlived their usefulness. Today, subsidies form a large part of government expenditure and for a country that is within touching distance of high-income status, the need to keep energy prices low to boost disposable incomes becomes less important and relevant.

Raising energy prices is indeed a political opportunity for the opposition as it was when the then opposition vilified the Goods and Services Tax (GST) and floated that a Sales and Service Tax (SST) replace it.

A couple of problems though. First, SST cannot collect the same amount as GST unless the tax rate is much higher. Second, doing away with GST has only compounded the government’s tax income pressures.

The timing of the diesel subsidy rationalisation is not surprising and it is to no one’s astonishment that political gamemanship ensued.

Political expediency is a mistake that is being repeated whereby politicians are sacrificing what is good for the country for political mileage, much like the GST issue previously.

The current government must show some serious political will if it wants to thoroughly reform the energy subsidy programme.

This baby step in rationalising subsidies needs a second look because in the grand scheme of things, the anticipated RM4bil savings — equivalent to about 1% of the federal budget for 2024 — will hardly move the needle.

Government income is forecast to grow to RM312.2bil this year from enhanced tax collection. The forecast income tax collection for this year is RM197bil, up from RM183.3bil in 2023.

There will surely be limits as to how much more tax can be collected through enhanced measures and also clamping down on leakages lost through corruption.

To counter the blanket political brinkmanship that the opposition parties will display in opposing such tax increases, the government will need to show how the additional tax collected will be used.

The government must demonstrate that the country’s low tax base will ultimately hurt the rakyat, and that doling out cash left and right is certainly not the answer. Before stuffing voters’ pockets, it should be about improving healthcare, education and public services.

This article first appeared in Star Biz7 weekly edition.

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