MARC said rationalising subsidies remains a key factor in capping government expenditure.
PETALING JAYA: Fiscal sustainability is crucial for Malaysia’s economic stability and Malaysian Rating Corp Bhd (MARC) believes the country should focus on building a robust tax base and containing expenditure to ensure long-term fiscal health.
The ratings agency said rationalising subsidies remains a key factor in capping government expenditure, as subsidies have increased as a share of Malaysia’s operating expenditure from 4% in 2003, to 25% in 2023.
Consequently, it believes the ongoing fuel subsidy reform remains absolutely necessary, alongside the ongoing review of various subsidies such that the money allocated is better targeted at disadvantaged groups in society.
“We estimate a 10% decrease in RON95 fuel subsidies could narrow the fiscal deficit by around 0.2% of gross domestic product (GDP).
“At present, encouraging signs in the labour market, GDP growth and consumer spending should facilitate subsidy re-targeting towards beneficial welfare outcomes,” it said in a statement.
MARC added that achieving fiscal sustainability will enable the government to meet future public spending needs and financial obligations without relying excessively on borrowing.
“Raising sufficient revenue while balancing current spending requirements builds buffers for future economic shocks.” it noted.
MARC said higher government debt levels necessitate a faster pace of current revenue generation and expense reduction to maintain a sustainable fiscal balance.
It said the Public Finance and Fiscal Responsibility Act 2023 has capped Malaysia’s fiscal deficit at 3% of GDP, with the goal of achieving this benchmark by 2026.
“The government aims to achieve this benchmark by 2026, which, if successful, would stabilise Malaysia’s elevated debt levels and align the deficit with the global median,” it noted.
The agency highlighted the importance of self-sufficiency in revenue generation, noting that Malaysia’s tax revenue-to-GDP ratio has trended downwards over time from 15.5% in 2003 to 12.6% in 2023 and is projected to decline further to 12.3% in 2024.
Moreover, it said this ratio is lower than those of its Asean-Six peers since 2017, where in 2023 the median of peers equated to 12.9%.
“While higher taxes are needed, welfare considerations for lower income groups are important to the government. As such, the medium-term revenue strategy is inclined towards higher tax rates with a more equitable tax structure such as windfall taxes and a progressive personal income tax rate,” it said.
Meanwhile, corporate income tax collection remains a significant source of revenue, and MARC suggested phasing out certain tax exemptions to enhance revenue.
