PETALING JAYA: Economists are concerned with the immediate impact of another cut in the Budi95 fuel quota, with most stressing that the measure will further squeeze household incomes and chip away discretionary spending.
Earlier this week, it was reported that Prime Minister Datuk Seri Anwar Ibrahim is expected to announce a plan soon to ensure national oil supply continuity as a result of global supply uncertainties.
Discussions have been rife on the ground as to how this could be achieved, with suggestions such as the top 20% income group in Malaysia (T20) or its variations could be excluded from the RON95 subsidy, or that the quota for Budi95 could be further reduced from the current 200 litres to 150 litres per month.
Chief economist for the Asia-Pacific at Coface, Bernard Aw, opined that an additional reduction in the Budi95 quota would likely squeeze lower-and middle-income households that rely on private transport.
“They have to shift more spending towards fuel and essentials, weighing on discretionary consumption and consumer sentiment,” he told StarBiz.
He pointed out that a tighter quota could raise transport and logistics costs, creating some upward pressure on inflation, especially for food and consumer goods that are transported.
The broader impact, Aw believes, depends on global oil prices, before noting that thinner margins businesses will be expected to pass on higher costs, depending on how competitive their sectors are.
He said: “Cutting the subsidy quota could improve Malaysia’s fiscal position by reducing subsidy costs and leakages, but the gains may be gradual.
“The government will still need to balance fiscal savings with targeted support measures to avoid hurting growth and social stability.”
Similarly, chief executive and economist at the Centre for Market Education Carmelo Ferlito said a further reduction of the subsidised quota would not affect all households equally, but would be more severe on families living far from workplaces or with several dependents, as well as workers in areas with weak public transport coverage.
“While the policy may reduce fiscal leakage, it could also weaken consumer demand among households that are transport-dependent.
“The problem with rigid quotas is that they treat fuel needs mechanically, while actual household needs differ widely.
“Two households with the same income may face very different mobility requirements,” he emphasised.
Ferlito argues that the government could move gradually away from fuel-price subsidies and rigid quota mechanisms, toward a system where fuel is sold at a single market price and support is delivered directly to those who need it through flexible purpose-vouchers.
He said this would protect price signals while allowing assistance to be more closely aligned with actual needs.
He noted Malaysia’s food-price channel as being particularly important, as the country’s food supply chain is transport-intensive, and even small increases in logistics costs can be passed on to consumers, especially when margins are thin.
However, Ferlito said whether this becomes a broader inflationary process depends on the policy environment, and while acknowledging that fuel quota reductions would create cost pressures, sustained inflation occurs only if such pressures are accommodated by broader monetary or fiscal expansion.
He added: “Reducing the Budi95 quota could improve Malaysia’s fiscal position, but the improvement may be meaningful only if the reduction is part of a broader and credible subsidy-rationalisation strategy.
“However, the real question is whether subsidy reform improves the quality of public spending. If subsidy rationalisation simply creates short-term fiscal room without improving expenditure discipline, and in particular a rationalisation of the public sector, the economic benefit will be limited.”
As such, Ferlito is of the view that the government needs to balance three objectives: protecting price signals by reducing distortions in fuel markets; protecting vulnerable and transport-dependent households through direct and flexible assistance; and clear communication, because social stability depends on the public understanding why the reform is being done and how the savings will be used.
“The best approach would be gradual rationalisation combined with a voucher-based mechanism. A single fuel price would reduce distortions and leakage, while purpose-vouchers would allow support to follow actual needs rather than crude income categories or rigid litre quotas,” he said.
Meanwhile, economist and associate professor at the Universiti Kuala Lumpur Business School Dr Mohd Harridon Mohamed Suffian hopes if the Budi95 cut materialises, the government would not make U-turns on its decision due to political pressure, unless oil price has dropped back to its pre-war levels.
“The improvement of the government’s coffers due to the deflation of subsidies would benefit the people as the government could funnel this extra financial capital to facilitate social economic initiatives,” he said.
Nevertheless, Mohd Harridon urged the government to execute its fuel subsidy rationalisation in stages, as he believes it is likely that consumers will bear the brunt of the fuel cost pressure that could cascade to other products and services.
“This would dampen the domestic economy of the nation and subsequently the vibrancy of the nation would be affected.
“In the long run, the economic growth of the nation would be depressed and hence the government should ensure the reduction of subsidies is staggered and within targeted groups so that the domestic consumption would not be holistically affected,” he said.
More importantly, Mohd Harridon noted that a reduction in fuel quota would also increase the demand for public transportation, but the government should be more proactive to mitigate the predicament of the “last mile”.
Economist Doris Liew estimates the government would save roughly RM320mil monthly, or about RM3.8bil annually, based on an estimated subsidy gap of RM1.88 per litre, and the assumptions that around 60% of users reportedly consume 150 litres of RON95 or less per month, and the remaining 40% consume approximately 175 litres.
“If the affected group is clustered closer to the current 200-litre ceiling, the savings could rise to around RM640mil monthly, and potentially higher if global oil prices widen the subsidy gap further.
“This would help ease fiscal pressure, but it would not fully offset the sharp increase in subsidy spending caused by higher global oil prices,” she said.
Nevertheless, Liew said the savings could still modestly improve the fiscal deficit trajectory and slow the pace of debt accumulation.
On the other hand, with tightening fiscal space, she observed an increasingly concerning trend of reducing much-needed development expenditure to accommodate rising subsidy commitments, which was seen earlier with the cut of developmental budget for healthcare, and education sectors.
She said one structural issue is that subsidies artificially suppress the true market cost of fuel and mask part of the impact from tighter global oil supply conditions.
As a result, consumption behaviour does not adjust proportionately despite rising prices and fiscal costs, as reflected in persistently heavy traffic congestion and continued high private vehicle usage.
“This presents a longer-term challenge for the government, as subsidy mechanisms weaken incentives for fuel conservation, public transport adoption, and broader behavioural adjustments needed to reduce structurally high subsidy burdens over time,” said Liew.
