Rationalising subsidies for economic prosperity

Resource reallocation: A file photo of a worker in a petrol station. The cost of fuel in Singapore is about five times higher than in Malaysia.

DISCUSSIONS around targeted subsidies have been growing in momentum in recent weeks after the tabling of the 12th Malaysia Plan mid-term review.

Sentiment among businesses looked promising with many in favour of the commitment to present details on the implementation of targeted subsidies in the upcoming second Madani Budget.

Subsidy rationalisation is a timely measure to reduce the drain on the public purse, freeing up resources to target growth and other well-being initiatives.

The prime minister recently shared that the total subsidy for this year is expected to surpass RM81bil.

Put in perspective, given Malaysia’s latest population estimate of 33.4 million, that’s a subsidy of RM2,425 per person or close to RM47 per week.

This translates to roughly an average of RM10,000 in subsidies for each household, considering the number of households is approaching eight million.

Travelling back to New Zealand recently where I used to work, I noticed a litre of RON95 petrol costs over NZ$3 or roughly RM8.49, four times as much in Malaysia.

Better outcomes

Over in Singapore, the same litre costs Singapore consumers the equivalent of RM10 or around five times what Malaysian consumers pay.

Clearly, there is significant scope for petrol subsidy rationalisation.

An upside of higher prices is that it can “nudge” behaviour towards better choices and greater economic efficiency.

For example, many people could choose to either commute by public transport, carpool, make essential trips only or manage their trips to multiple destinations as a result of higher petrol prices.

This applies to business as well, with higher electricity prices “nudging” business to look at energy efficiency improvements including investing in energy-saving office equipment.

We cannot progress as a nation if we increasingly rely on handouts, whether these are for businesses or households, to sustain our cost of living.

It is the right move to implement targeted subsidy rationalisation, in a fair and efficient manner.

In doing so, the government will be able to free up significant resources to reinvest in growth to move the nation up the value chain and enhance the nation’s social and economic well-being.

Savings from subsidy rationalisation can be utilised in the following strategic areas.

Fiscal strength

Firstly, to strengthen the nation’s fiscal position which has been affected by the impacts of Covid-19 and other global factors. Doing so would give us more room to manoeuvre as well as strengthen how we are perceived as a country by lenders and investors.

Secondly, savings can be used to invest in health and education initiatives to enhance our human capital and overall well-being.

This should lead, over time, to stronger and more inclusive economic growth, and social cohesiveness.

Last but not least, to fund digital as well as environmental, social and governance (ESG) initiatives to catalyse economic transformation, which will steer us towards a more competitive and sustainable low-carbon economy.

The successful and sustained impact of any subsidy rationalisation initiative relies heavily on its effective implementation.

Business is at the forefront, interacting with consumers.

Clear rules and consistent enforcement will assist in providing clarity and certainty.

This leads to more robust and consistent market practices.

It will also pave the way for increased trust and compliance by households and businesses.

Concerns around the long-term feasibility of diesel and fuel subsidies can be largely eliminated with the right market design and consistent enforcement.

The second Madani Budget will be a yardstick as to how businesses can be supported in working with both the government and households to usher in an era of greater prosperity for all.

Patrick Tay is deals partner, economics and policy at PwC Malaysia. The views expressed here are the writer’s own.

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