Subsidy cuts are painful but necessary, say experts

PETALING JAYA: Budget 2024 will be painful, experts say, but the measures which are expected to be unveiled tomorrow are necessary and will build a stronger economy that will ultimately benefit the layperson.

Measures such as cutting blanket subsidies that mostly benefit the wealthy, and redirecting them to middle- and low-income families, will mean that the government is more fiscally responsible, they said.

Although prices of goods and services are expected to go up once petrol subsidies are cut, it will educate consumers to spend wisely because necessities such as food will be priced at their true value, they added.

More taxes that are targeted at the wealthy, which are also expected to be announced by Finance Minister Datuk Seri Anwar Ibrahim, will increase government revenue.

“Subsidy rationalisation will strengthen the resilience of the economy. Reforming the economy will raise investors’ confidence because it proves we are on a sustainable fiscal path,” said economist Prof Yeah Kim Leng.

More investment will then lead to more growth in jobs and business prospects for everyone, he told The Star.

The money saved from cutting subsidies will also mean more funds going to public schools, hospitals and roads, said Prof Yeah, of Sunway University’s Jeffrey Cheah Institute on Southeast Asia.

In the past, Anwar – who is Prime Minister – had repeatedly emphasised how his administration wants to restructure blanket subsidies, such as the price cap on RON95 petrol, which has benefited everyone including the wealthy.

A Bank Negara study showed that the richest 20% of households received a large 42% of this subsidy, while the poorest 20% of households received only 4%.

This is due to wealthy households owning more and bigger cars, and therefore consuming larger quantities of fuel, said the central bank, which urged the government to replace the blanket subsidy.

The government also currently provides subsidies to cap the price of – among others – chicken, cooking oil, sugar and diesel.

In February, Anwar’s administration ended electricity subsidies for the 20% wealthiest households and large corporations.

Details of how the current blanket subsidy system will be replaced are expected to be revealed in Budget 2024, which will be tabled tomorrow.

Another economist, Lee Heng Guie, said that although blanket subsidies are expected to end, the government will continue to aid middle- and low-income households via cash transfers or other means to deal with inflation.

Consumer affairs advocate Saravanan Thambirajah echoed this point, saying that the current system will likely be replaced with targeted subsidies only for the M40 and B40 households.

“A huge chunk of subsidies goes to energy such as petrol and electricity.

“Moving forward, we might see a more targeted approach in terms of eligibility,” said the chief executive officer of the Federation of Consumer Associations (Fomca).

Lee, of the Socio-Economic Research Centre (SERC), said the budget will also likely reveal details on the tax for luxury goods and capital gains tax on shares of non-public-listed companies.

These were announced in Budget 2023 but their implementation has been delayed.

“At the same time, the government needs to reform the tax system as the current one is not sustainable because it depends only on one portion of society.

“We feel that the Goods and Services Tax (GST) is the best but we don’t think that the government is ready to reintroduce it because there are worries household incomes are not high enough,” said Lee.

Associated Chinese Chambers of Commerce and Industry of Malaysia’s (ACCCIM) treasurer-general Datuk Koong Lin Loong expects that the luxury tax will contribute between 1% and 5% of total revenue.

In comparison, the GST had contributed 20% of all government revenue in 2017 while its replacement the Sales and Services Tax only made up 11.4%.

“If they don’t implement (the luxury and capital gains tax), the sustainability of the budget will be questioned,” said Koong.

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