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    HomeBusinessSubsidy rationalisation requires a rethink

    Subsidy rationalisation requires a rethink


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    The budget for 2024 is expected to be tabled on October 13, 2023, around eight months after the budget for 2023 was presented. This comes after the unveiling of the New Industrial Master Plan 2030 next month and the 12th Malaysian Plan Mid-Term Review in September. Even though the government’s finances are tight, the budget for 2024 provides an opportunity for the unity government to address the pressing issue of how to raise revenue for the nation without burdening the public with higher taxes.

    However, finding a solution to this challenge is not easy. Tax reforms are necessary, and the Medium Term Revenue Strategy (MTRS) and Fiscal Responsibility Act (FRA) must be quickly implemented to prepare stakeholders for the reforms. Delaying these measures is not an option, as Malaysia’s tax revenue of only 11% of the annual gross development product (GDP) is unsustainable.

    One major issue that needs to be addressed is subsidy rationalisation. Malaysia should consider removing subsidies altogether in a carefully planned timeline between now and 2027, to gradually prepare Malaysians for market prices. Additionally, wage reform is necessary, as Malaysia’s current compensation of employees to GDP ratio is unacceptable. The introduction of a Progressive Wage Model (PWM) by the Economy Minister is a positive step towards improving the income of lower-income groups and preparing for the removal of subsidies.

    A successful PWM may lead Malaysia to raise the minimum wage to RM2,000 within five years and significantly increase the median salary of workers. Furthermore, a well-executed PWM would bring Malaysians closer to earning a living wage as defined by Bank Negara.

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    Implementing targeted subsidies is challenging, as it requires a foolproof system that is not easily manipulated, politicised, or misused. Furthermore, the administration and enforcement of targeted subsidies would require additional resources. Instead, the government should consider gradually increasing the market price of RON95 fuel, starting with an increase to RM2.40 per litre by January 1, 2024, followed by 20 sen increments every six months. By doing so and imposing an indirect sales tax on fuel, the government can both save costs from subsidies and generate additional revenue.

    Furthermore, Malaysia should focus on improving the public transport system to reduce the heavy reliance on cars. With the additional revenue generated, the government can develop a comprehensive and reliable bus network that encourages Malaysians to use public transportation rather than private vehicles.

    In conclusion, implementing targeted subsidies is burdensome, and it would be more effective for the government to remove fuel subsidies altogether. The savings or revenue generated from this can then be redirected towards assisting those who need the government’s support the most.

    Pankaj C. Kumar is a long-time investment analyst. The views expressed here are the writer’s own.

    Credit: The Star : Business Feed

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