KUALA LUMPUR: The government is right to address the subsidies issue as it currently benefits the rich more than the poor but finding the right mechanism to implement it is a huge challenge, said economists.
The biggest setback was that no one really knew how to target fuel subsidies correctly, they said.
Former second finance minister Datuk Seri Johari Abdul Ghani highlighted on Monday the importance of targeted subsidies as the government spent RM51 billion in subsidies last year from RM8.3 billion in 2017.
Citing Saudi Arabia as an example, Johari said its government slashed blanket subsidies that only benefited the high-earners in 2016. This helped the government to save money and allowed it to give cash aid directly to the low-earners.
Malaysia University of Science and Technology economist Dr Geoffrey Williams said Johari was right to highlight the issue because it was absent from 2023 Budget despite the Prime Minister instructed the civil servants to tackle the problem.
"There are two ways you can deal with this and he (Johari) has mentioned one. This is to target incomes not products.
"He uses the example of a cash transfer system for low-income groups in Saudi Arabia. This means although removing subsidies and price controls may cause prices to rise, the incomes of low-income groups are uplifted so that they can afford it.
"This targets support at the income level not at the product level and is more effective," Williams told the New Straits Times.
According to Williams, the help provided in the 2023 Budget for households with income below RM2,500 was exactly this type of scheme and was the start of a Universal Basic Income.
He said an alternative was to set tiered prices like in electricity tariffs. This can set lower tariffs directly for low-income households and higher tariffs directly for high-income households.
"This can be done because we have the data on household income and the billing is direct to the household.
"A similar tiered pricing scheme can be applied in petrol so those buying more pay more. Since low-income households buy smaller amounts of petrol in each purchase they would benefit from subsidised prices," he said.
Bank Islam Malaysia Bhd chief economist Firdaos Rosli said the biggest problem with targeted subsidies was that no one really knows how to target fuel subsidies correctly.
Firdaos said there was still no efficient way of implementing the targeted fuel subsidy mechanism in the country.
The show-me-your-MyKad method where the recipient would enjoy a fuel subsidy (via a lower retail oil price, presumably) was costly and notoriously complex to administer, he added.
"If one can use another person's bank card to make a purchase, MyKad is no different. Besides, what if a Malaysian is a taxpayer in a foreign country, say in Singapore, but refuels in Malaysia? What about a foreigner who is a taxpayer in Malaysia?" he asked.
The show-me-your-engine capacity method, where fuel subsidy will be given to motorcycles with 125cc capacity and below and 1300cc cars and below, is not a foolproof solution.
Firdaos said the contentious point here was that nowadays, engine capacity did not necessarily determine the car price, and by extension, an individual's income level.
He said the income supplementation method via universal cash transfers (UCT) might be a good solution.
"Instead of giving the fuel subsidy at the transaction point, a determined sum of cash is given to the recipient to cushion all price shocks. Malaysia has had this system since a decade ago, so the real problem is whether we have the proper fiscal setup for higher UCTs," he said.
Putra Business School economic analyst Associate Prof Dr Ahmed Razman Abdul Latiff agreed that targeted subsidies should be rolled out soon to reduce financial constraints of the government.
Ahmed Razman said some of the barriers were to ensure that there would be no leakages and no one left behind if they deserved it.
"At the same time to ensure the right platform and technology to be used to implement this targeted subsidy. The government can use the existing mechanism such as MyKad or MySejahtera apps to implement this subsidy," he added.
Meanwhile, Deputy Finance Minister Datuk Seri Ahmad Maslan today said the government was still studying the mechanism for targeted subsidies.
Ahmad Maslan said targeted subsidies would benefit a large segment of the population and would have a minimal impact on the cost of living.