KUALA LUMPUR: The substantially higher subsidies in 2022 should come as no surprise given the sharp increase in oil prices, according to economists.
They have strongly advocated for comprehensive tax reforms and the implementation of efficient, targeted subsidies to address and ameliorate the situation.
Malaysia University of Science and Technology economist Dr Geoffrey Williams said it was not particularly surprising as the increase in oil prices had pushed up petrol and diesel subsidies.
He added that oil prices would remain high in 2023 but will be much lower than in 2022, so there should be some savings.
"Unfortunately, apart from oil-related subsidies, other subsidies also ballooned because of bad policy and pre-election spending in 2022. We are seeing the consequences of that in the supply shortages across many items, particularly rice. This is because the subsidies were too high for too long," he told the New Straits Times.
Williams noted that the potential economic implications of such a substantial rise in subsidies were that high government spending on subsidies took money from other priorities.
Additionally, he said rich people benefited more than the poor, market distortions and supply shortages emerged and that there was an increase in corruption across the board.
Williams suggested that achieving a balance between subsidies for the people and economic stability, amid rising subsidy costs, involved removing subsidies and relying on market mechanisms to address price and supply concerns.
This will raise the cost of living for many people, especially the M40 income group, because they benefit a great deal from subsidies, especially on petrol.
"So subsidies must be reduced or rationalised in a way that compensates people when costs rise. This means targeted income subsidies using the Central Database Hub (Padu) to check net disposable income.
"Fortunately, the oil price is lower now than in 2022, so petrol subsidies should be lower. Utilities subsidies should also be lower, and subsidy rationalisation will save RM4.7 billion to RM9.5 billion over time.
"It will be very damaging if the government continues with huge subsidies and raises spending and taxes to pay for them.
"So overall spending should not be increased in the 2024 Budget and the focus must be on reducing subsidies, wastage, leakages and corruption to make savings."
Bank Muamalat Malaysia Bhd chief economist and social finance head Mohd Afzanizam Abdul Rashid said the subsidy bills would continue to go up, and this would pose a challenge to government finances.
"I believe that if no corrective measures are introduced, it can be deemed credit-negative by credit rating agencies such as Moody's, S&P and Fitch Rating."
Afzanizam pointed out that finding the right balance between providing subsidies to the people and maintaining economic stability was challenging.
Nevertheless, he emphasised the necessity of eventually rationalising subsidies, as failure to do so may lead to an escalating situation that posed a threat to the country's debt sustainability.
On improving revenues and rationalising expenditures, Centre for Market Education chief executive officer Dr Carmelo Ferlito suggested that on the revenue side, the government should move towards holistic tax reforms. These include a slight reduction in income tax, the reintroduction of the Goods and Services Tax, improving the collection system and designing special schemes for microbusinesses to help them emerge from the shadow economy.
On the expenditure side, Ferlito said the government must accelerate efforts towards targeted subsidies.
He recommended that the government work towards rationalising its presence in the economy, particularly concerning government-linked companies.
"Inefficient companies should be dismissed, and for the others, incentives for competition should be encouraged to maintain a constant drive towards profitability."