According to BNM, the top 20% is enjoying 42% of the subsidy and bottom 20% merely benefitting 4%.
On that score, it justifies for rationalisation of subsidies. In his latest statement, Anwar said the total subsidy bill is expected to surpass RM81 billion.
Seldom rationalisation of subsidies is misused to cloud the real intention to merely cut subsidies. Thus Anwar Ibrahim must be true to his words to prioritise correcting the misallocation of subsidies over indiscriminate subsidy cut.
Nevertheless, cutting subsidy remain necessary. The Auditor General reported the Federal debt for late 2022 has reached RM1,079.591 billion. It is an increase of RM99.777 billion or 10.2% increase to the 2021 figure of 979.14 billion.
It does not leave much room for borrowing to buy time till the economic condition is more stable. At the current juncture, the business of running the country cannot be as usual.
Malaysia has reached the crossroad to make a decision on the financial burden of subsidies, high opex, and large bureaucracies before it becomes a runaway train.
There was a view advocating government can continue to borrow because as an on-going concern, government is hardly obligated to retire its debt.
It is somewhat similar to the Mogdiliani and Sutch Theorem that firms could continue to borrow and it will not have an impact on the firms value.
It sounds fine in theory, but remained arguable. In real life, both government and companies have the limitation of interest and loan repayment to consider. Failing which Banks could foreclose on the companies.
Unless the arm forces has an aircraft carrier, countries will see their rating down, borrowing cost more, and International Financial Institutions can stop lending.
Why then was Tajuddin Ramli forced by Mahathir to buy MAS at RM8 per share?
The Star reported today:
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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Subsidies is expected to be cut in the next budget. Reuters reported:
Govt likely to cut subsidies for fiscal strength
Wednesday, 11 Oct 2023
Anwar is expected to announce a smaller spending plan for 2024 when he tables the budget in parliament on Friday, say economists. — Reuters
KUALA LUMPUR: Malaysia is expected to make subsidy cuts for the well-off and provide cash aid for the needy as part of its budget plan for 2024, prioritising support for low-income households amidst a global slowdown and fiscal strains.
Public finances are tight for the export-driven economy, whose growth is expected to moderate 4% to 5% this year, from 8.7% last year.
Prime Minister Datuk Seri Anwar Ibrahim is expected to announce a smaller spending plan for 2024 when he tables the budget in parliament on Friday, according to economists.
He is also expected to announce cuts to electricity and petrol subsidies as well as other measures to alleviate the rising cost of living.
“With efforts to pull in investments, socioeconomic restructuring, and the need for fiscal resilience, we believe there is a strong likelihood the budget will focus on fiscal tightening with an emphasis on funds reprioritised to households and sectors most needy,” CGS-CIMB Research said in a note.
It expects Malaysia’s fiscal deficit to narrow to 4.3% of gross domestic product (GDP) from an estimated 5% this year, partly due to the subsidy cuts.
Economy Minister Rafizi Ramli said last week the government would announce, in the 2024 budget, a shift to targeted subsidies that will save at least RM4.7bil to RM9.5bil a year. Cash aid may also be given, according to Rafizi.
Malaysia has blanket subsidies for petrol, cooking oil and rice, and since coming to power in November, Anwar has vowed to move to a targeted subsidy system that mainly assists the lower-income groups.
The government’s outlay on subsidies has ballooned in recent years due to rising commodity prices.
The country expects to spend RM81bil in subsidies this year.
According to economists, Anwar is expected to announce steps to implement capital gains and luxury taxes first mooted in the previous budget to broaden revenue base.
Some also said Malaysia could reintroduce the goods and services tax (GST) from late 2024 or early 2025.
It was first introduced in 2015 at a rate of 6% but was scrapped in favour of the sales and service tax in 2018. The current rate for sales tax is 5% to 10% while the service tax is 6%.
Kenanga Research said the government might transition to GST at a lower rate of 4%.“Since the government plans to reduce subsidies for higher-income individuals first before reintroducing the GST, we reckon that this transition may only happen in the second half of 2024,” the research house said. — Reuters
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The market expectation of Anwar for his first budget as PM is the extend he could be true to his reform agenda in view of the current economic constraints.
Will he take the bold measures to slash subsidies, introduce new tax and all done with full view of the debt situation and expectation of an expansionary budget with an economic stimulation package?
More responsible govt spending
By GANESHWARAN KANA
Star Online Thursday, 12 Oct 2023
Budget 2024 set to bring bold reforms, such as rationalising subsidies
PETALING JAYA: With election worries mostly out of the way, Prime Minister Datuk Seri Anwar Ibrahim is expected to roll out bolder measures and reforms under Budget 2024.
The spotlight will be on the government’s attempt to slash subsidies that may cross RM81bil this year, plug fiscal leakages and address the ballooning RM1.39 trillion national debt.
The financial markets and high-earners will also be looking out for new tax measures, as the government had hinted its intention to tax the ultra-rich more in order to expand its revenue base.
The potential tax measures will add on to the capital gains tax on disposal of unquoted shares and a tax on luxury items, which were announced under the revised Budget 2023 in February.
Budget 2024 will be tabled in Parliament tomorrow.
Despite the government’s efforts to trim expenses, economists still anticipate an expansionary budget for next year.
In the revised Budget 2023, the government had allocated RM386.1bil for expenditures, against a projected revenue of RM291.5bil.
Socio Economic Research Centre (SERC) executive director Lee Heng Guie said he expects to see “responsible spending” in Budget 2024.
Speaking to The Star, he said blanket subsidies that were costly and unsustainable must be phased out and targeted social spending should remain a short-term priority.
He noted that the government is committed to a continued fiscal deficit reduction path, to between 4.5% and 5% of gross domestic product in 2024 from an estimated 5% in 2023.
“The Finance Minister must focus on providing a platform for fiscal consolidation to strengthen fiscal health while at the same time continuing to support economic growth, ease cost of living pressure, drive innovation and technology as well as investment in key sectors.
“The government should include a detailed plan on measures to broaden its revenue base on a sustainable basis as well as responsible spending with better outcomes,” he said.
Economist Geoffrey Williams opined that Budget 2024 should incorporate fiscal consolidation, significant cuts in wastage and a set of clear policies focused on the seven Madani Economy targets.
The economics professor at the Malaysia University of Science and Technology said that unfortunately, Budget 2024 would likely entail increased spending by the government.
“It would put further pressure to raise taxes, which is bad,” he said.
Universiti Kuala Lumpur Business School associate professor Aimi Zulhazmi Abdul Rashid, meanwhile, said Budget 2024’s top priority should be about increasing Malaysians’ income levels.
He highlighted the urgent need to restore and improve the people’s purchasing power, which he said had decreased due to the long-term effects of the Covid-19 pandemic as well as the consequences of escalating prices of goods since 2021.
This is also necessary as the country’s inflation pressure could increase next year as subsidies are rolled back.
In an earlier note, Public Investment Bank Bhd estimated that eliminating fuel subsidies for the top 20% (T20) income earners would increase inflation by an additional 0.45 to 0.75 percentage points annually.
“Budget 2024 should outline the government’s plan to deal with the issue of national food security following the increase in food prices and the lack of food supply as witnessed recently,” said Prof Aimi Zulhazmi.
He also expects to see measures to stimulate a more active and resilient domestic economy in Budget 2024.
“This is necessary considering that the country’s exports have declined for eight months in a row this year and we must be prepared in view of the global economy continuing to slow down in 2024,” he added.
According to him, Budget 2024 has to focus on encouraging and facilitating both foreign and domestic direct investments.
“This should not be confined to incentives for infrastructure and financial facilities, but also the transfer process of operations (for foreign companies to enter Malaysia),” Prof Aimi Zulhazmi suggested.
Earlier in August, Anwar had expressed his administration’s commitment to strengthening both foreign and domestic direct investments.
A decision has been made to reactivate the Investment Coordination Committee between the Investment, Trade and Industry Ministry and all investment promotion agencies.
On another note, Williams said the upcoming budget presented an opportunity for the Anwar administration to show credibility, accountability and transparency in fiscal policy.
“I would like to see a plan to cut debt financing, which is the second largest part of spending, and a plan to cut civil service pay costs, which are RM31bil – almost as much as what is spent on public health.
“We also need to see the plan for subsidy rationalisation and cash transfers through the Central Database Hub (Padu), and the details of the progressive wage system,” he added.
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The reform measures need to work and achieve the economic recovery within the next four years before GE16 is called.
A defining moment for Anwar tomorrow at 4 PM.
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