By P. Gunasegaram
The key to proper budget management is cutting subsidies and waste
The widened sales and services tax (SST) from July 1, which also includes an increase to 8% from the previous 6% for many categories, will definitely raise prices – the billion dollar question is by how much. But it won’t solve the government’s budget woes – a double whammy.
It will also remove spending power from the public and put it in the hands of the government, but not by nearly enough to remedy an increasingly problematic budgetary position – a half measure which does little but creates much fuss.
Raising taxes when businesses and individuals are affected by a slowing economy is not the best thing to do. But then no time is a good time for pain – the longer you delay it the bigger it is when the inevitable comes. Just do it quickly and get it over with.
The first place to start when fixing the budget is government expenditure. Reduce the wanton waste that takes place through inflated procurements, needless projects, and treating miscreant contractors with kid gloves while giving them plum pickings.
One more, and most likely the most important one, is to cut subsidies, especially energy subsidies. It’s been done all over the world, including by oil producers – but we are balking because of lack of political will.
The latest SST changes are expected to raise RM5 billion for the rest of this year and RM10 billion for the full year 2026. You can hear the government’s explanation on why it chose SST here, from Treasury secretary general Johan Mahmood Merican. I disagree.
But subsidies in Malaysia amount to between RM70-80 billion by most estimates. In Budget 2024, operating expenditure was RM304 billion while development expenditure was RM90 billion for a total bill of RM394 billion.
RM80 billion subsidies
Subsidies of RM80 billion were over a quarter of operating expenditure, an amazing nearly nine tenths of development expenditure and a fifth of total expenditure. If subsidies were cut by 30%, it would still make a huge difference to government finances.
The sustainable solution is to cut subsidies, and if estimates that 80% of subsidies are energy related are true, that is definitely the place to start.
Progress has been made with diesel but petrol is still hanging in the air. Electricity rates reduce or maintain for 80% of customers but increase for higher spenders through a conjuring act which charges much more for greater usage – the big spenders.
If we remove all energy subsidies, we could potentially save RM64 billion a year (80% of RM80 billion). If we allocate an increase in grants to the poor by say RM20 billion, that’s still a saving of RM44 billion.
We can save RM64 billion
And if we can cut government wastage by just 5% of total expenditure, that’s a saving of about RM20 billion. That brings total savings up to RM64 billion (44+20) a year compared to that puny RM10 billion the widened SST raises a year.
If that’s so simple, why is the government not doing it? Because it does not want to burden the people, almost all the people in the country, including the middle class. Its targeted aim is 85% of the people must not be taxed. And it does not want to burden the middle class.
Yes, it’s ridiculous. When even Saudi Arabia’s price for RON95 petrol is higher, we have not thought it fit to raise prices – it has remained at RM2.05 for over four years now. We have the 10th lowest oil price in the world.
Malaysia’s price is US$0.488 per litre, Norway’s (also a net exporter of energy) is US$2.03, Singapore’s is US$2.15, a massive 4.4 times ours. Indonesia’s is US$0.79, 62% higher and Thailand’s is US$1.33, 2.7 times ours. There’s enormous opportunity for arbitrage trade and leakages with our closest neighbours.
The poor are not much affected by oil prices because they don’t consume much energy – not electricity, not fuel. They don’t have air conditioners, or cars. They use fans and motorcycles. With the money saved from removing energy subsidies, increase their grants to cover any shortfall from the increase in energy prices.
But why is it taking so long? Because this Madani government does not want to put any pain on its main constituents – it’s afraid to lose at the polls – period. No inflicting of pain even if it is necessary.
There are many ways of doing it to decrease the pain. The increase need not be all in one go. It can be spread out over months or even years. Make public transport far less expensive and much more extensive. Cut ticket rates for public transport, have season passes. Subsidise these from the money saved.
Don’t give cheap energy
That will be far better than giving cheap energy to everyone so that they consume it without regard to actual cost and the damage to the economy, not to mention the environment. Where is our plan to ration energy and for sustainable development?
The widening of the SST is yet another half-baked solution to the more major problem of inefficient allocation of limited resources, wastage through corruption and patronage and sheer incompetence, combined with the lack of political will to change things that matter.
This government does not even have the courage to impose a goods and services value-added tax (GST) which will almost immediately rescue the problem of low tax collection more efficiently than the SST by widening the tax base and reducing tax evasion to boot.
I dare say that with a GST, the tax rate can just be half the average rate of 8% for SST to even 4% for GST with no loss of tax collected, with the existing exemptions in place, part of the reason being a drastic reduction in evasion.
The nation suffers and holds its breath for the Madani government to pluck up enough courage to do a plethora of right things. But will it ever?
P Gunasegaram, a former head of equity research and business editor, says that courage is absolutely necessary for any meaningful change in government and to fight corruption.
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