Clock is ticking on blanket subsidies, says Salahuddin

Studies on new definitions of income groups to be concluded this year


BLANKET subsidies on fuel and essential items will be gradually removed in two years, as the government seeks to recover from heavy subsidy bills and move towards a targeted approach. 

The removal of blanket subsidies, nonetheless, will not be immediate as the government intends not to further burden low-income Malaysians and small businesses, who are already suffering from high inflation and the rising cost of living, said the Domestic Trade and Cost of Living Minister Datuk Seri Salahuddin Ayub in an interview with The Malaysian Reserve. 

Besides petrol and diesel, the government subsidises, among others, chicken, egg, 1kg cooking oil packets, rice and flour. Regarding fuel subsidy, the minister said that several proposals on its targeted subsidy mechanism are on the drawing board but have yet to be finalised. 

“The Cabinet has agreed in principle that the way forward is for the targeted subsidies… We cannot go on with blanket subsidies,” he said. The targeted subsidy implementation is one of the ministry’s key performance indicators (KPIs), Salahuddin added. 

The government spent RM50.8 billion in 2022 for subsidies on petrol, diesel and liquefied petroleum gas, Deputy Finance Minister Datuk Seri Ahmad Maslan said recently. He also said the government could save up to RM17 billion annually, if it were to implement a targeted petrol subsidy mechanism. 

The proposals for targeted fuel subsidies have been floating for almost five years, with various mechanisms mooted including fuel cards for eligible car owners, cash transfers, subsidised fuel based on engine capacity and vouchers in return for subsidies. 

All the proposals hit the wall at the planning stage and were never spoken about again, due to various factors including political will and opposition from the public amid the rising cost of living. 

Malaysia has implemented a weekly automatic fuel pricing mechanism for petrol and diesel since December 2014, following the withdrawal of government subsidies. The government has, however, maintained a ceiling price for RON95 and diesel at RM2.05 and RM2.15 per litre respectively, while the higher-end RON97 is sold at market rate. 

“To protect the consumers from the increase in global oil price, the government will maintain the ceiling price of RON95 at RM2.05 per litre and diesel at RM2.15 per litre, even though the market prices for both products have increased beyond the current ceiling price,” the Finance Ministry said in its weekly fuel price circular. 

We want to ensure that subsidies are given to those who need them the most, and not just those who fall within a certain income bracket, says Salahuddin (pic: Muhd Amin Naharul/TMR)

Salahuddin said targeted subsidies would “hit two birds with one stone”, where the government reduces expenditure while specifically subsidising the disadvantaged group. 

“We are committed to improving the lives of all Malaysians and we believe that our targeted subsidies will play a critical role in achieving this goal,” he said. 

“We are targeting the studies of the new definitions of income groups to be concluded this year and the whole process of setting up a new scheme of targeted subsidies within two years,” Salahuddin said. 

The main challenge in implementing targeted subsidies, according to the minister, is to synchronise available data on low-and middle-income Malaysians to enable the effective rollout of targeted subsidies. 

He said currently, there are various agencies with immense data on income levels which are varied based on location, age and household income. 

“Someone earning RM5,000 in the city and village cannot be placed on the same threshold because the living cost challenges are different,” he said. “The challenge is to synchronise all these pieces of information and create an effective database, which we can tap into, to know which segments need to be assisted.” 

Salahuddin said the government is currently conducting a study to determine the appropriate income thresholds for the different categories of households. 

“The government is set to redefine income groups in order to provide more targeted subsidies to those who need them the most,” he said. 

The existing income group data seems insufficient in accurately identifying those who require the assistance, said Salahuddin. Currently, Malaysians are categorised into three household income groups: Bottom-income 40% (B40), middle-income 40% (M40) and top-income 20% (T20). 

“We are looking into developing a new income group categorisation that is more accurate and takes into account the changing economic landscape. 

“A new system is needed, one that considers different living conditions,” he said, adding that the government is committed to developing a comprehensive system to capture the current economic situation and direct subsidies to the targeted group. 

“We want to ensure that subsidies are given to those who need them the most, and not just those who fall within a certain income bracket,” he said. 

The new income group categorisation is expected to be more comprehensive, taking into account factors such as household size, expenditure patterns, and the emergence of new professions and income sources. It is also part of the government’s broader efforts to address the issue of rising living costs, which has been a significant concern for many Malaysians. 

The new income group categorisation is expected to be developed in consultation with experts in the field of economics and social welfare, said Salahuddin. 

  • This article first appeared in The Malaysian Reserve weekly print edition