Budget 2024 may see subsidies slashed, more indirect taxes, to rein in RM1 trillion national debt

Prime Minister Datuk Seri Anwar Ibrahim’s government is at a crossroads as it prepares for Budget Day on Friday.

Anwar’s Madani economic framework, launched in July, was to give the people a better quality of life.

Anwar stated that the goal was to grow the economy at six per cent annually over the next decade.

However, due to China’s economic slowdown, the World Bank recently revised its estimates across Asia, lowering Malaysia’s predicted growth rate to 3.9 per cent.

Speculation is rife that the government may have no choice but to do away with some subsidies as it struggles to reduce its RM1,079.59 billion debt.

In its report on the Federal Government’s Financial Statement for 2022, the Auditor General said that Malaysia’s national debt had climbed to RM1,079.59 billion, an increase of RM99.78 billion (or 10.2 per cent), from RM979.81 billion the previous year.

Last year, the government spent RM50.8 billion on petrol, diesel, and liquefied petroleum gas subsidies. Of that amount, 35 per cent – or RM17 billion – benefited the T20 segment.

On Oct 2, Anwar indicated that he may stop universal healthcare in Malaysia, as he felt that the T20 group should pay a higher fee.

Financial experts say that the government cannot depend on personal income tax as a primary source of revenue, as only 10-12 per cent of the population contributes to it. They added that the government’s message – should it decide to reduce or stop subsidies – must be clear and concise.

“Malaysian wages are low, and many do not earn enough to fall under the tax bracket,” said Barclays Corporate & Investment Bank’s Senior Southeast Asia Economist (Director), Brian Tan.

“If they do away with the subsidies or introduce new taxes, the message should be, that it is not about taxing the poor, but to get the rich to pay more.

“The problem is, some people are not paying what they should in income tax as they know how to work the system. So, the only way for the government to increase revenue is to stop, or reduce subsidies, and have indirect taxes on sales and services.”

He said the higher income group would continue spending more on luxury items, thus paying more taxes, when compared to those earning less.

Pankajkumar Bipinchandra, managing director of Datametrics Research and Information Centre, said if the government were to do away with fuel subsidies, it could gradually increase the price every quarter.

“For instance, it could increase the current price by 20 sen every three months before reaching the market price of RM4.50 per litre (for RON95) in two-and-a-half years,” he said.

“That would help in slowly reducing the current deficit.

“The government can then transfer part of the savings (from the subsidies) to help those in the B20 or M40 segments, via cash handouts.”

The duo were on the panel of Malaysian Rating Corporation Bhd’s ‘Pre-Budget 2024 Views: Long Story of Fiscal Consolidation’, held in Kuala Lumpur today.

They were joined by Yew Keat Chong (Senior Economist Macroeconomics, Trade & Investment, World Bank Group), and Christian de Guzman (Senior vice-president, Sovereign Risk Group, Moody’s Investors Service), with MARC Ratings Bhd’s Chief Economist, Dr Ray Choy, as moderator.

This year’s budget, which was tabled by Anwar in February, involved an allocation of RM388.1 billion, with RM289.1 billion set aside for operating expenditure, and RM99 billion for development expenditure, including RM2 billion in contingency savings.

Budget 2023’s allocation was increased to RM386.14 billion from the RM272.3 billion budget that was tabled by the previous government in October of 2022.

Anwar was named prime minister following the formation of a so-called ‘unity government’ after the Nov 19 general election last year.