Malaysia is counting on its plan to cut subsidies next year to help narrow the budget deficit, giving the government room to avoid resorting to “too many taxes,” according to Economy Minister Rafizi Ramli.
(Bloomberg) — Malaysia is counting on its plan to cut subsidies next year to help narrow the budget deficit, giving the government room to avoid resorting to “too many taxes,” according to Economy Minister Rafizi Ramli.
The government expects savings of at least $1 billion to $2 billion dollars a year from its shift to targeted subsidies that could begin as soon as the second quarter of 2024, he said in an interview with Bloomberg Television’s David Ingles. Malaysia currently absorbs much of the price of fuel and cooking oil for its population, straining the Southeast Asian nation’s coffers.
“The successful implementation of the subsidy re-targeting program will put us in a much stronger position fiscally and it will allow us some breathing space so that we don’t jump on the new taxes bandwagon too carelessly,” Rafizi said.
Malaysia is set to unveil its 2024 spending plan on Oct. 13, and the budget must reconcile the country’s limited fiscal space with its ambition to become a high-income nation within this decade. Prime Minister Anwar Ibrahim had previously hinted at more taxes to shore up government finances, including a capital gains tax on the disposal of unlisted shares.
The 2024 budget will reveal a “concrete move” away from the current blanket subsidy system, Rafizi said, adding that how it plays out would help the government make informed decisions for taxes in 2025 and beyond. Malaysia aims to lower the budget gap to about 4.6% of gross domestic product in 2024, and is on track to meet its shortfall-target of 5% of GDP for this year, he said.
“So the fiscal deficit target is more important to us than the manner and the strategy to go there,” he said. The aim is to eventually narrow the gap to 3.5% of GDP by 2025, he said.
The World Bank said Monday that Malaysia’s narrow fiscal space remains a concern, as government tax revenue keeps declining while expenses such as on pensions and interest payments continue to rise. Spending inefficiencies including broad-based fuel subsidies and distortionary price controls exacerbated this, it said in a report.
The Southeast Asian nation will leverage the savings from targeted subsidies to start reducing the debt to GDP ratio to 60% from the current 63%, Rafizi said. That will start happening when the budget gap shrinks to 3.5% of GDP, he added.
Malaysia is designing cash transfers and aid to mitigate the impact of inflation from slashing its subsidy allocation, said Rafizi. About 80% of Malaysia’s 8 million households are set to benefit one way or another from the cash transfers, he added.
Malaysia’s central bank Governor Abdul Rasheed Ghaffour on Tuesday said the economy wasn’t facing a severe inflation challenge, and price pressures were expected to continue to trend lower. Still, changes to domestic policies on fuel subsidies posed potential risks to its outlook, he said.
–With assistance from Richard Lewis and Eric Lam.
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