Malaysia likely to cut subsidies in 2024 budget for fiscal strength

By Danial Azhar

KUALA LUMPUR (Reuters) – 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 Southeast Asian economy, whose growth is expected to moderate to 4%-5% this year, from 8.7% last year.

Prime Minister Anwar Ibrahim is expected to announce a smaller spending plan for 2024 when he tables the budget in parliament on Friday, economists say.

He is also expected to announce cuts to electricity and petrol subsidies, and announce 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 analysts said in a research note this month.

CGS-CIMB 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 will announce in the 2024 budget a shift to targeted subsidies that will save at least $1 billion to $2 billion a year. Cash aid may also be given, he said.

Malaysia currently 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 aids the lower-income groups.

The government’s outlay on subsidies has ballooned in recent years due to rising commodity prices. Malaysia expects to spend 81 billion ringgit ($17.14 billion) in subsidies this year.

Economists expect Anwar to announce steps to implement capital gains and luxury taxes first mooted in the previous budget to broaden the revenue base.

Some also said Malaysia could reintroduce Goods & Services Tax (GST) from late 2024 or early 2025.

GST was first introduced in 2015 at a rate of 6% but was scrapped in favour of the sales and service tax (SST) in 2018. The current rate for sales tax is 5% to 10% while the service tax is 6%.

Kenanga analysts expects the government may transition to GST at a lower rate of 4%.

“Since the government plans to reduce subsidies for higher-income individuals first before reintroducing GST, we reckon that this transition may only happen in the second half of 2024,” Kenanga said.

($1 = 4.7270 ringgit)

(Reporting by Danial Azhar; Editing by A. Ananthalakshmi and Simon Cameron-Moore)