Should Malaysia phase out blanket subsidies for targeted support?

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Malaysia Should Transition to Targeted Subsidies for Vulnerable Citizens

The World Bank has recommended that Malaysia phase out blanket and broad-based subsidies in favour of a targeted subsidy framework. This approach aims to better support vulnerable populations while simultaneously rebuilding fiscal buffers. The transition should be gradual to mitigate potential inflationary pressures.
Shift Towards Targeted Subsidies Recommended

The World Bank's "Malaysia Economic Monitor February 2023" report specifically cited fuel subsidies as an area where a transition is needed. It suggested implementing targeted cash transfers directly to lower-income households as a replacement for the current broad-based fuel subsidies. This move aligns with the Malaysian government's stated intention to develop a targeted subsidy framework for fuel. Furthermore, electricity subsidies for large businesses have already been phased out as of January 1, indicating a movement in this direction.
Reassessment of Poverty Metrics Urged

Beyond subsidy reform, the World Bank advised Malaysia to reassess its poverty line income and multidimensional poverty index. The report emphasizes the need for improved metrics to accurately measure poverty and inequality, enabling more effective and equitable policy responses. The current focus on the "hardcore poor" might overlook other vulnerable groups, such as informal and younger workers, suggesting a need to broaden the scope of support.
Revenue Collection Enhancement Proposed

The World Bank also highlighted the importance of increasing Malaysia's revenue collection, noting historical under-collection in personal and consumption taxes. Government revenue is projected to decline from 15 per cent of GDP in 2023 to an average of 14.7 per cent in the medium term. To address this, the report suggests broadening the tax base for personal income tax and enhancing the consumption tax framework, potentially as part of the forthcoming Fiscal Responsibility Act.
Leveraging Digitalisation for Economic Growth

In parallel with fiscal reforms, the World Bank called on Malaysia to harness its increasing digitalisation to foster an inclusive, dynamic, and safe digital economy. This involves strengthening foundations in areas such as digital infrastructure, platforms, financial services, literacy, skills, and safeguards. The pandemic accelerated digitalisation, with internet usage rising from 84% in 2019 to nearly 97% in 2021, presenting a significant opportunity for economic development.

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Should Malaysia phase out blanket subsidies for targeted support?

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