Budget 2025: Politics Likely to Prevail Over Subsidy Reforms

The Anwar administration has proclaimed subsidy rationalisation as a cost-cutting and efficiency-enhancing fiscal reform. This has been set up in sequence: electricity, diesel, and then petrol. The order corresponds with practical difficulty and political unpopularity. Malaysia has duly cut electricity subsidies for high-volume consumers, and slashed subsidies on diesel largely to curb cross-border smuggling and profiteering.

The government is wavering on ubiquitously used petrol, while also facing calls to bring back the goods and services tax (GST) to bolster revenue. It is unlikely that a firm decision will be made at the unveiling of the 2025 budget this week. Despite the federal unity government’s recent successive by-election wins, political considerations will continue to guide its approach to subsidies and taxes.

Policy discourses have been stressing that Malaysia’s subsidy bill — touching RM81 billion (US$18.9 million) in 2023 — is not sustainable. Fuel subsidies disproportionately benefit large vehicle owners instead of the lower-income layers that need the most help. This message was repeated throughout this year, indicating that the government may persist with the politically unpopular petrol subsidy removal and GST reintroduction.

However, Prime Minister Anwar Ibrahim has recently taken a more populist route, declaring that he will continue to focus on removing what he describes as subsidies for the ultra-rich. Speaking at the Ministry of Economic Affairs conference addressing extreme poverty, he hinted that low-fee education for the rich may end soon. Anwar cited government-funded boarding schools, which were formed for underprivileged Malay-Muslim students but are being enjoyed by children of well-connected, wealthy individuals from the community.

Anwar may have scored political points with the speech as the enrolment of “chauffeur-driven students” in boarding schools has been a hotly debated topic in Malay language media in recent years. Although the move is well-intentioned and consistent with the administration’s pro-poor disposition, the savings will, at best, make a small dent in the budget. The government budgeted RM388 billion for total expenditure in 2023; RM81 billion went to subsidies, mainly for lowering pump prices. Concurrently, the Ministry of Rural and Regional Development, which is responsible for some of the boarding schools, was allocated RM11 billion.

Fear of the political consequences of free-floating petrol prices is understandable. No prime minister has been able to address the issue decisively. When former Prime Minister Abdullah Badawi increased petrol prices by 41 per cent in 2008, his detractors took advantage of the people’s anger to force him out of office months later. His successor, Najib Razak, appeared to be more well-prepared. His administration’s public relations arm, PEMANDU, led by a cabinet minister, held glitzy events to justify subsidy rationalisation. However, the former prime minister became too politically compromised to make meaningful changes.

Realistically, Anwar has limited political space to reintroduce the GST or remove petrol subsidies. Malaysia will enter election mode soon with three states — Sabah, Sarawak and Melaka — scheduled to hold their elections between 2025 to 2026, while the federal government’s mandate will end a year later.

For the average Malaysian, cheap fuel is a necessity. Greater Kuala Lumpur has an expanding rail network, but the public transport usage rate remains a dismal 24 per cent. Beyond this central region, Malaysia’s public transport system is largely inefficient or non-existent in some smaller towns. The free-floating of diesel prices in June, reportedly to save RM4 billion, was limited to Peninsular Malaysia as the rural population in Sabah and Sarawak heavily rely on diesel-powered vehicles. Even in Peninsular Malaysia, most businesses still enjoy controlled access to subsidised diesel, a move to contain inflation and mitigate political fallout. The government appears doubtful that providing targeted cash transfers can sufficiently soften the impact of subsidy rationalisation. It is also concerned that the petrol price increase will be tangibly felt by all, including the middle class. There is a strong environmental argument for removing fuel subsidies, but green policies do not win votes in Malaysia.

Perhaps due to these challenges, some in the government view the reintroduction of the GST as politically easier, and there is a strong financial argument for it, too. The Ministry of Finance told Parliament that the GST revenue far exceeds the single-stage sales and services tax (SST), which was reintroduced to replace the GST in 2018. The GST, which operates more comprehensively at multiple levels along supply chains, netted RM60.5 billion in 2017; SST collected RM35.4 billion in 2023.

Reintroducing the GST faces steep challenges. Anwar’s people-centric Madani economic vision might be principally opposed to replacing the SST with the GST due to the regressive structure of consumption taxes. Lower-income households bear a higher tax burden because they spend a larger proportion of income on consumption; higher-income households have more to set aside for savings. Pakatan Harapan leaders, some of whom serve in the cabinet today, made abolishing the GST their main campaign issue for the 2018 general election. Introduced by the Najib administration in 2015, the poor management of the GST and the inefficiency of its refund mechanism made it unpopular among the business community.

The burden of the GST, like subsidy removal, can be mitigated through targeted cash assistance. The federal government could also consider working with the state governments to formalise an allocation of the GST to the states, in response to the state governments’ growing demands for higher shares of federal tax collection. Federal-state GST distribution will also enable Anwar to share the political burden with the 13 state chief ministers, and the Perikatan Nasional federal opposition coalition that controls four state governments. But the fractious state of Malaysian politics constricts the chances of the chief ministers coalescing around a new tax deal.

Realistically, Anwar has limited political space to reintroduce the GST or remove petrol subsidies. Malaysia will enter election mode soon with three states — Sabah, Sarawak and Melaka — scheduled to hold their elections between 2025 to 2026, while the federal government’s mandate will end a year later. The political rhetoric of going after the ultra-rich will likely travel well in election season. Malaysia’s fiscal health is not mortally endangered; the status quo can be punted forward. But financial reality will catch up, and the next federal government, whether led by Anwar or somebody else may not have the fiscal space to keep petrol cheap.

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