Energy subsidy burden on the rise

KUALA LUMPUR – The government’s energy subsidy bill has surged from RM15 billion to a projected RM58 billion, raising concerns among experts about the long-term sustainability of the approach.

Sunway University economics professor Dr Yeah Kim Leng said the approach is fiscally unsustainable as the amount is equivalent to nearly three per cent of gross domestic product (GDP), which may need to be financed through borrowing.

“This will cause the country’s debt-to-GDP ratio to exceed the statutory limit of 65 per cent.

“A more prudent approach would be to control the increase in fuel subsidy bills and share the impact of global energy price shocks more fairly between consumers and businesses, while protecting vulnerable households and small businesses in a more targeted manner,” he said.

Yeah added that trade-offs will be inevitable to prevent subsidy bills from continuing to rise, especially as inflation is expected to increase at a faster rate.

“However, the country’s low and stable inflation rate, averaging 1.9 per cent since the second half of 2023, indicates sufficient capacity to absorb moderate increases in inflation.

“Another approach to avoid excessive fiscal deterioration is to reduce government spending by tightening discretionary and development expenditures selectively so that economic growth, employment opportunities and capacity-building efforts are not affected,” he said.

Meanwhile, Centre for Market Education chief executive officer Carmelo Ferlito said the situation also means the government is using public finances to mask the true cost of energy from consumers, while shifting the burden to taxpayers, future generations and other areas of public spending.

“The danger of broad fuel subsidies is that they may appear compassionate in the short term, but over time become socially inefficient and fiscally burdensome (and in Malaysia, that period has arguably already passed).

“They not only benefit vulnerable households, but also advantage households and businesses that consume more fuel simply because of their higher usage. In other words, they are not truly targeted,” he said.

He stressed that a better alternative would be to move towards market-based pricing combined with targeted individual assistance.

“Fuel prices at the pump should remain uniform and market-based, while assistance is channelled directly to those in need through dedicated vouchers for fuel, transport, food, or other basic necessities,” he added.

Ferlito said the government should not manipulate prices at the retail level, but instead support households directly and transparently.

“This would protect vulnerable groups while preserving the economic function of prices. Prices signal where supply shortages occur. If we artificially suppress them, we also suppress incentives to save, adapt, innovate, or seek alternatives,” he said.

Researcher and policy analyst at the South-East Asian Futures Initiative Centre Dr Mikhail Rosli said the bigger question is that every ringgit spent on subsidies is a ringgit not spent on essential needs such as healthcare.

“So I would be cautious in framing this issue purely in terms of sustainability, because there is no immediate risk of insolvency. The Malaysian government is still able to bear it.

“But the bigger question is that every ringgit spent on subsidies is a ringgit not spent on healthcare or education and I think that is the broader discussion Malaysians need to start having,” he said.

Mikhail noted that such discussions are sensitive because they involve real policy choices and trade-offs between different segments of society.

“For example, the recent proposal for T20 households not to receive Budi95 is an active policy choice and in fact, a political one. I think this is the kind of conversation Malaysian society needs to begin having. Unfortunately, we have yet to do so,” he said.