KUALA LUMPUR (July 18): Malaysian Rating Corporation Bhd (MARC) estimates that a 10% cut in RON95 fuel subsidies could narrow the fiscal deficit by around 0.2% of gross domestic product (GDP).

In a statement on Thursday, MARC said GDP growth and consumer spending should also facilitate subsidy retargeting towards beneficial welfare outcomes, along with current encouraging signs in the labour market.

“Rationalising subsidies remains a key factor in capping government expenditure, as subsidies have increased as a share of Malaysia’s operating expenditure from 4% in 2003 to 25% in 2023,” it said.

MARC said Malaysia spent RM70.3 billion on subsidies in 2022, with fuel subsidies making up 74%.

“Consequently, ongoing fuel subsidy reform remains absolutely necessary, alongside the ongoing review of various subsidies, such that the monies allocated are better targeted at disadvantaged groups in society,” it noted. 

As for the taxes, the rating firm said that while tax compliance remains a challenge, especially for direct taxes, Malaysia’s ongoing refinement of the e-invoicing system should enhance the efficiency of indirect tax collection.

“Overall, widening the catchment of the consumption tax is critical for fiscal sustainability, and this can be implemented through having a wider basket of goods for the existing sales and service tax, or introducing a variant of the goods and services tax or a value-added tax,” it opined. 

It also said Malaysia’s Public Finance and Fiscal Responsibility Act 2023 had capped the fiscal deficit at 3% of GDP while allowing for temporary deviations.

“The government aims to achieve this benchmark by 2026, which, if successful, would stabilise Malaysia’s elevated debt levels and align the deficit with the global median,” MARC added.

https://www.theedgemarkets.com/node/719477