Economists warn against targeted petrol subsidy based on income

Economists have cautioned against an income-based targeted subsidy mechanism for RON95 petrol, recommending instead a system that charges according to tiers, as implemented in the distribution of electricity bill subsidies.

Geoffrey Williams told MalaysiaNow that the calculation of subsidies currently shown on bills worked well, and that the tiered pricing for petrol should work in the same way.

"If I have a motorcycle or a small car and fill it up with RM5 or RM20 worth of fuel, then I get the full subsidy. If I have an SUV and pump RM100 worth of fuel, I get less, just like electricity.

"For example, up to 10 litres, you get full subsidy, 10 to 30 litres you get half subsidy, and above 30 litres no subsidy. For someone buying 10 litres, normally in the low-income groups nothing would change.

"For someone buying 50 litres, they get partial subsidy below 30 litres but no subsidy above 30 litres. These are mostly high-income people."

Williams added that the government could do away with the PADU system if the targeting of petrol subsidies went according to consumption, using it instead to focus on other types of subsidies such as education, healthcare and social welfare.

"Even people in the high-income group need subsidies for medical costs when a loved one suffers from long-term disabilities and require round-the-clock care, for example."

The government has since June 2022 allocated funds of RM5.8 billion for a fuel subsidy on electricity bills for residential and non-residential customers.

To cover the cost of fuel increases, customers only need to pay their bills after deducting the fuel subsidy amount based on the number of electricity units used that month.

According to the Tenaga Nasional website, the subsidy calculation will be revised based on a review of changes in fuel costs – whether increases or decreases – every six months.

During the presentation of the 2025 budget, the government announced targeted RON95 subsidies next month, saying subsidies amounting to RM8 billion would be cut for the T15 group while the retail price of RM2.05 per litre would remain for 85% of the population.

It has yet to detail the methods and mechanisms for these subsidies, as well as the definition of T15 or the 15% of Malaysians considered as having the highest incomes.

Who are the T15?

Economic analyst Aimi Zulhazmi Abdul Rashid said the terminology for such groups is similar to that used by the World Bank to identify the standard of living of countries based on gross income divided by the total population.

In Malaysia, though, he said the use of such terminology was not entirely accurate as it did not take into account the cost of living and the differences between urban and rural areas, as well as the commute taken by members of the public each day.

He said even categorising individuals as T15 based on an income range of RM13,000 to RM20,000 would not be accurate as this was only measured by gross income.

He suggested calculations according to net income instead, allowing for deductions for matters such as household expenditure, fuel, education and the location of the workplace.

"There is a significant difference between the cost of living in cities and rural areas," he said.

"All of this requires the use of integrated smart data such as the PADU system, which was announced as the main platform in the government's efforts to digitalise the workplace."

Mohamed Aslam Gulam Hassan, a former senior lecturer at Universiti Malaya's department of economics, asked how the government intended to ensure that the T15 pay the full price of RON95 petrol after the withdrawal of subsidies.

"What about the B40 and M40, or the remaining 85% of households which will enjoy the RON95 subsidy?" he added.

"Will it be paid through rebates in income tax? Or will those who qualify receive subsidies or monthly vouchers, or a special card, or will the government credit the subsidy payments? How will all of this work?"

Aslam said other concerns might also arise, describing the withdrawal of subsidies for the T15 as beneficial but regressive.

Seen from another angle, he said, it could be perceived as a form of discrimination against the rich, which could affect their motivation to work and invest their wealth.  

In general, he said, the T15 pay more income tax than other groups.

"Generally, the estimated average monthly income of the T20 is three times the average monthly income of the M40 and six times the average monthly income of the B40," he said.

"But any effect of this sort might not be very strong, either. If it is less than the incentive to work and invest, the T15 might not care very much."

Aimi agreed that the T15 were the biggest taxpayers.

"If this is not implemented in a smart and fair manner, it could lead to tax evasion or other long-term effects such as migration to other countries."