Budget 2025, with its significant allocation of over RM420 billion, strategically emphasises addressing the most pressing needs of the people, particularly in light of rising living costs. Among the key reforms in this budget, which focuses on providing more for education, healthcare and public transport, is the rationalisation of subsidies, a measure aimed at reducing fiscal inefficiencies while ensuring support for those who need it most.
Subsidies in Malaysia have come a long way since they were first introduced decades ago as a tool for economic support in boosting agriculture production and social welfare.
In recent years, however, the Malaysian federal government has embarked on a rationalisation exercise to implement targeted subsidy policies rather than blanket ones as part of the country’s ongoing fiscal reforms.
Reducing the Burden of Living Costs through Targeted Subsidies
In his Budget 2025 speech, Prime Minister Anwar Ibrahim announced that the government will implement targeted subsidies for RON95 petrol starting mid-2025. The subsidies will be restructured to exclude foreigners, businesses and the wealthiest 15% of Malaysians. Meanwhile, the government will continue to allocate RM12 billion to subsidise petrol for 85% of the rakyat. Similarly, the diesel subsidy will be concentrated on essential industries and lower-income households, offering potential savings of billions annually.
These measures are a response to significant inefficiencies under the previous universal subsidy system, which saw substantial leakages. Subsidised fuel, particularly RON95, has been exploited by smugglers, further draining government resources. By narrowing the scope of subsidies, the government aims to reduce these leakages and ensure that financial support reaches those who need it the most.
With the targetted subsidies cut, the government hopes to save up to RM8 billion which will be directed toward improving public services such as education, healthcare, and transportation.
Targeting High Electricity for Cost Efficiency
The petrol subsidy targeting is expected to mirror the electricity subsidy model introduced in 2023, which safeguards the lowest 85 percentile of users. Under the current scheme, only consumers exceeding 600 kilowatt-hours per month must pay the full rate without a subsidy. This affects about 15% of the population that consists of big businesses and wealthy individuals, while the majority continue to enjoy subsidised rates.
Households and businesses exceeding a defined threshold will face higher tariffs, a move designed to encourage energy efficiency while reducing unnecessary consumption. This approach aims to ease the government’s fiscal burden, incentivises efficient energy use and reduces the overall carbon footprint, supporting Malaysia's aim to achieve carbon neutrality by 2050.
Malaysia's Pioneering Approach to Fiscal Responsibility
Doris Liew, an economist at IDEAS Malaysia, notes that the targeting of fuel subsidies in Malaysia is an unprecedented move, positioning the country as a leader in embracing technology to create a policy that is both fiscally responsible and mindful of the rakyat’s burden.
For instance, when the diesel price at the pump was floated, targeted subsidies for logistics companies and diligent monitoring by the Ministry of Domestic Trade and Cost of Living (KPDN) helped prevent inflation from exceeding 2%. These efforts underscore Malaysia's ability to manage inflation effectively.
The government also has introduced initiatives like cash assistance through Sumbangan Asas Rahmah (SARA) and Sumbangan Tunai Rahmah (STR), price controls, and Jualan RAHMAH to help alleviate cost pressures on the B40 and M40 groups.
The targeted subsidy system represents an unprecedented approach in Malaysia's policymaking, balancing fiscal responsibility with measures to ease the rakyat's burden. By leveraging technology, Malaysia is leading the way in adopting a forward-thinking, integrated framework. However, Liew emphasise that the success of this system relies heavily on accurate identification and verification of subsidy recipients. While the government has pivoted from the PADU system to a consolidated database approach, ensuring the reliability of this data is critical to minimise misclassifications.
Cost of living indicator to enhance targeted subsidy programmes
The government is set to introduce a cost of living indicator to design more targeted subsidy programmes aligned with Malaysians’ specific needs and spending habits, said Domestic Trade and Cost of Living Minister Armizan Mohd Ali.
The initiative is part of ongoing subsidy reforms to ensure aid reaches those most in need. The indicator will help refine both existing programmes and future initiatives for better planning and execution. Under Budget 2025, an additional RM700 million has been allocated to the Domestic Trade and Cost of Living Ministry to introduce new measures aimed at alleviating the cost of living.
“This allocation allows us to not only enhance current programmes to benefit target groups but also implement more specific initiatives for certain regions,” said Armizan. He added that the indicator will ensure future programmes are more focused, addressing necessities while empowering citizens to participate more meaningfully in society.
Budget 2025’s shift to targeted subsidies presents a critical step toward fiscal sustainability and social equity, driving Malaysia towards having a more sustainable and equitable economy and future as envisioned under the MADANI framework. The shift to targeted subsidies is not just a fiscal adjustment; it is a commitment to ensuring that support reaches those who need it most, strengthening social cohesion and economic resilience.
The views expressed here are those of the author/contributor and do not necessarily represent the views of Malaysiakini.
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