Unaddressed subsidy leakages could result in significant economic liabilities, says economist

Malaysiakini

26-05-2025

Subsidy leakages severely undermine economic efficiency and fiscal discipline, potentially leading to major liabilities if not addressed, according to an economist.Goh Lim Thye of Universiti Malaya noted that in the short term, these leakages can cause direct revenue losses, weakened impact of fiscal transfers and a decline in credibility in public spending.
'In the long-run, these leakages create systemic distortions: they entrench rent-seeking behaviour, reduce incentives for energy efficiency, and delay the necessary shift towards a more targeted, sustainable subsidy framework.
'Without reform, subsidies risk becoming politically entrenched fiscal liabilities rather than tools for equitable development,' he told FMT.
Leakages erode trust and widen inequality
Another economist, Madeline Berma of Institut Masa Depan Malaysia, said leakages also fuel public distrust, particularly when unqualified recipients benefit from government subsidies.
'Subsidy leakages can also potentially exacerbate income inequality which also creates opportunities for corruption and rent-seeking behaviour,' she added.
She said that while reforms have been implemented, Malaysia is still grappling with leakages and has yet to entirely eliminate them.
However, she noted that the government's move to rationalise diesel subsidies in June last year had led to significant decrease in leakages.
Rationalisation efforts show promising results
Earlier this month, the government ended price controls on eggs and reduced subsidies from 10 sen to 5 sen per egg, with full removal set for Aug 1.
The agriculture and food security ministry said prolonged price controls and subsidies were unsustainable in the long term for both local egg producers and the country's fiscal health. It said rationalising subsidies was the fairer approach, as subsidies are currently also enjoyed by foreign nationals and high-income groups.
'By resetting the system and using technology to monitor eligible recipients, the government has saved RM7.5 billion without harming those genuinely in need of subsidised diesel,' said economist Geoffrey Williams.
He said success in tackling leakages not only saves money for more meaningful public spending, but also eliminates the broader disadvantages of subsidy-related corruption.
The funds saved could be redirected to for health services, education, and social protection, encouraging a return of public trust
'It cuts out all the disadvantages of subsidies and removes market distortions, creating a more competitive, agile and efficient system,' he said.
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