Long-term effects of stimulus unclear

The Star

4 days ago

PETALING JAYA: The goodies announced by Prime Minister Datuk Seri Anwar Ibrahim, including the RM100 cash transfers to Malaysians above 18 years of age and the lowering of RON95 petrol price, will spur economic activity although the long-term effects remain uncertain, say economists.
They opined that the measures, while likely to be offset by tax reforms, subsidy rationalisation and revenue enhancement measures, might pose certain risks to the government's fiscal position.
Economist Doris Liew, who specialises in South-East Asian development, said the removal of fuel subsidies, long seen as necessary for structural reform, has faced significant political resistance.
'The lowering of RON95 prices is less about sustainable economic management and more about short-term populism.
'For Anwar, who has pledged a path of fiscal consolidation with the ambitious goal of reducing the fiscal deficit to below 3% of gross domestic product (GDP), this move appears inconsistent and politically expedient,' she opined.
She cautioned that the implications of the decision were many while the tangible benefits were limited.
'First, the actual reduction in the cost of living for households will likely be marginal, particularly when weighed against the long-term fiscal cost.
'Second, it undermines Malaysia's broader ambition to transition towards electric vehicles.
'Artificially suppressing petrol prices will only deepen the public's dependence on fossil fuel vehicles and weakens incentives for cleaner alternatives,' she told StarBiz.
Thirdly, the move risked a steep increase in subsidy-related expenditure over time, according to Liew observed that in 2022, fuel subsidies amounted to RM52bil, equivalent to 74% of all government subsidies.
Although global oil prices have declined recently, she said projections indicated a potential rebound by 2026, which could place renewed and unsustainable pressure on public finances.
Nevertheless, she said to the government's credit, several revenue-enhancing initiatives have been introduced this year, including the expansion of the sales and service tax (SST), the implementation of the global minimum tax starting January and the increase in the minimum wage, which could help increase income tax collections.
However, the continued reliance on broad-based subsidies remains a cause for concern, she said, as fuel subsidies in particular, are a fiscal black hole.
'Once reinstated or increased, they become politically difficult to scale back, even when economically unsound,' she said.
Commenting on the RM100 cash transfers, Liew said they might offer modest relief for low-income households, but would do little to fundamentally improve welfare or address structural inequalities.
Of interest, economist Geoffrey Williams opined that the cash handout was a good initiative, viewing it as a pilot for reform of the Sumbangan Tunai Rahmah/Sumbangan Asas Rahmah programme to create a possible universal basic income (UBI), which would be a first in the world and set Malaysia as a leader in welfare reform.
'It has all of the features of a UBI because it is a cash transfer to individuals, not households, without any conditions and available universally to all Malaysians without the need to apply.
'For the moment, it is a one-off payment but it will provide useful lessons to become a regular monthly payment so that Malaysia would be the first country to have a full UBI which would be part of Anwar's legacy,' he said.
Noting that the cash handout is affordable under the subsidy rationalisation savings, he said it would add consumption to the economy in the second half of the year to support economic growth especially for the low-income group as the money would be spent in local shops and communities.
While noting that the cash transfer could cost the government RM2bil, Williams reckoned that the initiative would have an impact of RM6bil due to its multiplier effect. According to him, the cash transfer will not impact the government's fiscal position because it is essentially a transfer of money from one use to another.
He added: 'If it supports growth, then the GDP will be higher than 4% and this helps the push towards debt and deficit ratio push targets. The funds come from subsidy rationalisation savings so development expenditure is not affected.'
On the other hand, he said the small reduction from RM2.05 to below RM1.99 per litre of the RON95 fuel would be 'only marginally' helpful for boosting the economy and the subsidy rationalisation is not primarily intended to cut daily lifestyle expenses, but to reduce wasteful subsidy costs.
'The cut is very small, and so it will have a negligible impact on fuel use,' he said.
Meanwhile, Bank Muamalat Malaysia Bhd chief economist Mohd Afzanizam Abdul Rashid likend the measures to a mini fiscal stimulus as the country is facing heightened economic uncertainties brought on by US tariffs and ongoing geopolitical risks.
'We have seen Bank Negara cutting the overnight policy rate by 25 basis points this month. So, it clearly shows that Keynesian economics prescriptions are at work now,' he said.
Keynesian economic policies, first developed by British economist John Maynard Keynes in 1936, advocate for government intervention to stabilise or mobilise the economy when it is facing risks of a downturn.
Mohd Afzanizam highlighted the fiscal consolidation exercises that had been ongoing since last year, including the SST increase by two percentage points and the diesel subsidies that had been rationalised, allowed a fiscal space to be established.
'The government is using this space to spend in order to grow the aggregate demand,' he added.