Blanket subsidies bring more harm than good, say economists

Free Malaysia Today

21-05-2025

An economist believes that subsidy reform will become harder to accomplish the longer subsidies remain, as the public will begin to see them as entitlements.
PETALING JAYA : While subsidies have long been positioned as a tool to help ease the burden of living costs, economists warn that the cost of keeping blanket subsidies afloat may be higher than we think.
While fuel subsidies have helped cushion citizens from rising costs, they've also come with unintended consequences such as overconsumption, leakage, and a disproportionate benefit to higher-income groups.
'There is a tipping point, and we are already beyond that point,' says economist Geoffrey Williams bluntly. 'This is why implementing targeted subsidies is essential.'
He said the tipping point is marked by growing inequality that usually occurs when the cost of the subsidies outweigh their intended benefits.
But the challenge isn't just about how much subsidies cost, but also the damage that it costs when left unchecked.
The cost of doing nothing
Economist Madeline Berma argues that while subsidies are not inherently bad, the current design often benefits those who least need them.
'They're poorly targeted. The wealthier groups, not the vulnerable ones, are absorbing a big chunk of the benefits,' she says.
She notes that the government has already made commendable progress in rationalising diesel subsidies and rolling out targeted initiatives such as the Budi Madani programme.
According to the finance ministry, the programme has helped save approximately more than RM7 billion, with significant reduction of smuggling and leakages.
Universiti Malaya's Goh Lim Thye takes it a step further, saying that blanket subsidies become liabilities and encourage wastage when reforms are delayed.
'Nearly 40% of the RON95 fuel subsidy amounting to RM8 billion benefits the wealthiest 15% of the population and foreign nationals,' he said.
By 2023, fuel subsidies had ballooned beyond RM50 billion annually, more than the budget for health and infrastructure combined.
That inefficiency has a ripple effect as funds that could be channeled into more productive avenues, such as digital infrastructure, or education.
'Money lost to leakages and inefficiency could have gone into healthcare, digital infrastructure, or climate resilience. It's not just inefficient, it's unfair,' Goh said.
Another 'silent cost' was that of entrenchment. The longer subsidies remain universal, the harder it is to carry out reforms as 'the public begins to see them as entitlements' and the political window for reform starts to close.
Williams said excessive protection through subsidies would also weaken economic vitality in the long run.
'Companies are less competitive if they are protected with subsidies, and this makes Malaysia as a whole less competitive, agile and innovative,' he says.
Madeline said that without timely action, Malaysia would be at risk of missing its own fiscal targets, weakening investor confidence. 'Subsidy reform isn't just about economics. It's about national credibility and long-term resilience,' she said.