21 hours ago
Navigating Shifts In Government Policy
Recently, we have frequently heard announcements regarding government policies, particularly those related to taxation and subsidies. The latest among these is the expansion of the Sales and Services Tax (SST) scope, scheduled to take effect on July 1, 2025. Additionally, the government plans to implement fuel subsidy rationalisation for RON95 petrol in the second half of 2025. Furthermore, a new base electricity tariff will be introduced from July 1, 2025, until December 2027. This includes implementing the Automatic Fuel Adjustment mechanism, which is intended to bring greater transparency in determining electricity tariffs.
However, such policy changes are often met with a negative public reception. For instance, the expansion of SST is widely viewed as a move that will increase business costs, compelling entrepreneurs to raise the prices of goods and services. Each time the government attempts to introduce reforms aimed at improving its financial position, resistance tends to arise from various quarters, particularly from associations representing specific interest groups. It is undeniable that these reforms may lead to higher operating costs and the compression of profit margins.
Nevertheless, the issue of fiscal consolidation is far from new. In the context of Malaysia, particularly since the change of administration in 2018, economic reform, especially those pertaining to public finances, has remained a core ideological pursuit. This narrative has continued, even as the political landscape has grown increasingly dynamic and complex. It is, therefore, crucial to discuss how fiscal consolidation measures should be viewed from the perspective of ordinary citizens, especially those who are not directly involved in economic policymaking.
The change in the service tax rate from 6% to 8% in March 2024 drove a 30.3% YoY increase in SST collection
To truly appreciate the significance of fiscal consolidation and its broader impact on society, we must turn to data. For instance, in the first quarter of 2025 (1Q25), Malaysia's federal fiscal deficit stood at RM21.9 billion, or 4.5% of GDP, compared to RM26.4 billion, or 5.7% of GDP, in 1Q24. Two primary factors contributed to this improvement: Higher SST collections and reduced subsidy expenditures.
On March 1, 2024, the service tax rate was increased from 6% to 8%. This change alone drove a 30.3% year-on-year (YoY) rise in SST collections to RM12.9 billion in 1Q25. Then, on June 10, 2024, the diesel subsidy rationalisation was rolled out, resulting in a 19.4% reduction in spending on subsidies and social assistance in the same period.
These figures help explain how the government was able to raise allocations for direct cash assistance programmes, such as Sumbangan Tunai Rahmah and Sumbangan Asas Rahmah, from RM10 billion in 2024 to RM13 billion in 2025. This increase is expected to benefit over nine million Malaysians this year. The aid distributed through these programmes is likely to be spent by households, thereby stimulating retail demand and indirectly benefiting businesses through increased sales.
Hence, fiscal consolidation should be viewed through a broader and more forward-looking lens. While it is often associated with reduced government spending or increased taxation, its deeper objective is to realign public finances in a way that enhances long-term economic resilience. As the government gradually strengthens its financial position, the positive spillovers will inevitably benefit the rakyat, whether through better-targeted social assistance, improved infrastructure or stronger public services.
Digitalisation and e-commerce platforms have empowered buyers with greater price transparency, broader product choices and real-time access to competing offers
Admittedly, the transition phase may involve temporary trade-offs. Among these are the potential rise in prices and business costs as subsidies are rationalised or tax structures adjusted. Yet it is critical to understand that Malaysia's economy today operates within an increasingly open, digital and competitive environment. Unlike in the past, consumers are no longer passive recipients of prices set by businesses. Digitalisation and e-commerce platforms have empowered buyers with greater price transparency, broader product choices and real-time access to competing offers.
In this context, businesses face a far more discerning and informed consumer base. Arbitrary price increases are no longer viable, especially when customers can switch to alternative suppliers with just a few taps on their phones. This phenomenon creates what economists refer to as market discipline, where competition, not regulation alone, acts as a natural check on inflationary behaviour.
In other words, the threat of losing customers to more competitively priced providers forces businesses to be more efficient, innovative and customer-focused, rather than simply passing on costs.
Moreover, technological advancements in logistics, inventory management and digital payments have also helped reduce transaction costs and improved supply chain efficiency. This, in turn, mitigates some of the price pressures that might otherwise arise from fiscal adjustments.
Therefore, while price fluctuations may occur in the short term, the broader economic architecture, including competition, consumer empowerment and digital innovation, serves as a stabilising force. Over time, these mechanisms will support a more sustainable, responsive and inclusive market environment where both consumers and businesses can thrive, even amid evolving policy landscapes.
The above commentary was contributed by Bank Muamalat Malaysia Bhd chief economist Dr Mohd Afzanizam Abdul Rashid Related
