Fiscal deficit target requires fuel subsidy removal or reduction with 4% GST- RHB IB

KUALA LUMPUR: A complete removal of fuel subsidy or, alternatively, a combination of at least a goods and services tax (GST) rate of four per cent and 90 per cent reduction in fuel subsidy is necessary to achieve a fiscal deficit target of three per cent of gross domestic product (GDP), RHB Investment Bank Bhd said.

In a research note today, the investment bank said the adoption of two-pronged fiscal consolidation strategy, namely diversification of revenue base and rationalisation of operating expenditure (OE), is necessary to ideally balance the budget further down the road.

It said other ways to reduce the fiscal deficit would be a reduction in fuel subsidies while keeping the current sales and services tax (SST) framework or reinstatement of a relatively higher GST rate to a minimum of six per cent in place of SST.

“We think the path to rationalise Malaysia’s OE is via the targeted subsidy approach while gradually reducing the quantum of subsidies in the years ahead.

“We observe that the higher OE is perhaps structural. Rationalisation of other key components especially emoluments and pension expenditure, debt services charges, development expenditure needs, would likely take a longer time,” it said.

The investment bank also said that with the assumption that fuel subsidy rationalisation is being implemented by January 2024 and the fuel subsidy be reduced by 70 per cent in 2024, the fiscal deficit could potentially decrease to 3.4 per cent of GDP.

It said this would be within the 12th Malaysia Plan Mid Term Review (12MP MTR) fiscal deficit target range of three to 3.5 per cent of GDP.

“Alternatively, a more progressive and gradual approach of fuel subsidy rationalisation could be considered as well,” it said.

RHB Investment Bank said in a setting where the GST started at a higher rate of four per cent and progressively increased to six per cent by 2027, the fiscal deficit would likely decrease to 2.6 per cent of GDP with the fuel subsidy being reduced by 70 per cent.

“Subsidised fuel prices could potentially reduce the incentives for individuals and businesses to conserve fuels and adopt energy-efficient technologies and practices, slowing down the progress in energy conservation,” it added.

The government had set a target of annual development expenditure as a percentage of GDP of at least three per cent and a fiscal deficit of three per cent or less within three to five years. – BK