Restructuring Subsidy

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Topics: Tax, Income tax
Kajian Malaysia, Jld. XXV, No 2, Disember 2007

THE CHALLENGES OF RAISING REVENUES AND RESTRUCTURING SUBSIDIES IN MALAYSIA Suresh Narayanan School of Social Sciences Universiti Sains Malaysia Penang nsuresh@usm.my

Malaysia has run deficit budgets in all but five years since 1970 but past deficits have been managed thanks to substantial oil revenues and high domestic savings. However, the slow growth or decline of several traditional sources of revenue and the rising subsidy bill since 2007 have given pause for reflection on the traditional approach to fiscal management. In this paper, it is argued that fiscal management must not only centre around reducing non-productive expenditures and wasteful leakages but must also confront the problem of reducing and restructuring subsidies, particularly to petrol and petroleum-related products. The global dip in petroleum process has fortuitously provided the respite needed for such an exercise and should not lull policy makers into complacency. When the economy recovers from the current downswing, a solid revenue raising instrument such as the value-added tax must be introduced in order to wean the economy away from the current over reliance on petroleum-based taxes. Keywords: budget deficit, petroleum subsidies, revenue, value-added tax INTRODUCTION Malaysia has experienced difficulties in balancing its budget. Since 1970, the budget has been in deficit in all but five years and deficits have accumulated in periods of economic upturns and downturns, alike. Furthermore, since 1999, the deficits have consistently exceeded the figures forecast. This has prompted observers to comment that not only is the budget deficit structural in nature (not cyclical), but there is also an apparent lack of fiscal discipline (Ahmad Saifuddin, 2008).

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Suresh Narayanan

Budget deficits in Malaysia became commonplace with the advent of the National Economic Policy (NEP) in 1970. In the ensuing decades, fiscal spending was actively

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