Potential RM25bil revenue from fuel taxes

PETALING JAYA: The government needs to be bold and brave in terms of implementing strategies and reforms to tighten the fiscal screws in the upcoming Budget 2024, says Pankajkumar Bipinchandra, who is managing director of Datametrics Research and Information Centre.

One of the effective ways to address the budget deficit is to cut fuel subsidies by increasing petrol prices gradually to be aligned with market prices and thereafter imposing taxes on fuel.

“The way to address this is to come up with a strategy to bring fuel prices not only back to market prices, but to also derive tax revenue out of it, let’s say over a period of three to five years,” Pankajkumar said at the “MARC360: Pre-Budget 2024 Views Series 2: Malaysia’s Long Story of Fiscal Consolidation” webinar yesterday.

He suggested increasing petrol prices by 20 sen per litre on a quarterly basis over a two-year period until they reached market prices and then imposing taxes on fuel.

“We can start with 25 sen, 50 sen or even RM1 per litre. If the government was to tax RM1 per litre, petrol will be sold at around RM4.50 per litre and the government will generate around RM25bil in revenue. Not to mention, it would have saved RM45bil in subsidies.

“That is your answer in tackling our budget deficit. The amount earned from taxes on petrol and savings on subsidies will be more than enough to provide cash assistance directly to the lower-income group,” Pankajkumar added.

He cited that Malaysia is expected to spend RM81bil on subsidies this year, a huge jump from RM62bil in 2022 – of which RM45bil went to fuel-related subsidies.

Pankajkumar highlighted that Malaysia had the ninth lowest petrol price in the world at RM2.05 per litre for RON95 compared with an average fuel price of more than RM5 per litre across the Asean region.

“Why is Malaysia so special; why is Malaysia not able to remove the subsidy or even tax them? If you look at a lot of countries, fuel is sold with a tax – a sales, value-added or petroleum tax element.”

He was not in favour of the government’s plan to introduce targeted subsidies for petrol.

“Why bother going to a different system (of targeted subsidies for petrol) altogether; it’s not proven, it takes a lot of effort, there will be leakages.

“You probably have to spend a bit more in terms of administration. There will always be people trying to find ways to either abuse or beat the system,” Pankajkumar said.

In May, Deputy Finance Minister I Datuk Seri Ahmad Maslan said the top 20 income group will no longer enjoy the benefits for RON95 petrol meant for the middle and lower-income groups next year.

“This mechanism to implement a targeted subsidy is not the answer. To me, the answer is the gradual increase in petrol prices, and by reducing the subsidy element coming from petrol subsidies, the government can use that to provide direct cash transfers to the bottom 50% (earners) of society,” Pankajkumar reiterated.

MARC chief economist Ray Choy pointed out that Malaysia’s subsidies to the gross domestic product (GDP) ratio was 3.8% in 2022 compared to the five-year average of 1.6%.

He added that subsidies formed a large part of the government’s operating expenditure of 23% in 2022 versus the five-year average of 10%.

Meanwhile, Moody’s Investors Service senior vice-president (sovereign risk group) Christian de Guzman said Malaysia should reduce its reliance on Petroliam Nasional Bhd (PETRONAS) as a “financial backup”.

“In the event of a massive shortfall in revenue or when there is a need to bulk up revenue to meet higher spending, whether it is a cyclical shock like Covid-19, or a large shortfall takes them away from fiscal consolidation, there is this tendency to tap into the national oil and gas company.

“This is interesting because other countries do not have PETRONAS. I think there is a degree of comfort taken by policymakers in Malaysia that there is some kind of financial back spot in the case of unforeseen events,” said de Guzman.

PETRONAS is expected to pay about RM40bil in dividends to the government in 2023, which is lower than the RM50bil dividend paid in 2022, when the average Brent crude oil price exceeded US$100 per barrel.

de Guzman believes that the country should make better use of the source of income.

“Perhaps not using it as a source of financing but systemise its role in fiscal finance. We have already seen that in Singaporean state-owned investors GIC and Temasek Holdings where their returns are invested back into the budget,” he said.