Subsidy reforms must protect vulnerable without distorting market prices, says expert
PETALING JAYA: Malaysia should abandon rigid income-based subsidy models and move towards a flexible purpose-voucher system that channels aid directly to households based on actual needs, an economist said, warning that the current approach risks creating distortions, inefficiencies and unfair outcomes.
Centre for Market Education (CME) chief executive officer Dr Carmelo Ferlito said blanket classifications based largely on income bands fail to capture the real financial pressures faced by many households, particularly as the government prepares to roll out more targeted RON95 fuel subsidies.
He said subsidy reforms must focus on protecting vulnerable groups without distorting market prices or creating excessive bureaucracy.
“Malaysia needs a subsidy system that protects those who genuinely need help without undermining price signals.
“The problem is not the desire to support people. The problem is designing a support mechanism that is too rigid, too bureaucratic and too detached from the real circumstances of households,” he said.
Under CME’s proposal, subsidised goods such as fuel would continue to be sold at a single market price, while aid would instead be distributed directly to eligible recipients through vouchers earmarked for essential needs including fuel, food and transport.
Ferlito said maintaining one market-based price would improve transparency, reduce confusion at the point of sale and minimise opportunities for abuse and manipulation.
“The market price should remain one, while support should be individualised.
“Once we start creating different prices for different people, we create administrative complexity, distortions and incentives for manipulation,” he said.
He also proposed allowing purpose-vouchers to be traded within a regulated framework, enabling recipients who do not fully require the aid to transfer or sell vouchers to others with greater need.
According to Ferlito, such flexibility would allow assistance to flow more efficiently to those who value it most.
“If someone is eligible for assistance but does not need the full amount, the ability to sell or transfer the voucher allows the support to move towards those who value it more.
“This is not a weakness of the system; it is precisely how flexibility can improve targeting. The market can do a better job than a centralised approach,” he said.
Ferlito said the vouchers should be digitally traceable and purpose specific, with safeguards against fraud, hoarding and abuse, while retaining enough flexibility to avoid becoming another form of rigid price control.
He argued that income alone is an unreliable benchmark for determining eligibility for assistance, as households with similar earnings may face vastly different living costs and financial obligations.
“For example, one person earning RM8,000 may work from home and have limited transport costs, while another person earning the same income may travel long distances every day or support several dependents.
“Treating these two individuals in the same way because their income is similar misses the point. Need is not captured by income alone,” he said.
Ferlito also described blanket subsidies as fiscally costly and economically distortive, saying a purpose-voucher model would offer greater transparency and more precise targeting.
“General subsidies are fiscally expensive, socially imprecise and economically distortive. “A purpose-voucher system is not perfect, but it is a better institutional compromise.
“It allows the government to help people without pretending that prices can be politically engineered without consequences.”
He said subsidy reforms should ultimately be guided by three principles: maintaining a single market price, delivering targeted aid through purpose-vouchers and ensuring support is based on actual household needs rather than rigid classifications.
“The goal should not be to suppress prices.
“The goal should be to protect vulnerable households while allowing prices to continue performing their essential role: coordinating decisions, revealing scarcity and guiding responsible consumption,” he said.
The proposal comes as the government refines its income classification framework, including categories such as T5, T10, T15 and T20, ahead of the planned implementation of more targeted petrol subsidies amid mounting fiscal pressures.
Officials are currently reviewing appropriate income cut-off points as part of broader efforts to align subsidy rationalisation measures with household realities and long term fiscal sustainability.
