Why subsidies sound costly but incentives sound strategic — Dr Mohd Zaidi Md Zabri

JUNE 17 — As global oil prices climb amid sustained tensions in West Asia, Malaysia’s fuel subsidy debate has returned with renewed urgency. Under the BUDI95 program, eligible Malaysians continue to purchase RON95 petrol at RM1.99 per litre. The unsubsidised market price currently stands at RM3.92 per litre, nearly double the subsidised rate. Nurhisham Hussein, Economic Adviser at the Prime Minister’s Office, recently estimated that fuel subsidies cost the government around RM1,700 every second, or up to RM147 million a day. The figure gives a sense of the fiscal pressure behind the debate and explains why calls for rationalization have become harder to ignore.

At such scale, the debate understandably turns to familiar questions. Can the government continue to bear the fiscal burden? Are subsidies reaching those who genuinely need them? These are important questions. Yet there is another dimension of the debate that often escapes attention: the very language we use when discussing government support, and the assumptions hidden within that language.

Two kinds of help

When governments assist lower-income households, the support is usually called a subsidy, welfare program or cash aid. These terms often come with concerns about dependency, leakages, inefficiency and fiscal burden.

But when governments support corporations, the language changes. We speak of tax incentives, investment promotion, strategic grants, industrial policy and competitiveness packages. This difference is not merely semantic. Language shapes perception. A fuel subsidy for a fisherman is often framed as a cost to taxpayers, while a tax incentive for a multinational is framed as an investment in growth. One is treated as consumption, the other as development. Yet both involve the same reality: public resources directed towards specific groups for specific policy objectives. The question is not whether governments should provide support. They do so constantly. The real question is why some forms of support are instinctively viewed as burdens, while others are celebrated as investments.

Why business support gets a free pass

Part of the answer lies in the enduring influence of supply-side economics and trickle-down thinking. The basic premise is straightforward: if businesses face lower taxes, lower costs and fewer barriers, they will invest more, expand production and create jobs. Economic growth will then eventually benefit society as a whole. There is merit to parts of this argument. Businesses play a central role in generating employment, innovation and economic activity. Governments also have legitimate reasons to encourage investment and enterprise.

The problem arises when the assumption becomes automatic. Support directed towards firms begins to be treated as inherently productive, while support directed towards households must continually justify its existence. In other words, the debate is not always only about evidence. It is also about whose support is presumed to create value, and whose support is presumed to create cost.

A standee publicises the BUDI95 initiative at a petrol station in Kuala Lumpur on September 25, 2025. — Bernama pic

The evidence is less flattering

Whether support for capital reliably generates wider benefits is ultimately an empirical question, not an ideological one. And the record on corporate investment incentives is more mixed than public discourse tends to acknowledge.

The International Monetary Fund, Organisation for Economic Co-operation and Development, United Nations and World Bank issued a joint assessment in 2015 noting that these institutions had collectively shifted to a more cautious position on tax incentives, as evidence mounted that their effectiveness was variable and context-dependent.

That shift matters because firms do not invest because of tax incentives alone. Infrastructure quality, workforce skills, regulatory certainty and market size often carry equal, if not greater, weight in investment decisions. In some cases, generous incentive packages have resulted in substantial foregone government revenue without producing commensurate gains in investment, employment or productivity.

The point is directly relevant to Malaysia’s own development experience. Instruments such as Pioneer Status and Investment Tax Allowances, administered by the Malaysian Investment Development Authority, allow companies in promoted sectors to receive tax exemptions on up to 70 per cent of statutory income for a five-year period. These incentives have played a role in Malaysia’s industrialization and economic transformation, and they are not without justification.

But acknowledging their contribution should not place them beyond scrutiny. Public discussions rarely apply the same rigor to these incentives as they do to household subsidies. Questions about targeting, effectiveness and fiscal sustainability are routinely raised when discussing fuel subsidies, but far less frequently when discussing corporate tax expenditures.

That asymmetry is not fully explained by the evidence. It reflects a prior assumption that one form of support is productive while the other is suspect.

Different rules for different recipients

None of these means subsidy rationalization is unnecessary. Blanket subsidies can be costly, poorly targeted and difficult to sustain, especially when higher-income households consume more fuel in absolute terms. The issue is not whether subsidies should be reviewed. The issue is whether fiscal discipline is applied consistently.

If household subsidies must be targeted, audited and justified, corporate incentives should face the same discipline. If support for ordinary citizens must demonstrate measurable outcomes, support for businesses should be expected to do likewise. The same questions should be asked of both: Who benefits? How much public revenue is involved? What measurable value is created? Are the benefits proportionate to the costs?

Otherwise, what appears to be fiscal prudence may simply reflect a hierarchy of priorities. Support for households is treated as expenditure. Support for capital is treated as strategy. One is approached with suspicion. The other, almost in good faith.

Judging by outcomes, not by class

To be clear, this is not an argument against corporate incentives, nor against subsidy reform. Rather, it is an argument for consistency. Public resources should be evaluated according to the outcomes they produce, not according to the social status of their recipients. A petrol subsidy for a delivery rider and a tax incentive for a multinational corporation may serve different purposes, but both represent policy choices involving public money. Both deserve scrutiny. Both deserve evidence-based evaluation.

Malaysia needs an honest conversation about subsidies. It also needs an honest conversation about incentives, exemptions and tax expenditures. Too often, one side of the ledger is examined under a microscope and treated with suspicion, while the other is accepted almost instinctively as sound economic policy. The issue is not whether the state should support households or businesses. Modern economies require both. The issue is whether we are prepared to evaluate each with equal intellectual honesty.

Until then, the language of economics will keep giving the game away: when the poor receive help, it is a burden; when capital receives help, it is strategy.

* Dr Mohd Zaidi Md Zabri, a research fellow at the Centre for Islamic Economics, Kulliyyah of Economics and Management Sciences, International Islamic University Malaysia.

** This is the personal opinion of the writer or publication and does not necessarily represent the views of Malay Mail.