Most of the money the government spends on subsidies goes to companies, not to the poor.

This is because a subsidy pays companies the difference between the market price and the price at which they sell their products to customers. Of the RM78 billion subsidy bill for 2022 around RM52 billion, or two-thirds, goes to companies and middlemen and RM26 billion, or one-third, goes to low-income groups under cash transfers and other social assistance programmes.

In terms of benefits, only those who buy subsidised products benefit directly. Those who have air-fryers do not benefit from the RM4 billion cooking oil subsidies, vegetarians do not benefit from chicken subsidies and people without cars or motorbikes do not benefit from the petrol and toll subsidies.

The rich benefit more than the poor from spending subsidies. Official estimates suggest that the richest 20% of households benefit from more than half of petrol subsidies for example. This is also true of all the other spending subsidies.

In the meantime people struggle with poverty and low incomes. In May 2022 the World Bank High-Frequency (HiFy) survey found, nearly 60% of Malaysian households were not able or only partially able to cover their monthly basic needs and 21% had no savings, up from 16% in 2021.

So subsidies are expensive, they benefit the rich more than the poor, they distort the market, they are paid to companies and middlemen, often involving leakages and corruption and they do not solve the low income and poverty problem.

Prime Minister Anwar Ibrahim is therefore wholly correct to target subsidy reform as the first priority of the unity government and the economics minister Rafizi Ramli is also correct to target poverty eradication as a structural priority. These aims can go hand-in-hand through a simple change in mindset.

Instead of targeted subsidises on products, direct cash assistance should target incomes. Whatever you want to call it, be it a universal basic income, an assistive basic income, a negative income tax, a reverse income tax, a cash transfer or credit transfer the effect is the same.

A basic income solution targets direct help to the poor, not the rich, transfers money and not vouchers or hand-outs for them to spend as they choose, allows free choice when spending and so has fewer market distortions, has no middlemen and less corruption and benefits all companies, whether their products are subsidised or not, through spending in the marketplace.

It is also less expensive. According to our modelling, based on household income and using a progressive payment schedule, the annual cost of a basic income scheme for those earning below RM2,000 per month is RM1.5 billion. If the threshold is set at RM2,500 the cost is RM2.5 billion and for a RM3,000 threshold it is RM4.7 billion.

At RM4,000 the cost is RM11.5 billion and to capture households below RM5,000 per month which would cover the B40 group and many of the B50 group, the cost is RM20.2 billion. This is lower than the current social subsidies bill and allows the saving of RM6 billion to be targeted at groups, such as people with disabilities, who need specific and urgent help.

In other words, it is fully affordable within current budgets and it also happens to be around the average social subsidy over the last five years.

The government is serious about subsidy reform and poverty eradication, this is clear. To do it properly it must also be serious about structural reform to provide a world-class social protection system which can become the model for other countries and a legacy of the unity government in years to come.

The views expressed are those of the writer and do not necessarily reflect those of FMT.