PETALING JAYA: Malaysians have long been divided by household income into three groups – the B40 (bottom 40%), M40 (middle 40%), and T20 (top 20%) – but the government is now mooting a new approach based on net disposable income (NDI).
While this plan has largely been welcomed, economists remain wary.
After all, the B40/M40/T20 is a World Bank demarcation that Malaysia has used for 15 years – from 2006 to 2020 – since the Ninth Malaysia Plan to the Eleventh Malaysia Plan .
The Statistics Department defines household income as the total income received by household members, who can be related or unrelated to each other, either in cash or in kind, on a regular and accrual basis, be it weekly, monthly, or annually.
A 2022 survey conducted by the Statistics Department decided that those in the B40 have a household income of less than RM5,250, constituting roughly 3.16 million households; the M40 represents a household income of between RM5,251 and RM11,819; while the T20 denotes a household income of above RM11,820, representing 1.58 million households.
Earlier this month, Economy Minister Datuk Seri Rafizi Ramli said that by looking at net disposable income – which refers to the income left after taxes, deductions, and essential living expenses – the government will be better able to identify eligible recipients for the RON95 subsidy rationalisation.
Sunway University economics professor Yeah Kim Leng emphasises that the NDI approach will better reflect an individual’s socio-economic status, and provide a more accurate yardstick to assess an individual household’s need and eligibility for government assistance.
“If the government were to use this method, we expect more people will be entitled to petrol subsidy given that the number of dependents, financial obligations and cost of living will be factored in,” says the adviser to the government
“The higher number is also consistent with the government’s statement that in shifting from blanket to targeted subsidy scheme, 85% of households will continue receiving the subsidy under the two-tiered pricing system,” he tells Starbiz 7.
However, he cautions that since income is not identical to wealth, the proposed approach will need to be supplemented by more comprehensive checking of income sources and appropriate means-testing to accurately establish the socio-economic status of Malaysians, to minimise errors in the petrol subsidy programme.
Economist Geoffrey Williams believes there are two separate aspects to the RON95 issue – how wealth is defined; and whether the definition can be justified for petrol subsidies.
He agrees with Yeah that using NDI was better because household income disguises the real situation for groups of people.
“For example, a household of four adults might each be low-income but when put together, it looks like a high-income family.
“In some households, there are non-family members, so again that is misleading,” he remarks.
On whether the NDI should be used to justify fuel subsidies, Williams instead suggested tiered pricing, the model used for power tariffs, which effectively means discarding the NDI approach altogether.
He believes that tiered pricing for petrol can work in the same way: “If I have a motorcycle or a small car and fill it with RM5 or RM20, then I could get full subsidy. If I have a sports utility vehicle and fill it with RM100, I will get less subsidy.”
Hence, he says for someone buying low volumes of RON95 – who would normally be in the low-income group – nothing would change. However, if a vehicle user were to buy a larger amount of fuel – usually someone of a higher income – a subsidy could be given only for part of that volume.
“Then you do not need the Central Database Hub (Padu) or income levels for simple petrol purchases. Padu can focus on subsidies for education, healthcare and social needs,” says Williams.
Ideas Malaysia economist and assistant research manager Doris Liew feels that in the short term, the government is likely to maintain its plan of classifying beneficiaries for RON95 subsidies, using the T15 income bracket as a benchmark to determine eligibility.
However, she believes that while this is more targeted than universal subsidies, it serves only as a stop-gap measure.
Over the longer term, she says, it will be crucial to transition to a more holistic system based on income level and actual needs, potentially incorporating an NDI metric.
“Such a method would help ensure that lower-income households can still afford transportation, while also reducing the government’s fiscal burden,” she predicts.
Furthermore, Liew says the NDI approach accounts for real financial capacities, instead of relying solely on broad income brackets or vehicle ownership.
As incomes grow, the government can incrementally reduce subsidies for those who no longer need them, she says.
“By gradually phasing it out for those beyond the most vulnerable groups, the government can free up valuable resources for other social and economic programmes and meet its fiscal consolidation goals.
“At the same time, tying subsidies more closely to actual needs is a fairer and more precise way to manage public funds,” she notes.
With Rafizi saying an NDI approach would still see 85% of households getting RON95 subsidies, UOB Global Economics and Market Research senior economist Julia Goh feels it is still a sizeable proportion for subsidy allocation.
On the other hand, she agrees the NDI initiative would be a fairer and more inclusive method to rationalise subsidies, telling Starbiz 7 that the public savings will eventually come from subsidy removals as well as plugging leakages.
OCBC senior Asean economist Lavanya Venkateswaran thinks NDI is likely to optimise the data the government has collected via Padu to tailor cash assistance programmes better.
“There are limited details in terms of the new mechanism at this point in time.
“However, there is likely to be some overlap or link to the previous classification given that the B40, M40, T20 classification is based on mean and median household incomes,” she says.She feels the NDI method could also help identify the affordability thresholds for households in terms of basic expenditures such as food, fuel, and utilities.
More importantly, Venkateswaran foresees there could also be some relief for pensioners and those working in the “gig” economy, as the criterion for cash assistance could be based more on the flow of income, as opposed to the individuals’ stock of wealth. — KEITH HIEW
