BUDI95 and the long road to fiscal consolidation
Letter to the Editor The introduction of the Budi Madani RON95 (BUDI95) fuel subsidy retargeting marks a new era in Malaysian politics, decisively abandoning blanket subsidies. There also appears to be a shift away from the administratively challenging mechanisms associated with income-based targeting, towards a more verifiable system that targets consumption. However, this policy is not nearly as unprecedented as some make it out to be. The income-based targeting impasse The current consumption-based cap was preceded by significant policy discussion regarding income-based targeting, specifically excluding high-income earners (T15 or T20) from RON95 subsidy eligibility entirely. While this would be theoretically equitable, linking fuel price eligibility directly to income level would be difficult to implement quickly and effectively. The primary constraint is that it has been fairly easy for the rich in Malaysia to hide their wealth, whether through under-declaring income or offshoring assets, while benefiting from government assistance designed to help the most vulnerable members of society. According to the Inland Revenue Board (LHDN), only 17.8% to 19% of Malaysians in the workforce paid income tax between 2015 and 2022. Compared to regional counterparts, the top marginal income tax rate is both lower and triggered at a higher income threshold. The under-declaration of income and over-declaration of expenditure to get more personal tax relief, coupled with the failure to account for gig workers, leaves a large deposit of potential revenue that remains uncollected by the federal government. This severely undercuts the government’s ability to finance operational expenditure, for which it cannot take out loans. A new taxation philosophy? Hence, the introduction of e-invoicing, platforms to report tax evasion, the augmented list of items taxable under the sales and service tax (SST) regime appear to have foreshadowed the 13th Malaysia Plan’s new philosophy: improving standards of living through enhanced governance and adoption of regulatory technology. The new fuel subsidy rationalisation is the latest in this new line of policy moves. While RON95 rationalisation in this way secures meaningful support for the majority of citizens (as this volume covers over 99% of private vehicle owners), it also leverages the consolidation of government data through the government's central database hub (Padu) to eliminate major sources of leakage and fraud. Both the finance and the domestic trade and cost of living ministries are also working with oil companies to deploy sophisticated monitoring tools designed to track purchases and flag suspicious consumption patterns. Specific safeguards have been implemented to target known sources of leakage. Firstly, foreign nationals are explicitly excluded from the subsidy scheme and must pay the market price for RON95 (around RM2.60/litre), while drivers of foreign-registered vehicles are restricted entirely to the premium, non-subsidised RON97 grade. Repeated fills will also be flagged by the system, designed to prevent multiple high-volume refuelling attempts within a single day. This control directly combats commercial siphoning, illegal bulk purchases, and the risk of resale across porous borders. In cases where high-volume usage is legitimate, such as e-hailing or fishing, the government has allowed users to apply for higher allocations. The system will then cross-check with platform data to verify commercial necessity, and prevent systemic abuse. The projected annual fiscal savings, ranging between RM2.5 billion and RM4 billion, while relatively modest, show proof of concept for a retargeting mechanism that will be foundational to strengthening public finances and narrowing the fiscal deficit in years to come. Behavioural conditioning towards sustainable consumerism The policy also establishes a clear benchmark for responsible consumption patterns by punishing high-volume and inefficient usage, forcing Malaysians to confront the true cost of their overconsumption. Blanket fuel subsidies have, in the decades since their implementation, subsidised large-scale consumption inefficiency by incentivising the wealthy to maintain large, resource-intensive vehicle fleets. This distorted the domestic automotive market, prioritising vehicles with high energy dependency and embedding long-term fiscal cost into the country's economic structure. Nevertheless, the 300-litre threshold established by the government takes even this distortion into account, with indications from the Household Income and Expenditure Survey that this will cover monthly fuel requirements for 99% of private vehicle owners nationwide. The consumption cap also functions as an indirect mechanism for penalising carbon inefficiency. By increasing the marginal cost of fuel only for the heaviest users, the policy levies a higher effective price on consumption volumes deemed non-essential or environmentally excessive. This structurally embeds the true financial cost of high carbon consumption for the top consuming tier. This direct financial pressure incentivises high-volume users to immediately adjust their behaviour, either by adopting more fuel-efficient driving habits or, critically, by making future purchasing decisions toward smaller, more economical vehicles, or considering alternative sources of transportation. While the high coverage rate means there will be little to no immediate financial pressure for most, the policy is calibrated to create a sustained signal that guides long-term fleet renewal and vehicle purchasing decisions toward energy efficiency. Fuel subsidy reform: a catalyst for green mobility The fuel subsidy reform and the simultaneous enhancement of Electric Vehicle (EV) incentives should not be seen as isolated policies, but as components of a national energy transition strategy. The consumption cap now provides a necessary cost-based "push", while the EV incentives supply the financial "pull", creating a powerful dynamic that accelerates the adoption of green mobility technologies. The consumption cap ensures that the most excessive consumers of fossil fuel are financially exposed to the increasing marginal cost of their usage. This exposure targets the group most likely to benefit from a shift to EVs, due to high accumulated fuel costs. This is where the policy synchronisation kicks in: the government has already minimised the shock of transition by ensuring that key EV duty exemptions remain active as the cost of heavy fossil fuel usage rises. The announcement of several new public transportation lines will further disincentivise personal vehicle ownership. As the price gap between high fossil fuel usage and ownership costs for EV becomes starker, these incentives provide optimal conditions for market migration into greener transportation options. Lauren Lopez is an FMT reader. The views expressed are those of the writer and do not necessarily reflect those of FMT.