Impacts of Fuel Subsidy Rationalization on Sectoral Output and Employment in Malaysia

Noorasiah Sulaiman, Mukaramah Harun () and Arief Yusuf
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Mukaramah Harun: Universiti Utara Malaysia College of Business, Malaysia

Asian Development Review (ADR), 2022, vol. 39, issue 01, 315-348

Abstract: Large allocations for fuel subsidies have long put the Government of Malaysia’s budget under great strain. Using a computable general equilibrium (CGE) model, this paper evaluates the impact of fuel subsidy rationalization on sectoral output and employment. Employment is classified into occupational categories and skill levels. Fuel subsidies were measured using the disaggregation of prices for petrol, diesel, and other fuel products. Findings show that removing fuel subsidies would hit economic performance through high input costs, specifically for industries closely attached to the petroleum refinery sector. The manufacturing sector has the largest reduction in output and employment. Nevertheless, high- and medium-skilled labor forces experience increased demand. To increase economic efficiency, the savings from the removal of fuel subsidies should be put toward policies such as sales tax reduction. This study provides useful information for policy makers in evaluating or updating current subsidy policies to reduce economic losses.

Keywords: computable general equilibrium model; employment; fuel subsidy; sectoral output; subsidy removal (search for similar items in EconPapers)
JEL-codes: D58 E23 E24 H29 (search for similar items in EconPapers)
Date: 2022
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Persistent link: https://EconPapers.repec.org/RePEc:wsi:adrxxx:v:39:y:2022:i:01:n:s0116110522500081

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DOI: 10.1142/S0116110522500081

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