UPDATE 1-Malaysia says budget on track despite high subsidies

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KUALA LUMPUR, May 12 (Reuters) - Malaysia is sticking to its 2008 budget deficit target of 3.1 percent of gross domestic product, a government minister said on Monday, despite a ballooning subsidy bill.

Malaysia maintains some of Asia's lowest fuel prices, and also controls the price of basic foodstuffs, but the cost of these subsidies is spiralling as energy and food prices soar. The bill is set to hit 50 billion ringgit ($15.7 billion) this year.

"The challenges for the government are indeed great given this environment. At this point of time there is no change in our budget forecast," Second Finance Minister Nor Mohamed Yakcop told reporters.

He was speaking after launching a new state-backed investment fund, before heading to a cabinet committee meeting on ways to reform subsidies while shielding the poor from price rises.

"The anti-inflationary measures we are thinking of are in the context of making our subsidy scheme sharper and focusing on the group that should be getting it," he said, adding that the government aimed to cut waste and target only the needy. Yakcop said Malaysia wanted "to move from very blunt instrument to something that is very sharp and very focused".

"So basically then, it may not really cost that much more because if we save all the money from the leakage and from those who don't really need it and provide more for those who need it, then we don't really have to spend more money," he said.

"It is not propositioned on the basis that we have to bring out more money."

Yakcop also said that the country's new proposal to raise the retirement age for civil servants by two years to 58 would cost the government about 719 million ringgit ($225 million). (Reporting by Liau Y-Sing; Editing by Faisal Aziz and Anshuman Daga)