TARGETED SUBSIDIES TO EASE RAKYAT’S BURDEN (Part 2)

THIS is the second part of a two-part discussion on subsidies for the Rakyat. To start at part one, go here.

4. What is wrong with the current blanket subsidy mechanism?

The problem with some of the subsidies in Malaysia, such as our fuel subsidy, is that they are blanket subsidies. This means everyone, regardless of socioeconomic background, benefits from these subsidies.

The problem is blanket subsidies benefits those users who consume the most. For example, it was previously disclosed in Parliament that the T20s are getting more than their fair share of the fuel subsidies . They only make up 20% of population but they enjoy 35% of the fuel subsidies.

Figure 2: Fuel Subsidies by Income Group under SSA

To understand why, a more well-off family is more likely to have two to three vehicles or more and therefore use more fuel, as opposed to a less well-off family, who will probably only own one motorcycle.

For example, RON 95 petrol costs RM2.05 per litre at the petrol stations, with the government subsidising about RM1.50 per litre of the actual cost. This simply means a motorcyclist or a delivery rider, from the lower income group, who consumes 100 litres a month will only get RM150 in subsidy while a well-to-do family with two to four cars consuming 1000 litres a month gets to enjoy RM1500 in subsidy.

So, it begs the question, who is actually benefitting from these subsidies? And which one of the two is more deserving of the government’s support?

Then there’s the problem of unwanted leakages. How often do we see on social media examples of foreign cars coming into Malaysia to fill up on RON-95? This is because the petrol price in Malaysia is generally much cheaper than our neighbours. Therefore, not only are our subsidies inefficient, but we are also subsidising foreigners. We also see in the news cases of diesel and cooking gas smuggling.

Source: www.globalpetrolprices.com

This problem isn’t just confined to fuel subsidies. Let’s take the example of electricity. Since prices are kept artificially low, we tend to overconsume or waste electricity – for example, by keeping our aircons on all-day long. There is also no incentive for firms to invest in energy-efficient equipment. This is probably not the path we want to go down – considering fuel used to generate our electricity is increasingly being imported as well as recent concerns over global warming.

For electricity, the government has already started to implement targeted subsidies to heavy users whereby domestic households who use more than 1,500 kWh a month, will be imposed a 10 sen per kWh surcharge.

5. What are the alternatives to blanket subsidies to assist vulnerable groups?

As mentioned earlier, blanket subsidies benefit everyone regardless of socioeconomic status. There are many more efficient ways to alleviate the burden of the rakyat.

One good example is cash transfers. When we remove unproductive blanket subsidies, there are significant savings to the government’s coffers. A portion of it can be returned to the rakyat in the form of cash transfers. And we empower the rakyat to use it according to their needs, rather than confine it to the selected products and items that the government has been subsidising.

The other way to achieve this is through targeted subsidies, whereby only certain vulnerable groups are allowed to continue buying at a subsidised price. A good example that we can see is the public transport discount that we provide for senior citizens.

However, the problem with this is that we confine the subsidy only to that product/service rather than empower the rakyat to spend on what they need. To use the previous example, a senior citizen who does not use public transport will not be able to enjoy the subsidy. But this is still much better than providing blanket subsidies.

Let’s also not forget that in order to enforce targeted subsidies effectively, systems and supporting infrastructure will need to be put in place to ensure there is no abuse; these systems in turn will require maintenance and periodic upgrading. In short, enforcing targeted subsidies can have significant implementation costs.

6. Does this mean that the government will remove all subsidies?

I can’t speak for the government, but that said, I don’t think it needs to remove all subsidies.

However, given the current economic situation of the country, reform of subsidies is something that urgently needs to be done. I believe that subsidy reform should focus more on items such as petrol, diesel, cooking gas and electricity as they account for more than 90% of the total subsidies.

Let’s see how this would apply in the case of fuel subsidies. A good way to manage the impact of a possible fuel subsidy reform would be to maintain the Automatic Pricing Mechanism (APM), which has been in place since 1983. The APM helps to set a ceiling price at the petrol pumps regardless of the location, whether it be in Tanjung Malim or in Bangsar.

Therefore, should we proceed with fuel subsidy reform, the APM can be used to manage petrol pump prices in the event of global oil price volatility. This is essentially what we call a “managed float”.

7. How much savings is expected to be made if we move away from blanket subsidies? How will the rakyat, notably the low and middle-income benefit from this measure?

Let’s put this into perspective. In 2022, we spent six times more on blanket fuel and electricity subsidies (RM60.6 billion) than on education (RM10 billion) and a whopping 14 times more than on health (RM4.4 billion).

Source: Bank Negara Malaysia

In fact, if you total up what we spent on economic and social initiatives, which not only includes education and health but also other initiatives such as social and community services, agriculture and rural development, and housing (this works out to RM23.6 billion), it would still be less than half of what we spent on our fuel and electricity subsidies.

Needless to say, the rakyat would benefit more if our fuel and electricity subsidies were diverted to other economic and social expenditures.

8. Wouldn’t removing subsidies on petrol, diesel and electricity cause inflation and the prices of many other goods to rise?

On the impact on inflation, yes, as an economist, I would not deny that reforming the subsidy system will induce inflation. Many scholarly articles will attest to that.

However, there are ways to manage the impact of inflation caused by subsidy reform. One of the ways is what I mentioned earlier, which is to use a managed float pricing mechanism (or APM) to standardise our fuel prices.

Secondly, enforcement needs to be ramped up. The government already sets ceiling prices of certain essential goods and services. We need to ensure that these ceiling prices are adhered to. There needs to be a way for the public to play a part in this – for instance, by helping to report unrealistic price hikes or smuggling activities in the case of diesel and cooking gas.

More importantly, as has been rightly pointed out by the Prime Minister on many occasions in the past, we must find a way to cushion any inflationary impact especially on vulnerable groups. This move is in line with the MADANI framework, specifically under the Compassion core value.

Therefore, as I mentioned earlier, a mechanism should be introduced to enable the vulnerable sections of our society.