Dealing with subsidies is serious business, it cost RM74bil in 2009

  • Business
  • Wednesday, 26 May 2010

SUBSIDIES in the country, which reached a staggering sum of RM74bil in 2009, will be the thrust of discussion over the next few days as the Cabinet and the public will examine the ambitious plan hatched to minimise and eventually remove the burden to the Government.

The Cabinet is scheduled to meet today to deliberate on the subsidy-removal plan laid out by Pemandu and the public will have their say at the subsidy rationalisation lab open day tomorrow.

The basis of wanting to give subsidies the boot is simple. The cost of maintaining cheap food, energy and services has put a terrible strain on government finances with the fiscal deficit now projected at 5.6% of GDP.

Whatever the case, maybe as one economist puts it that Malaysians may now feel a right of entitlement with subsidies after enjoying the benefits all these years with Malaysia being one of the most heavily-subsidised nations in the world.

As a percentage of GDP, subsidy expenditure is now at about 11% of GDP compared with 3.5% in Switzerland, 1.4% in France, 0.7% in Britain, 2.7% in Indonesia, 1.6% in India or a meagre 0.25 in the Philippines.

One study puts the average subsidy expenditure for OECD countries at 1.5% of nominal GDP.

Much of the subsidy bill, totalling RM42.8bil, is in the form of social services which include health, welfare, education and scholarships.

While such expenditure is important as it involves directly funding education and healthcare and other services which the public is dependent on, there are components within that category where subsidies can be lessened through better effort to check on wastage and abuse.

“I don’t think people will complain much if they are asked to pay RM3 for outpatient care at a government hospital compared with the current charge of RM1,” said an economist with a local brokerage.

While savings from the huge social bill can be obtained, the biggest and fastest source of savings from the reduction in the deficit will come from the reduction and removal of energy subsidies.

Fuel, either in the form of petrol, natural gas, LPG or electricity, cost the Government RM23.5bil in 2009.

Subsidised fuel has made the price of petrol in Malaysia among the cheapest in the world, as Malaysia is ranked 157 out of 175 countries in terms of having the lowest cost of petrol.

Cheap petrol and diesel prices have also led to wastage and frivolous use of such energy. Furthermore, the amount of smuggling, in the form of fuel, sugar and cooking oil, to neighbouring countries is huge.

The subsidy bill for food, which includes cooking oil, sugar, flour and rice fishermen, was RM3.1bil in 2009.

Analysts agree that the subsidies for fuel and food should eventually go but they caution that the immediate consequence of that, depending on how the subsidies are removed, will have an impact on inflation and consumption.

The planned subsidy removal, which will likely be done on a comprehensive but staggered and gradual basis, may see inflation rising by between 4% and 4.5% in 2011 before coming back down the following year.

“If the rise in fuel price is gradual then people would be able to stomach such increases. What they don’t want to see is a sudden steep increase in the price of fuel as that would see inflation and their disposable incomes hurt,” said an economist.

Dealing with the subsidies is a major concern for the Government now as the mountain of subsidies, which it has to borrow money just to fund, has taken a toll on its total debt.

The percentage of total debt to GDP, which was in the 40 percentage plus point range for much of this decade, surged to 54% in 2009 which also took into account the fiscal stimulus cost incurred to aid the economy during the recent recession.

Economists have said that the implementation of subsidies had been faulty for all these years as they were not targeted to the needy.

Instead, government data shows that 97% of subsidies were given regardless of household income levels. As an example, 71% of fuel subsidies go to the mid-income and high-income groups who can pay for higher fuel prices.

If subsidies can be reduced and utilised to targeted groups, then the extra freed-up cash can be used to improve services and productivity that will improve economic growth in the years ahead.

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