Targeted subsidy needs government willpower

In the immediate term, the government may reconsider the cash hand-out mechanism and introduce a fuel subsidy of RM100 into the BPR account holders in the short run. This can simplify the implementation as BPR’s mechanism is already in place and operating well.

ON Dec 13, 2022, Prime Minister Datuk Seri Anwar Ibrahim instructed all government departments to formulate and develop suitable measures to implement targeted subsidies by taking into consideration the interest of consumers and the industries.

Despite the strong intention to implement targeted subsidy, the government(s) is (are) still struggling to prepare an ideal policy instrument then and now.

Each time, the government wants to implement new structure, the effort fizzles out after the global petroleum prices ease.

Most importantly, we need strong government willpower to reform the fuel subsidy.

With efforts to rebrand the subsidy still proceeding, I strongly reiterate that the implementation should be by way of a secure system that accurately identifies the B40/50 group.

This is to ensure that the subsidies are channelled to those in need to achieve maximum impact.

This article discourses some of the viable mechanisms that could be considered by the government to bring in targeted subsidy.

Option 1: Additional cash handout

In early 2019 when the oil price was hovering between US$60 (RM266) and US$75 (RM332) per barrel, the-then government mulled over adopting a cash hand-out method to lower-income households.

However, this never came into effect, as the RON95 was capped at RM2.08 per litre and maintained until the Covid-19 pandemic hit the global oil price to below US$50 (RM221) per barrel in early 2020.

Under the purview of the government, the petrol subsidy disbursement via the cash hand-out method will go through an improved database, one that has updated information extracted from the Bantuan Prihatin Rakyat (BPR) and the Inland Revenue Board (IRB).

In the immediate term, the government may reconsider the cash hand-out mechanism and introduce a fuel subsidy of RM100 into the BPR account holders in the short run. This can simplify the implementation as BPR’s mechanism is already in place and operating well.

The existing cash aid programme, in a way, is already means-tested, since recipients must be registered with the IRB.

So, eligible recipients would need to update their income information regularly to qualify for cash assistance. On a positive note, this will minimise exclusion/inclusion error.

Option 2: Tiered price system

A tiered price system could be another viable solution in which subsidies would apply for low volume of fuel consumption and removed for higher consumption.

For instance, the current price cap of RM2.05 per litre for RON95 could be applied for petrol consumption of 100 litres and below per month.

Prices above ceiling price (prices to be determined based global petroleum prices) can be charged those consume above the threshold. It can also be tiered further – purchases between 101 and 200 litres or 201 to 300 litres could be charged higher prices in stages. Whereas, purchases above this threshold would be charged at the full market prices without subsidies.

This, in fact, can be applied for Diesel but at a slightly higher level for any commercially registered vehicles used for transporting goods such as rigid lorries, articulated lorries, panel vans and other vehicles.

The tiered price system can be introduced almost immediately by simple changes at point-of-sale at the petrol pumps. The subsidy would only be available at low volumes at point-of-sale, and so it is not open to a grey market in traded discount vouchers. Such mechanism would be targeted at low volume consumers who are mainly from the low income groups.

For the government, one obvious advantage of implementing tiered price system is that it will reduce the overall subsidy bill because a large bulk of petrol consumption will no-longer be subsidised. This definitely provides some fiscal relief and paves way for channelling the fund to other necessities.

In broader economic terms, tiered price system is less distortionary in terms of market prices and has fewer negative implications on petrol suppliers. Most importantly, it is less inflationary compared with removing the blanket subsidy altogether.

Option 3: Subsidy points for eligible recipients

One more way of implementing the targeted subsidy is by adopting an improved instrument to distribute petrol subsidy points (corresponds to the tiered consumption level) via eligible recipients’ MyKad. Ideally, this should come with an automatic renewal at the end of every month. This way easily targets the low household income group by going through an improved database, one that has updated information extracted from Bantuan Prihatin Rakyat (BPR) and road transport department (JPJ).

With this system, misconduct is mitigated as no one would lend their MyKad to another person unless they are willing to lose their subsidy points.

In order for petrol station staffs to verify recipients’ identities when approached to redeem subsidy points, petrol stations should install a MyKad reader integrated with software designed to accommodate such redemptions.

As for food items, I strongly suggest that the government should consider introducing “myKasih card” for the eligible people from low household income group. A specialised or dedicated counters should be opened at wholesale and retail shops to enable the myKasih card holders to buy essential goods at discounted price whereby the difference between the discounted and market price will be compensated by the government.

Such mechanism is being practised in India, which is called “ration card”. Ration cards are an official documents issued by state governments in India to households that are eligible to purchase subsidised grain from Public Distribution System under the National Food Security Act. Introducing such card-based system in Malaysia could also reduce the issue of food shortages and ensures food security.

Option 4: Tax for the rich

Malaysia used to have one of the largest fuel subsidy bill in the world. Fundamentally, fuel subsidy are not sustainable in the long run as the economic impacts are severe. This includes market distortions, smuggling, fiscal burden, poverty, and income inequality.

The RM2.05 per litre retail price of RON95 in Malaysia is relatively low compared to oil-producing countries such as Saudi Arabia, where it is RM2.59 per litre, and also when compared to neighbouring countries such as Indonesia at RM3.74, Thailand at RM5.63 and Singapore at RM9.16 per litre. The significant price differential is also due to imposition of fuel taxes by the respective governments. This is to reduce fuel consumption and encourage people to switch to more affordable public transportation.

In Malaysia, the taxation is only set for RON97 of which price is determined by managed float price setting mechanism. While thinking of a targeted subsidy for vulnerable groups, the government may also consider imposing fuel tax for the people from higher income bracket given that the consumption rate is higher among high-income individuals compared to those earning less.

To put it simply, “subsidy for the needy, tax for the rich” approach should be thought-through in order to save the government from ballooning fiscal deficit as well as to channel the additional revenue for other purposes.

Manokaran Mottain has served the industry as an Economist for over 30 years and is currently the Director of Rising Success Consultancy Sdn Bhd. After retirement, he has been appointed as the Industrial Expert to UKM/GBS and lecturing MBA students.