Enough talk, time to bite the bullet and start removing subsidies

Subsidies distort the market, and as with the current debate, the wealthy benefit most from them simply because they consume more. — ZHAFARAN NASIB/The Star

There's a lot of angry chatter about the changes to how diesel is being sold with the introduction of the Budi Madani programme, a targeted subsidy for diesel vehicle owners in Peninsular Malaysia. And a lot of it is loud if only because everyone seems to be angry about it. But the more I hear and read about it, the more I realise: This is something I’ve heard before.

On the surface, the programme is intriguing. It aims to provide RM200 a month to recipients; eligibility includes owning a diesel vehicle that is less than 10 years old, and living in a household that earns less than RM100,000 a year. That is worth a dissection on its own already.

However, you just need to look around to know that diesel is very cheap in Malaysia – we sell it for RM2.15 per litre right now (at the time of writing this it hasn’t yet been announced how and when the price will change). Compare that with prices in other countries: Vietnam sells diesel for RM3.69 a litre, Thailand for RM4.17, Indonesia for RM4.70, and let’s not even start about Singapore’s RM8.86 price tag!

This isn’t new. Back in 2008, this column highlighted how Malaysia’s pump prices seemed far too low, given global crude prices (“Fuelling trouble with petrol subsidies”, StarLifestyle, March 30, 2008). I also highlighted the high cost of diesel subsidies for fishermen, which threatened to disincentivise actual fishing and incentivise them to become diesel salesmen to neighbouring countries instead.

And back then, some Malaysians took the time and effort to write in and defend the low prices. One argument was that oil is a national birthright, springing forth from the “soil that our blood has spilt upon”. Others argued that it was only fair that fuel was cheap, to compensate for poor public transport and high car prices.

For me, those Malaysians that quite willingly felt that what’s good for them now should override what’s good for the country in the future were a worrying symptom.

Just a few months later, in June 2008, diesel prices jumped to RM2.58 per litre. Unsurprisingly, the reaction was, again, outrage. Some threatened to stop driving altogether, because it was getting so expensive. Instead of celebrating that Malaysia was no longer selling a valuable commodity, and at far below market price to boot, there were calls for lower car ownership costs and increased taxpayer subsidies.

To me, it felt like a repeat of “What about me, me me?”.

I noted that the cost of road tax and income tax is very small for those owning smaller cars and earning lower incomes; in fact, most of the complaints were being made by the middle class. In particular I wrote, “The poor have always been poor, they’ve always been struggling. Nobody is falling into poverty because petrol now is closer to its true price than before.”

In hindsight, and partly as an aftereffect of the Covid-19 pandemic that began in 2020, perhaps that statement is not quite as true now. There is a realisation that the basic cost of living expenses is a burden for the middle class as well, and explains the government’s cut-off for its diesel subsidy set at RM100,000 a household per year. According to data from the Statistics Department, roughly two-thirds of households in Malaysia earn less than this amount.

Yet I maintain, as hard as things are for the middle class, it is surely harder for those who earn even less.

Subsidies distort the market, and as with the current debate, the wealthy benefit most from them simply because they consume more.

In fact, there is a whole section in the Malaysian government’s Fiscal Outlook and Federal Government Revenue Estimates for 2024 that is titled “Subsidy: A Double-edged Sword”. It notes that between 2012 and 2022, the government spent RM223.5bil on subsidies, with 71.6% of the expenditure on fuel.

While the section recognises the benefits of subsidies fostering stability and economic development in the short-term, it also highlighted a study by the International Monetary Fund (IMF) showing that “subsidised products and services lead to overconsumption and do not encourage the industry to upgrade and enhance productivity”. In 2023 the IMF concluded that energy subsidies in Malaysia are “costly, regressive, inefficient, and detrimental to the environment”.

For me, oil subsidy discussions go hand in hand with the debate about the goods and services tax (GST), another topic previously addressed in this column (“Well, we need to collect money somehow to run the country”, The Star, Sept 19, 2023).

Not only could GST potentially recoup RM44bil, roughly matching petroleum revenues, it is absolutely crucial for a nation that is making the transition from being oil-rich to becoming oil-dependent. Last year Petronas predicted peak domestic oil and gas production by 2024 – we cannot pin the hopes of the country on a dwindling resource.

Removing subsidies is unpopular, but so is a government backtracking on an unpopular tax reform. And for all the benefits for the nation as a whole in bringing back a sales tax like GST, if not properly implemented, it will worsen income distribution among the rakyat (because the poor pay a disproportionate amount on everyday items like food and basic services).

Nevertheless, the argument for reducing reliance on subsidies has been made for the last 20 years, so perhaps it’s about time we stopped just talking the talk, and doing something real about it.

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In his fortnightly column, Contradictheory, mathematician-turned-scriptwriter Dzof Azmi explores the theory that logic is the antithesis of emotion but people need both to make sense of life’s vagaries and contradictions. Write to Dzof at [e-mail]. The views expressed here are entirely the writer's own.