Recently the Malaysian government removed part of the subsidy provided on petrol, reducing the amount by 20sen (roughly 6cents usd) per liter. The fuel subsidy, plus other subsidies on things like cooking oil, sugar, and rice is a drag on the government's budget each year. The reduction of this subsidy is predicted to result in a 3.3 billion MYR savings (about 1billion USD), but will continue to subsidy petrol to the tune of 24.8bil MYR a year. The reason the subsidy is being removed is because of a desire to reduce deficits and to moderate the balance of payments. In 2012, Malaysia's budget deficit was 4.5 percent of gross domestic product, the second highest in emerging markets after India. Prime minister Najib is quoted as saying, "Currently, our subsidy system benefits everyone, including the higher income group and foreigners."
He is absolutely right. I have quite enjoyed the subsidy, but noticed the hike when I went to the pump a few days ago. It used to cost me about 65 MYR to fill my tank, now its about 75. This will occur not only in transportation costs, but also ripple through costs for most consumer goods. Still, by western standards a very cheap price to pay, but this will hit Malaysians more than just at the pump. Many people complain about cost of living increases, a sign of a reduction in AS due to inputs. There is also the hope that this will ebb capital outflows that have occured recently as SEA markets have become more unstable.
Petrol subsidies/taxes are like crude VAT since nearly everything must be transported. In fact, Turkey uses a hefty petrol tax as a method of putting a sales tax on the informal economy, a pretty neat idea. A petrol subsidy, on the other hand, is sort of like a transfer from those who pay taxes to those who don't. A direct welfare check would create less distortion, and it is easy to find people you want to pay (less easy to find people you want to tax!).
ReplyDeleteThat is a great idea! What a way to get most transactions in the net.
ReplyDeleteYes, the pm has actually stated that the subsidy is not the best idea and direct payments or something like it would be better.