A Case for The Removal of Subsidies

I generally agree with the Government’s move to reduce the subsidy on sugar and remove it from white bread. I was also happy (although it also hit my pocket) that the Government reduced the subsidies on petrol.

Generally subsidies make us have a false sense of economic security and well being. It also gives us a false inflation indicator as the index is calculated based on the subsidised price and not the actual market price and cost. We then think we have more money in our pockets whilst in all fairness, our purchasing power has gone down. Because of subsidised pricing and this false sense of security, we tend to be clumsy on our spending and maybe even consume more, which in turn chalks up a higher subsidy bill for the Government and taxpayers.

Subsidies are also a lot like burnt money. They tend not to have a high multiplier effect on the economy but is just given to the supplier direct. For example, Malaysia’s subsidy bills runs up to approximately RM25 – RM30 billion. Imagine what the nation can do in terms of development, economic stimulus packages and so on if we have that much money in the nation’s pocket instead of it being burnt money.

So,in general, subsidies are bad for the economy in the long run. The gradual removal of subsidies, especially to the rich must be implemented and welcomed. For example, why should a person who can afford to buy a luxurious huge oil guzzler of 3.0 litres or more, be given the same amount of subsidy per litre petrol as a person driving a 1.6litre. More so the oil guzzler might have a 120l capacity tank compared to the smaller car which has a 70l capacity tank. In this regard, obviously, the Government subsidy on petrol is being enjoyed by the wrong group.

However, in reality, the Government still needs to subsidise for the poor and the needy, especially on basic and essential items like rice, sugar and so on. Certain economic activities like padi planting, farming, fishing and so on also must be subsidised. These are all part of the overall “Food Security Programme” for the country. It is better to subsidise these activities and ensure domestic production of these food types rather than import from outside and be exposed to the whims and fancies of foreign country suppliers.

The removal of subsidies should be done gradually and smartly. Agreed that this will be an unpopular move politically but it must be done to ensure the country’s competitiveness and survival in the long run. The Government must clearly explain and justify to the rakyat the importance and the effects of the removal of these subsidies. At the same time, the Government must clearly show where all the money saved as a result of the removal of the subsides go to. A case in question is the reduction of the petrol subsidy. The Government declared that it would save RM4billion which would be used to improve transport facilities and so on. Even if the ensuing world petrol price hike had wiped out the total RM4b savings, this must be explained clearly and in detail to the Rakyat instead of a one off remark. The same goes for the savings for sugar, white bread subsidies and other subsidies in the future.

Though the Government means well, lack of communication and explanation will lead to confusion and speculation. The Rakyat will think that there is corruption and leakages in the Government machinery which is a worse political death knell than the removal of subsides for the rich initially.

Remove certain subsidies and re-strategise on certain other subsidies to ensure that the subsidies reach the right target group. At the same time, the Government machinery must be improved to ensure there is no abuse or wastage on these subsidies.

Tell the rakyat clearly where the savings from the removal of subsidies have gone to.

Ahmad Ikmal Ismail

Vice UMNO Division Chief Jerai

(sent this article to the media)