The topic of subsidy rationaliSation has been on the air for some time as the government has been straddling between helping its populace that has been hard hit by rising prices and at the same time adhering to fiscal discipline and keeping a tight lead on the government purse.
Subsidy rationalisation would ensure that vulnerable groups particularly the B40 are assisted while the rich and the T20 would pay the market price. In announcing Budget 2024, Prime Minister Anwar Ibrahim said that Putrajaya was expected to spend over RM81 billion on subsidies this year, partly due to the rise in the cost of importing food.
The Prime Minister went on to add that subsidy rationalisation would be implemented in stages to ensure that subsidies are only accorded to those who need the subsidy and that the rich can pay at market prices.
Blanket subsidies may be necessary at the initial stage of economic development, these policies would tend to outlive their usefulness and a more targeted approach should be undertaken as the economy matures.
This is imperative as it allows the government to rebalance its expenditure and ensure that it can sufficiently allocate its resources towards expenditure in health and agriculture.
The question uppermost in the mind of consumers is the mechanism that the government would use, to ensure that subsidies reach the intended groups. Considering fuel subsidy is almost RM40 billion or half of the total subsidy of RM80 billion, the government should start by rationalising fuel subsidy.
It is estimated that the T20 benefits almost RM20 billion of the RM40 oil subsidy and it would be a waste if the government continues to subsidies this group.
But the easiest way is to just float the pump price according to the market price. This way, everyone, including the T20 households and foreigners, pays the same pump price, and enforcement is much easier. The fuel subsidy can then be targeted at deserving households via direct cash transfer. The government already has data on those entitled to receive BRIM payments
The government could gradually increase pump prices by 10 sen from the current price of RM2.05 which would result in cost savings of approximately RM2 billion for every increase in 10 sen for the government and through cash transfers it can accord to deserving individuals but only to those who can show proof of car ownership.
With the gradual increase in pump prices, it must also ensure that there is no significant increase in the price of goods. Towards achieving this, it can also ensure transporters carrying essential goods are given subsidised rates to avert them from passing on the increase in petrol prices to consumers in the form of higher prices of goods and services that they sell.
While subsidies for consumers are being considered, the government should also consider looking at subsidy rationalisation holistically and also look at it from the point of producers. If the government decides to set a ceiling price and withdraw subsidies from the producers, it might not make it worthwhile for them to stay in the industry.
A case in point is when the government decided to ban the export of chickens last year and withdraw the subsidy from poultry breeders, the move saw many breeders exiting the industry as the elevated price of the feedstock costs such as corn and soya had already impacted their margins.
With the government shutting its doors to the export markets, they had no choice but to leave the industry as the export markets would have allowed them to offset their losses in the domestic market. When industry players leave, supply factors are affected which would invariably increase prices.
The government should also find ways of infusing more competitors into the market to address the supply-demand imbalance and ensure prices are kept stable.
It is paramount that when subsidies are doled out, the government establishes that price increases are not through collusion of producers through cartels.
There must be constant surveillance to ensure that cartels are dismantled as they have an overall negative effect on the economy.
It would be a waste of valuable resources if the government doles out subsidies to keep the prices of goods affordable only to know that are helping cartels that are squeezing the consumers.
It is paramount that subsidies not only reach the desired target groups but also ensure that it is used for the right purpose.
The writer was formerly attached to a think tank.
The views expressed in this article are the author's own and do not necessarily reflect those of the New Straits Times