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Tuesday, June 1, 2010

Subsidies are not all that bad

I REFER to your reports “Time for the subsidies to go” (May 23) and “Subsidy cuts vital to avoid bankruptcy” on May 28.

The arguments against subsidies in a market economy are well-documented and recognised by most economists. Subsidies are generally wasteful, misplace resources and create distortions to the proper functioning of a market economy. However, such views are valid provided the market economy, as we understand, is free from weaknesses and not subjected to policy measures which may be as “harmful” as subsidies in causing the distortions.

I would like to offer some counter arguments to the general notion that subsidies, ipso facto, are bad for the economy.

First, subsidies for education, staple food and medicine are socially desirable. We know subsidies are paid out of tax revenues. In what ways are subsidies wasteful if a part of tax revenues is used to subsidise socially desirable goods?

We argue that subsidies benefit the rich more than the poor. Is this true? If we are talking about staple food, basic transportation (including fuel) and medicine, I am sure the poor spend a larger proportion of their income on these items than the rich. So, subsidies on these items would have benefited the poor more than the rich.

Many have argued that the Government’s fiscal deficit is caused by subsidies, as if without the subsidies our deficit problem would be resolved. This is not entirely true as our deficit is caused mainly by overpricing and overspending on programmes and projects that are totally unnecessary.

Malaysia’s deficit currently stands at about 10% of the total government expenditure (both operating and development). It is not far fetched to suggest a 10% budget cut for all ministries and agencies will not seriously jeopardise the performance of the Government.

We know most government purchases are overpriced. We just have to review the prices paid for all goods and services and I believe a 10% reduction in prices is not difficult to achieve if past reports of the Auditor-General are relied on.

Second, most ministries and agencies are over-budgeted. They could operate with 10% less allocation without much difficulty. They just have to be watchful and prudent with their expenditure, which I find lacking currently. In addition, I find many programmes and projects undertaken by the Government are unnecessary, redundant or overlapping.

In fact, by streamlining the activities and by doing away with some of these programmes, the performance of the Government could actually improve.

A market economy without subsidies and distortions is good for efficiency and competitiveness. However, a market economy without government intervention is also notoriously known for its inability to distribute wealth and income equitably.

Subsidies, if properly administered and applied, can help alleviate some of the shortcomings of a market economy.

If we are not able to administer the subsidy scheme properly, please don’t blame the scheme but blame the people who manage it.


Kuala Lumpur

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