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Tuesday, June 1, 2010

Subsidies, taxes, expenditure and you

Cutting burdensome taxes and needless expenditure will make slashing subsidies more palatable

AH, yes, we are probably one of the most heavily subsidised countries in the world. RM74bil is a lot of money and if we did not have to subsidise, we won’t have a government budget deficit, currently a record RM49bil.

But are we not also one of the most heavily taxed when it comes to certain goods? We pay more – much more – for cars and motorcycles than most other countries.

Which brings up the question of how the unpalatable and politically unpopular but very necessary task of cutting subsidies can be best done with as little damage as possible to people and as a wide an acceptance as possible.

For the first time ever we have very detailed statistics on subsidies – how much and to whom they go. An examination (see chart) of that shows straightaway that the poor actually got very little of that RM74bil – less than RM2bil or under 3%.

That’s clear indication that almost everything is wrong with the subsidy system – the target group is getting an almost negligible amount of the subsidies with most benefits going to the middle and upper income groups and companies. There is no question that the subsidy scheme has to be revamped.

Importantly, Pemandu, the Performance Management and Delivery Unit within the Prime Minister’s Department, has come up with a solid plan to cut subsidies and save up to RM103bil over five years.

Its CEO Datuk Seri Idris Jala, in characteristic form, made an eloquent and persuasive presentation on Thursday backed with statistics outlining where the cuts will come from and how exactly it will be done. He explained further that the phased cuts over five years would not result in inflation going over 4% per year.

The big question mark is whether the Government will have the political will to go ahead with the subsidy cuts. Much political capital will be made out of the cuts even though statistics clearly indicate that the poor get only a miniscule under 3% of the total subsidies of RM74bil.

Looking at the chart again it is clear that much of the subsidies are for subsidised education and health, with education alone accounting for around RM30bil. If health and other social expenditures are included, then this comes to over RM40bil.

However, the envisaged cuts leave these largely intact and indeed that is as it should be since it is the duty of the Government to provide for education, health and other social services at reasonable costs, although there is scope for substantial savings through prudent cost cuts. It is well known that the Government pays much more for goods and services.

The cuts come largely from two sectors – fuel, which will save almost RM45bil over five years, and electricity, which will save RM35bil. Together, they account for nearly 80% of the proposed subsidy cuts over five years of RM103bil.

Considering that these cuts are graduated and will not result in an unacceptably high inflation rate, the Government must be prepared to put its foot down and go ahead with it, explaining that the poor are not the ones who are going to be affected by the cuts.

But that’s not enough. The Government must show its commitment to reducing expenditures across the board. If the rakyat have to tighten their belts, so must the Government.

Pemandu’s labs can be put to good use again to ascertain the wastage in government expenditure, both operating and development, through abuse of the procurement process and otherwise and to suggest ways and means to save unnecessary expenditure here. The savings will potentially amount to tens of billions of ringgit a year.

The lab can also then suggest ways to remove burdensome taxes such as the ridiculously high import duties on cars and motorcycles as well as a range of other goods which are aimed at protecting inefficient local industries.

If we remove subsidies, it must be across the board. Malaysians should not be subsidising the profits of inefficient companies. The chart shows that companies receive only a little less in subsidies than consumers. Besides, removing such subsidies reduces costs and makes us a more competitive country as companies learn to stand on their own feet and not depend on the largesse of the Government and the people.

Two things will make reduced subsidies very palatable – the reduction of wastage through incompetence, corruption and patronage in Government and the cutting of burdensome taxes.

If these are done simultaneous with the subsidy cuts, the Government will see even more acceptance from the public. Otherwise, the public will eventually see the subsidy cuts as just another scheme to put money in the pockets of the well-heeled and connected.

Indications are there is wide acceptance that subsidies are inefficient – in an informal SMS poll by Pemandu, six out of 10 people among 191,592 respondents agreed that subsidies should be cut. At Pemandu’s open house on subsidies on Thursday, an astonishing 90% of 1,291 respondents to a questionnaire said the subsidy rationalisation should go ahead.

If public affirmation is what the Government is looking for, it already seems to be getting it. What else is it waiting for?


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