September 8th, 2005 by Hafiz Noor Shams
An awful lot of Malaysians are happy with the road tax reduction in the face of rising fuel cost. The government assures more is to come. The libertarian part of me jumps with joy. My green half however warns me that the government current policy might be unsustainable.
Fuel prices have been marching forward continuously for many months now. Give and take a jump of another USD20, crude oil price will be at an all-time high. The highest price in 2005 term is USD86 per barrel. Crude oil prices are currently around USD65 per barrel. Roughly a week ago, it was USD70 per barrel.
Consequently, all countries running gasoline subsidy are finding out that the program eats a lion’s share of their expenditure. Indonesia is a perfect example of this. Its subsidy program is so huge – a quarter of government expenditure in fact – that capitals are flowing out of Indonesia at a frightening rate. That capital outflow then forces Rupiah, the Indonesian currency, to plummet 10% against the USD this year alone. This could happen to Malaysia too and it’s crucial to reduce or even eliminate Malaysian fuel subsidy.
The Rupiah today rose after the Indonensian authority confirms that they will cut fuel subsidy further. Almost similarly, Malaysian government has allowed fuel price to increase step-wisely a few times this year. Three times if I’m not mistaken. That in effect reduces deadweight loss.
Despite so, the government has made several promises that are too bold.
First and foremost, the government promises that there will be no more price hike till the end of the year. There reason why this might be more than the goverment could chew is that there can be no guarantee how the global crude oil prices will react in the short term. The market is too susceptible to immediate events like Katrina, of which had forced the crude oil to break the USD70 benchmark. Not to mention, for the northern hemisphere, winter is looming in four months time. Given the no-hike promise, a too liberal price increase could match or even outdo the reduction in deadweight loss.
Second is the promise of more tax cuts. Bigger cuts mean lower revenue.
Combining possible fall in income from taxes with the inability to reduce expenditure, this is a formula only Republicans will endorse. It’s a recipe for budget deficit. A fall in income must be followed with a fall in expenditure if a budget is to be sustainable. Of course, economics allows greater expenditure against an inferior income but it must be noted that only in time of crisis should anybody allow that. This is where normative and positive economics diverge. On top of that, Malaysian 2004 budget deficit stands at 4.5% of its GDP. 2005 deficit is expected to stand at 3.8% of the GDP.
This is type of economics practices by Republicans – from Reagan to W. Bush – might increase the expected deficit for 2005. Our government is doing what an economic populist would do.
This might backfire soon – all the cheer might turn into jeer when the deficit swells in size.
p/s – even the World Bank is worried of climate change.
pp/s – fun flash animation. Don’t you love your SUVs?