Tag: fuel subsidies

Categories
Economics Politics & government

[1364] Of off with fuel subsidy, but what about election?

At 10 per cent — the official estimate — of the fuel subsidy, the Economic Planning Unit in 2005 characterised the illegal outflow as “akin to giving to foreigners the subsidies intended for Malaysians”. Now that our neighbours have reduced their fuel subsidies, it is perhaps time to stop subsidising them and to take away the incentive to smuggle out our diesel by aligning our prices closer to theirs. [Narrowing differentials. New Straits Times. September 11 2007]

Finally, it sinks in one of the local mainstream media. But does this mean there would be a fuel price hike in the future?

I refuse to believe that the NST says such thing out of “mere” economic rationale. The possibility of somebody higher up told them so simply appeals to me. The NST is a government’s mouthpiece after all. If that is so, it would definitely be an odd move however since the general election expected to be just around corner. Or maybe, election is not so close after all!

The recent budget in my opinion itself might not be as populist as the previous ones, despite what I wrote preemptively. Hmm…

I have stated earlier that the government of the day has missed its chance to ride on positive sentiment due to slowing economy. There has been talk of having the election in November but given the latest news from Japan.

If I were BN, I would somewhat favor to have the general election at later dates, perhaps after the release of economic reports for the third or even the fourth quarter are out. I would ride out the bad news and wait for a better time. Maybe, after Chinese New Year in February when economic activities, local and abroad, are up due to seasonal demand. Therefore, from being too late, November now seems too early.

Categories
Economics

[1068] Of blanket subsidy is inferior to targeted subsidy

Subsidy leads to inefficiency. Notwithstanding the reasoning, sometimes subsidy could be justified; sometimes, efficiency is not the only consideration of a society. The word subsidy is commonly heard when a society tries to address the problem of inequity; subsidy is a tool of wealth redistribution.

I maintain a high dose of skepticism against any subsidy policy. Yet, I am prepared to lower my opposition if such subsidy is well-tailored. A well-tailored subsidy however does not include blanket subsidy; blanket subsidy is the worst form of subsidy one could ever think off. An example of blanket subsidy is the current Malaysian fuel subsidy.

A blanket subsidy is a lazy policy — at best, clumsy — formulated to solve a perceived problem. It generalizes society, assuming that everybody in the society is in need of the subsidy; that people are fully homogeneous. On the contrary, people are heterogeneous to a very large extent. If people were completely homogeneous, I do not doubt that communism would have ruled supreme.

That generalization is costly. The generalization, believing that the lower, the middle and the upper economic class are equally needing of or benefiting from a blanket subsidy is an expensive proposition. It is expensive because it gives benefit to those that value such subsidy the least; the rich values subsidy less than the poor. A blanket subsidy does not make that discretion. Therefore, a blanket subsidy regime pays too much to increase societal welfare whereas in fact, a better policy would have done the same job with lesser resources. One of those better subsidy regimes is a targeted subsidy.

A targeted subsidy policy specifically identifies a segment of a society that is in need of aid and then aids only those that in need of aid.

With a targeted subsidy, resources that would have been used under blanket subsidy could be used to make investment in education or other areas that could permanently and structurally increase societal welfare.

Not only that blanket subsidy as a policy is expensive, somebody has to fund it in order to maintain such policy. Resources ultimately has to be sourced from the society; the taxpayers. The society has to be taxed in order sustain any subsidy. Therefore, to defend a blanket subsidy as a mean to increase societal welfare is almost oxymoronic. The society is being taxed to support a subsidy — you pay me to pay you, all else being equal.

In my opinion, rather than support a subsidized regime as far as the current Malaysian fuel subsidy is concerned, it is better to promote tax reduction instead. Or a hybrid tax reduction-targeted subsidy policy if we are so hooked up on the crack that is subsidy. Rather than you pay me to pay you, why don’t you just keep your money for yourself?

Categories
Economics

[1060] Of tax reduction, not subsidy increase please!

Crude oil prices have been falling lately and certain quarters are calling for the reduction of fuel prices in Malaysia. That call includes implicit demand for increase in subsidy. Anwar Ibrahim is one of them.

I oppose any subsidy increase that distorts the market. In fact, to combat externalities caused by fossil fuel consumption, I advocate the imposition of tax to internalize the externalities. Unfortunately, taxation is politically unpalatable. As an alternative to subsidy increase or taxation, I propose a policy better than subsidy increase as well as pragmatic at the same time; a third way — a proportionate decrease in taxes.

That means any saving made by the government through the reduction of subsidy as well as the fall in crude oil prices should be fully used to fund tax cut across the board.

The term saving here needs to be defined. Saving means the amount would need to be paid by the government for subsidy if crude oil prices had not fallen from the price level when the latest subsidy regime was announced.

Why is this policy better than the call to increase subsidy?

This policy is less distortionary. Not only it does not increase distortion caused by subsidy, it also reduces distortion caused by taxation through tax reduction. Apart from economic consideration, tax reduction might have favorable impact comparable to the political effect of subsidy increase effect — it would please the mob, for better or for worse.