Subsidies for the Poor or UMNO-Putras (Part 1)

Every now and then we will get statements from government on how much it is spending on subsidies for the poor. This message is especially loud and clear during vote canvassing in elections or by elections; or when there is an intended rise in the price of goods and commodities. A few days ago, the Najib administration announced that it will increase electricity prices by an average 7.12 per cent from 1 June so as to trim the subsidy. Natural gas prices will also rise by RM3 per mmBtu every six months until it reaches market levels.

So far there has been little public reaction to this price increase partly because it has not been factored yet into the monthly bills of the public. But be warned that this increase in electricity bills will affect all households – poor, middle class and rich. Even the poorest households spending less than RM20 will be affected as the free service to them will be discontinued at the end of the year. It looks like the children of poor households will have to read by candle light in the night.

The public is also not aware that this increase in gas price move will have a knock on effect on their daily expenditure since the prices of ALL goods and services will rise. This is because industrial and commercial consumers will have an average increase of 8.35 per cent in their power bills. We can expect all businesses – big and small – to pass on the electricity and gas price hike in their bills to the public since this affects their bottom line!

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Unbelievable 0.27% Increase in Inflation Rate

Minister in the Prime Minister’s Department Tan Sri Nor Mohamed Yackop has told reporters that the gas price increase is expected to cause an inflation level of 0.27 per cent this year. How he arrived at this amazingly low figure has not been disclosed but it looks unbelievable. Since the government is responsible for putting out the national statistics we can expect some extra massaging to go into the calculation of the gas price hike impact on the consumer price index. This massaging will ensure that the predicted figure becomes the real, realized and authoritative one. After all, as the saying goes, there can be lies, damn lies and statistics.

My purpose in focusing on this issue is not simply to criticize the government for trying to reduce subsidies. We have been running a massive government deficit and we need to bring government expenditure down or we face bankruptcy as a nation. That is a challenge which we must overcome because the fiscal deficit issue has already reached crisis proportions.

What I am concerned about is whether power subsidies – with its impact on overall cost of living and the poor and middle class households – should be in the front line of cuts in government expenditure.

This is an issue which needs more analysts to come out with their feedback so that the government can have a larger range of perspectives and data available before implementation of subsidy cut policies.

These are not simply pure economic issues; they have social implications. Already we have the second highest household debt in Asia at 86 per cent of GNP. This is official debt. If we take into account the unofficial debt which ‘Ah Longs’ have provided, we probably already have the highest household debt in Asia. Let us also not forget that beginning from next year, the Goods and Services tax (GST) of about 4% will be implemented. While this will strengthen the government’s revenue base, it will add on to the financial burden faced by the lower and middle class.

I am in favour of fiscal reforms that can trim the country’s debt level and widen our revenue base,. But I am also of the view that we need to cut back on all the major categories of government expenditure, and not just subsidies, if there is to be positive impact to the economy and nation.  

Major Categories of Government Expenditure

The following are some of the major categories of government expenditure.

  1. Petrol, diesel and gas subsidy
  2. Food commodities subsidy
  3. Expenditure on GLCs. MAS for example, during the past 7 years,  has made three cash call exercise for the amount of RM7 billion while accumulating losses of RM4.1 billion in three years.
  4. Social expenditure on education and health
  5. Economic expenditure on transport
  6. Expenditure on civil servants (salaries, pensions, etc)
  7. Expenditure on defence  
  8. Expenditure on NEP-related Bumiputra businesses

Each of these categories of government expenditure benefits a different group. Although a few of these categories are labeled as subsidies, in fact, we can consider most of them as a form of subsidy – an approach which was used by the government not long ago to calculate the level of subsidy that was being provided to the public by including health and education as components.

In the second part of my article, I shall focus on subsidies for the rich and on sectors which are undeserving and where the expenditure has not generated much national benefit.  

* This is the first of a two part article focusing on the issue of subsidies for the poor and the rich.

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