Infernal Ramblings
A Malaysian Perspective on Politics, Society and Economics

Why Fuel Subsidies Should Go

Written by johnleemk on 8:55:58 am Jun 15, 2008.

There are fundamentally 2 issues at hand when it comes to taxes and subsidies: one is how their enactment influences people's behaviour; the other is how their impact on government revenue and spending. The Malaysian government says fuel subsidies must go because the federal budget can no longer afford the expense; the opposition says they can remain if we manage our finances better. But even this argument aside, the impact of fuel subsidies on people's behaviour, combined with how we could be otherwise spending the billions of ringgit that would go into fuel subsidies, suggest that it is more prudent to end subsidies for fuel once and for all.

First of all, let's be clear: we are not necessarily talking about the policies of a Barisan Nasional government. Hopefully the previous general election has made it clear that we do not always have to be talking about the policies and principles of one party; saying "well, that's fine, but this policy would never work under a corrupt government" is ridiculous, since we are not always burdened with one party holding power.

I don't think it's possible to contest the claim that good governance would have helped us maintain the fuel subsidies for much longer. If we had invested a significant portion of our oil revenues in some sort of fund and managed it as well as we have managed Petronas (which is really one of the best government-linked corporations out there, from what I know), things would be a lot different. We would be able to spend more on subsidies, and indeed, spend more on everything.

In spite of this, I am not convinced that we should be spending anything on subsidising fuel. It is not as straightforward as saying the subsidies benefit the rakyat and that is the end of that; spending on almost anything benefits the rakyat in some sort of way. Even giving money to government cronies helps because the cronies still have to spend their money on something, so that money will somehow find its way to us. Nobody would support this sort of policy, however, because it is inefficient relative to other ways we could be spending our money. Subsidies are simply inefficient compared to other things we could be doing with this kind of cash.

In the first place, subsidies actually do harm. No doubt, they ameliorate the increasing costs of fuel and make life easier. However, they do encourage us to behave in ways we would not have otherwise. It is irresponsible to pay people to give others lung cancer and breathing difficulties, but that is basically what a subsidy on petrol does. We can afford road trips that we would otherwise not take, holiday plans we otherwise would have rejected as too extravagant. Subsidies do not distinguish between necessary consumption and consumption that is nice to have.

If we really want to aid the common man, then just rebate the petroleum revenue to him, as the DAP has proposed. The most efficient welfare system is one which gives money to people to spend as they find necessary. When you give me a lump sum payment, under, say, a negative income tax policy, I can spend it not just on petrol, but on public transport, school uniforms, food, whatever. If I don't have a car, I still benefit. Relative to a subsidy on petrol alone, a direct transfer payment is more efficient.

It is imprudent to promise to directly lower the cost of living. Price controls always result in empty shelves and substandard products; ask industries which have had to overpay for shoddy steel because of government price controls. Ask mothers trying to prepare a huge reunion dinner during the festive season who were limited to one bag of sugar at the supermarket. Rationing and price controls do not work, and benefit people who are lucky rather than deserving.

If we want to ensure that the man on the street can afford to eat and work, the best solution is to put money in his hands directly. If he is responsible, he will change his spending accordingly, but he will survive. If he is irresponsible, it's not like he would benefit much from fuel subsidies in the first place. The Pakatan Rakyat came to power in five states on promises of better economic management; they would be wise to plan prudently. Bad fiscal policies got us into this position; let's not keep digging ourselves a hole after having hit rock bottom.

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Infernal Ramblings is a Malaysian website focusing on current events and sociopolitical issues. Its articles run the gamut from economics to society to education.

Infernal Ramblings is run by John Lee. For more, see the About section. If you have any questions or comments, do drop him a line.

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