Tuesday, June 01, 2010

The Subsidy Rationalisation Puzzle

The current public debt is at RM 362 billion which is 54% of GDP. The Minister said that at 12% growth of public debt per year, we will be bankrupt by 2019.

Public debt is expected to be equal to GDP in 2019 at RM 1.158 trillion. This probably means that our economy is expected to grow annually by 6 to 6.5 percent by simple calculations.

But the Government might cause ripples/shocks to the economy. Malaysia should reduce their subsidies periodically. A calculated phase out must be done.

Don't let the people decide the duration of the phase out (Look at the 2nd question above). The economists from the private and public sector should decide.

Who doesn't want to pay fuel at RM 1.80/litre for the longest duration possible as opposed to probably paying RM 2.80/litre ?

The Government should announce welfare packages targeted at the lower middle and poor income groups hand in hand with the reduction of subsidies.

Otherwise, people with lower middle income and low income will see no safety nets in place in the near term.

Proper schemes should also be announced to ensure that the middle and upper income aren't badly affected either but the core benefits should go to lower middle and the low income groups.

One thing is for sure. Individual cost of living will rise. Individuals in the low income group won't have much money left to spend or invest in other areas after consuming necessities and utilities.

It is indeed a painful path that we need to take if we want to transform into a high income + high cost economy.

Anyway, I wonder what will the Government say if the official statistics show that the people voted against the Subsidy Rationalisation Plan.

The last time we were told to absorb higher costs individually for fuel, the Government promised us better public transportation. We were hoodwinked by the former administration.

It is said that the Subsidy Rationalisation Plan will save us RM 103 billion over the next 5 years.

Unfortunately, it will only be a saving of RM 20.6 billion a year on average. Compare it to a 12 % growth of public debt from current level which comes to about RM 43.44 billion. Saving RM 103 billion over the next 5 years won't help us for long.

So, after cutting costs in the listed categories (and hopefully other sectors also), the Government must really look into sectors that can generate more revenue and also improve the ease of doing business in Malaysia.

Communications and transportation sector please, Sir !


katdog said...

You forgot to mention the other aspects that are leading to our nations huge deficit:

- 28 billion a year wastages on crony 'pork barrel' projects.
- 500 million a year on the National service program that has obviously failed miserably in its objectives
- 2 billion for 2 submarines
- 2 billion for 200 new APC (Armored Personnel Carriers)
- 2 billion for new Couger Eurocopters
- 3.2 billion for Russian Sukhoi fighter jets

cut the 28 billion wasted annually. Over 5 years, saves 140 billion. Govt will save more than cutting subsidies???

katdog said...

Personally i support the removal of fuel subsidies. After all, the bulk of fuel subsidies only benefit the rich and businesses anyway.

Fuel subsidies should be removed. In return, Road taxes on small engine vehicles should be reduced. Taxes on fuel efficient cars should be drastically reduced.

Thailand already has such an incentive providing tax exemptions for manufacturers of eco friendly cars. What is Malaysia doing? Our leaders still sleeping on the job.

Before reducing subsidies, government MUST first implement minimum wages.

The current proposal by the government is ill conceived.

Anonymous said...

Implementing minimum wages is not a good thing neither although most of the first world country has such law. Try to think that you're paying a lazy person who is not deserved to be pay at that price. This will only lead to big losses for the private sector.

I would suggest that we concentrate in a market that has the potential to grow. Green technology has the most potential to grow in the next few decades. It will be tough in the short-run for this industry but in the long-run it will be a cash cow for our country.

The next thing I agreed with Goh is that we should eliminate fuel subsidies and focus on building infrastructures that can attract FDI. This will help increase the GDP better than anything. It will be a plus if the government practices bureaucracy and eliminates corruption internally and externally.

Anonymous said...

Wei Liang,

This is a good piece from you, keep it up. My advice is forget about MCA line up, it does not mean anything at all. MCA crisis has not come to an end, bigger one in the making and takes many years to wipe out some warlords. You should be more forward looking with new party or new ideals to replace MCA and Gerakan role in BN. BN still very much relevant to multi-racial society but in different format.

Regarding subsidy reduction, I applause Idris Jala honest, independent and brave viewpoint. BN must move forward to engage more professionals from public sector and GLCs in helping PM leadership gather solid think-tank group. In contrast to Idris cautious that nation risk go into bankruptcy, Umno's Awang Adek from Finance Ministry still in denial. Look, this is very disappointing respond to Najib's think-tank Pemandu study. Be less politicking and face the truth.
The biggest issue facing the nation at the moment is not political struggle between BN and PR. Political aside, our future generation like you and me facing critical point at present state of economic and government financial position. Frankly, everytime I enter The Star website, I will vote for answer reduction subsidy in one year from Pemandu survey. I will vote for many many times. Najib think-tank led by Idris Jala is a wake-up call for all of us. A new comprehensive strategy must be adopted and implement in next 5 years to overcome current critical condition.

Looking beyond Malaysia, debt crisis in Iceland, Greece and Hungary gives us extra cautious. Are we the next mired in debt crisis? I opined not in 5 years but later on we have to face possibility of bankruptcy. If you read the news about debt crises development at Greece and Hungary, the shocking point is that their government falsified data for too long. When new government took over, actual data explodes. In Malaysia, just be skeptical on RM362 billion debt, actual data could be astronomical. Barry Wain's estimation of RM100 billion wasted by Mahathir's 22 years tenure is a conservative number.

BN needs new lease of life in political survival with Umno dominance must persist and in wider scope. This is the right time Umno play a bigger role in determining the victory in any election. Hulu Selangor prove that Umno should decide the candidate to ensure victory. May be Umno should consider change into multi-racial party in Peninsular by absorbing weaken MCA, MIC and Gerakan. This will guaranteed more representativeness in new political scenario.