Metzelder says: Previous two posts, I have been highlighting about the subsidies cut. So I would put a better picture about subsidies, why it needs to be done, and its effects.

All the information below are reproduced from a Malay Mail article.

SUBSIDIES: Why it needs to be done, and its effects
Monday, July 19th

KUALA LUMPUR: Beginning July 16, 2010, subsidies for fuel, specifically petrol, diesel and LPG, as well as sugar, have been reduced as part of the gradual implementation of Malaysia’s subsidy rationalisation programme.

These measures will have minimal impact on individual families, but is estimated to reduce government expenditure by more than RM750 million between now and year’s end.

1. What is a subsidy?

A subsidy is monetary assistance provided by the government to keep prices for certain goods and services affordable to help Malaysians who need assistance buying essential goods and services.

2. What are the proposed stages of implementation for subsidy rationalisation?

The reduction in subsidies for fuel and sugar is the first step in a gradual implementation of a broader rationalisation effort. Moving forward, additional and reasonable changes will be made to our subsidy programme.

3. What will happen if we do not rationalise subsidy?

If subsidies remain at the same level, we would face a variety of problems:
● Our national debt would increase – Malaysia’s debt has been growing by more than 10% per year since 1997. We must reduce our spending to ensure we have the necessary resources to invest in our future.
● It would delay achievement of our national goals which is to become a high-income nation and a developed economy by 2020.
● It would reduce Malaysia’s attractiveness for foreign investment – international companies are attracted to countries that provide a level playing field and utilise market pricing. Foreign investments in factories and businesses provide jobs and opportunities for Malaysians.

As rationalisation of subsidies complements the overall transformation plan, non-rationalisation of subsidies is not an option.

4. What is changing, and what will not change

Subsidies on important public needs like education and healthcare will remain. Subsidies were introduced for a reason – to provide access to essential goods and services at affordable prices, and to provide for the health and future of the Malaysian people. As such, the government will not reduce subsidies on important public needs, including education and healthcare.

We are just rationalising – even with these reductions, the government will still be spending an estimated RM7.82 billion in 2010 on subsidies.

This is the first step in a gradual implementation of a broad rationalisation effort – moving forward, additional, gradual and reasonable changes will be made to our subsidy regime to ensure that Malaysia is able to meet its development goals while still providing for the needs of the Malaysian people.

5. There are many reasons why these changes are necessary

The current subsidy programme has become ineffective in helping those who need it the most – our subsidy programme has been ineffective in helping the most disadvantaged Malaysians, with too much of the benefits going to wealthier Malaysians, foreigners and big businesses.

This is a matter of fiscal responsibility – cuts will allow Malaysia to reduce the deficit and achieve development goals – Malaysia needs to manage or reduce the deficit. While we have the right policies in place to drive growth, policies that helped us achieve 10.1% growth in the first quarter of 2010, we must also reduce our spending to ensure that we have the necessary resources to invest in our future.

Reduced expenditure will allow investment in Malaysia’s future – our subsidy spending has become a barrier to achieving our goal of becoming a high-income nation by 2020. This reduction in government expenditures will allow investment in the nation’s future – in education, healthcare, infrastructure, community development, training and job creation – investments that will provide lasting benefits for current and future generations.

6. Subsidy rationalisation is an important component of our broader reform agenda

These measures are part of our implementation of the New Economic Model and 10th Malaysia Plan – subsidy rationalisation was one of several enabling measures included in the New Economic Model and the 10th Malaysia Plan. By enacting these subsidy rationalisation measures, which the Prime Minister said would "improve competitiveness and market efficiency and will ensure more optimal utilisation of resources", Malaysia has taken a concrete step towards implementing these reform initiatives.

7. This was not an easy decision, but after extensive study and public input, we believe it is the right one

This was a collective decision, made by government and the people – this decision was unanimously agreed to by the Cabinet, but it was not conceived of and made by the government alone. Through the labs and Open Day process, thousands of Malaysians provided input into this decision, as they had with other major initiatives including the Government Transformation Programme and now the National Key Economic Areas, for which labs are currently underway.

8. Several changes will take effect immediately

Reductions in fuel and sugar subsidies – effective July 16 2010, have been adjusted as follows (for a full outline of these changes, please refer to Chart 6):
● RON 95 subsidy has been reduced by 5 sen per litre.
● RON 97 will no longer be subsidised. It will be subjected to a managed float, where the price will be determined by the automatic pricing mechanism.
● Diesel subsidy has been reduced by 5 sen per litre for all subsidised sectors.
● LPG subsidy will be reduced by 10 sen per kilogram.
● Sugar subsidy has been reduced resulting in a 25 sen per kilogram upwards price adjustment.

Why Sugar and Fuel?

We are reducing subsidies on sugar and fuel because reducing fuel subsidies will have the greatest impact on government spending and reducing sugar subsidies will allow us to promote healthier lifestyles.

The subsidy reduction for fuel (petrol, diesel and LPG) has minimal impact on the rakyat, however it has a huge impact on the Government due to the high amount of consumption per capita in Malaysia e.g. petrol which is estimated to be about 13.4 billion litres for 2010.

With a subsidy reduction of 1 sen for the retail price of petrol, the Government will be able to reduce expenditure by as much as RM134 million.

Benefits of fuel subsidies are going into the pockets of those who do not need such assistance such as foreigners owning cars with higher engine capacities (c.c.).

The low cost of sugar in Malaysia has led to overconsumption which has contributed to a 105% increase (from 1996 – 2006) in overweight or obese Malaysians – who comprise more than 40% of the population. We are seeing a 5% annual increase in diabetes cases and nearly 1.4 million Malaysians now have diabetes.

Chart 1 – Facts and Impact on Sugar Overconsumption

Chart 2 – Figures on obese and overweight Malaysians

Additionally, these subsidies were selected, because:
● We need to better target our resources – these subsidies have largely benefitted the wrong people, and have not done enough to support those most in need.

● Sugar subsidy disproportionately benefits industries and not families.

● Foreigners and the rich are benefiting equally – those driving imported luxury cars are receiving the same subsidy as those using motorcycles and Kancils.

● More than 2/3rd of fuel subsidies are going to middle and high-income earners and foreigners, while less than 1/3rd goes to those who most need the cheaper prices.

● Around 70% of subsidised LPG is being used by businesses instead of households, meaning that most of the government’s spending on LPG is currently misdirected.

● Manufacturers are using twice as much subsidised sugar as households. Our overconsumption of fuel and sugar is endangering our health and security – we are, quite simply, using too much sugar and fuel, which is having a significant negative impact.

● Malaysia has the highest per-capita fuel usage in the region. At the current rate of consumption, we will become a fuel importer. This has significant implications for our energy, economic and national security.

● The low cost of sugar in Malaysia has led to overconsumption which has contributed to a 105% increase from 1996 to 2006 in the number of Malaysians who are overweight or obese, which now stands at more than 40% of the total population (Refer to chart 2).

● We are seeing a 5% increase in diabetes cases year on year – 1.4 million Malaysians now have diabetes.

● Smuggling and other unintended uses of subsidised goods have diverted government resources – instead of helping those in need, the low cost of subsidised goods, in some cases, has been exploited by smugglers for profit.

● Prices for fuel and sugar in Malaysia are the cheapest in the region (see chart 5 for additional information).

9. What is the impact of subsidy rationalisation to my family and I?

Chart 3 – Projected Impact on Consumer Costs

The chart details the current and projected costs of basic consumer goods and services following rationalisation of subsidies on fuel (petrol, diesel and LPG) and sugar.

The charts were computed and compiled by Performance Management and Delivery Unit, Prime Minister’s Department. Please note that these are projections only – cost changes may differ based on other factors.

Chart 4 – Projected price changes for common items following rationalisation of fuel subsidies – CPI = 0.3%

● Teh tarik stated does not take into account the impact of the 25 sen upward price adjustment for sugar.

Taking into account the 25 sen upward price adjustment for sugar, the additional cost to a glass of teh tarik is 1.25 sen.

The new teh tarik price taking account into the impact of subsidy reduction of fuel and upward price adjustment is now at RM1.0155.

10. How does the price of fuel and sugar in Malaysia compare with our neighbouring countries?

Regional Price Comparisons

Chart 5 (below) outlines the comparative cost of fuel (petrol and diesel) and sugar, following rationalisation measures effective July 16 2010, in Malaysia and other countries in the region.

Key facts and figures

Chart 6 (below) outlines the key facts and figures of these initial subsidy rationalisation measures. Based on government projections, subsidy spending in 2010 on fuel (petrol, diesel and LPG) and sugar would have cost RM8.6 billion without rationalisation. With the implementation of subsidy rationalisation beginning 16 July 2010, the overall cost of the remaining subsidies for 2010 will be reduced to RM7.82 billion, a reduction in expenditure of more than RM 750 million.

Things to note:

The subsidy reduction is based on consumption figures from January-June 2010, by the Ministry of Domestic Trade, Co-operatives and Consumerism.

RON97 petrol will be subjected to a managed float, where the price will be determined by the automatic pricing mechanism (APM) without subsidy.

Calculation of subsidy reduction for RON 97 is based on the average subsidy of 14.8 cents per litre from the period of January-June 2010. It is used as the basis for the calculation of the remaining 5.5 months of 2010.

* Calculation of managed float price for RON97 of RM2.10 per litre is based on APM and taking into account the product position between RON 95 and 97

** Fleet card/skid tank are given to land transport vehicles such as school buses and stage buses, cargo, refrigerated and Luton, lorries, containers and river boats are given a special subsidy where prices are lower than retail prices at the pump of RM1.43 versus RM1.70