The Great Subsidy Debate

By Rafizi Ramli
Lately, subsidy has become somewhat a swear sword along the nation’s corridors of power. Subsidy is primarily blamed for the nation’s ballooning fiscal deficit that threatens to march Malaysia down the same path that Greece and Ireland had taken recently. The removal of subsidy thus has become a great national mission.
It is good that Malaysians are becoming more aware of the pros and cons of a social system that relies heavily on subsidy. A continuing reliance on subsidy to keep fuel prices down; or an expectation that our fuel prices will remain at today’s prices for a foreseeable future is of course unrealistic for the simple reason that hydrocarbon resources are finite. Even if we have much larger oil and gas reserves that can last another 100 years, it is imprudent to waste it as cheap fuel given that it will become more costly to produce a barrel of oil twenty years from now. Any right thinking Malaysians understand that gradually we will live without fuel subsidy.
Where we differ is the manner the great national debate on subsidy is being selectively approached by the government, especially vis-a-vis the huge gas subsidy given to the energy sector and the amount of debt servicing charges the public has to absorb each year. Both feature prominently in any solution to reduce fiscal deficits.
For the record, the national budget for 2011 allocates 8.7% out of the total RM212 billion operational budget for debt servicing charges for all the loans taken and guaranteed by the Federal Government. This works out to be RM18.4 billion of interest and principal payments annually. The number should strike a chord instantly for those who are familiar with the mathematics of subsidy in Malaysia, because it is a lot higher than the fuel and food subsidy that the Federal Government bears each year.
When the crude oil price shot through the roof in 2008, the total fuel subsidy borne by the government was RM15 billion (based on data released by Pemandu). In normal circumstances when crude oil price hovers in between US$65 to US$85 per barrel, the estimated fuel subsidy is in between RM9 billion to RM11 billion annually.
Therefore, this is a fact – even when the crude oil price repeats the dramatic increase of 2008 (which we have not seen so far), the total fuel subsidy borne by the government is still lower than the debt servicing charges. In normal circumstances, Malaysia spends double the amount of public money servicing the debts that the Federal Government has accumulated over the years; which has reached RM407 billion by the end of 2010.
Thus, while it is right to focus on subsidy removal as a means to reduce the national fiscal deficit, the public must be bolder to press for a concrete plan to reduce our debt servicing charges over the years. Debt servicing is a bigger culprit and it is about time that the public calls a spade a spade, especially in light of the government’s mad rush to issue bonds to fund for the billions worth of mega projects announced under ETP. A pre-occupation with subsidy removal to the point that we lose sight of the imprudent debt raised annually by the Federal Government is a mistake we cannot afford as a nation.
Is there a necessity for austerity measures to trim down the national budget, so that we scale down the annual borrowing to fund the budget deficit? Can we live with a period of modest economic growth while we tackle the problem of high debt level? I do not have the answer to this but eventually we will arrive at a junction when we cannot avoid the questions anymore, so it is best to start the public discourse now. Either way, every Malaysia will agree that eliminating corruption and shoddy government procurement practices will go a long way to manage the reliance on debt.
The other economic question that should be weighed heavily in any national debate on subsidy is the RM19 billion-question on gas subsidy provided to the energy sector each year. It is a sore point to PETRONAS which complains annually on this as it is akin to burning RM19 billion of good money for the sake of keeping the electricity tariff artificially low. Even if we have an abundance of gas reserves (which we don’t), burning that amount of natural gas each year is environmentally harmful and economically wasteful when it can fetch a much higher price if utilised differently (either as LNG or feedstock for processed chemicals).
The proponent of the RM19 billion gas subsidy to the energy sector will argue that it is necessary to help the rakyat, as the cheaper tariff benefits the rakyat directly. That is a political argument that goes along the same breath as the economic argument that an energy subsidy is necessary to make Malaysia competitive as a manufacturing hub.
Personally, there are loopholes in both arguments.
A research by Jeff Rector of Stanford University discovered that the rakyat (non-business and non-industry users) consumes only 19% of the total electricity generation in Malaysia in 2005. TNB has also made a few changes to the public tariff structure since then that in all probability there will not be a sudden tariff hike for low capacity users such as the public if the gas subsidy is phased out.
The industrial and commercial sectors have the right to be jittery when any proposal to phase out the gas subsidy to the energy sector is made, because they stand to bear the full brunt having consumed 81% of the total electricity generation. But this is where the practical and philosophical questions on gas subsidy require an in-depth discussion(which has been conveniently ignored by the government):
Firstly – there is a big disconnect between the drive towards a high income economy driven by higher innovation and creative capital; with the insistence that our industrial sector will continue to be protected in the form of cheap electricity tariff paid for by the state. An economy that can still benefit greatly from state give-outs(either in the form of bloated state contracts or state subsidies)will resist any attempts at structural reforms, as it is only natural that human beings will choose an easier option. Why go through the pains of economic reforms to change the structure of the economy, when our industry can still make tonnes of money producing products with lower technology and creative contents because the state subsidy distorts the manufacturing costs? Continue reading ‘The Great Subsidy Debate’