Soft Pedalling On Ron95 Subsidies Is Bad

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Soft-pedalling over removing subsidies for RON95 petrol and a system of identity card verifications for those eligible is likely to cause implementation problems and raises questions over its efficacy in reducing government expenditure.
There is a lack of clarity over who will be eligible for the subsidy, with the government maintaining it will target the top 15 percent of income earners for full price without saying how they will be determined.
What happens if you have wealth but limited income, for instance?
The government will end up subsidising most people in the food chain, which means that the amount saved may not be much, especially since oil prices remain depressed.
ADSIn a press announcement in July, Prime Minister and Finance Minister Anwar Ibrahim said, “When the RON95 targeted subsidy is implemented, Malaysians will enjoy a lower RON95 price of RM1.99 per litre.
“This will certainly benefit around 18 million car drivers and motorcyclists, including youths as young as 16 years old and gig workers,” he said, adding the rakyat will continue to enjoy the subsidy while addressing leakage to those who do not qualify.
Some will pay full price
Obviously, then there will be those who will pay the full price. The question is who.
Finance Minister II Amir Hamzah Azizan had this to say: “... RON95 petrol subsidies - similar to the electricity and diesel subsidies - will not affect the wider public,” he said.
Second Finance Minister Amir Hamzah AzizanHe was responding to BN’s Ayer Hitam MP Wee Ka Siong late last month, who asked in Parliament how the government determines the T15 (top 15 percent of income earners) category. He added that the system would be implemented this month, but was not specific about eligibility criteria.
There are two problems with this approach. First, the target for full price is just the top 15 percent of income earners, which means that many of those who can still afford to pay the higher prices will not.
The subsidised price is RM1.99 per litre compared to the unsubsidised RM2.50.
Not effective enough
The second is that with only 15 percent of users paying full prices, how effective would the subsidy rationalisation be in terms of raising revenue? The answer is “poor”.
There is only so much petrol for their cars that the rich can use. Let’s say on average they use double the average amount. That would mean only 30 percent (15X2) of the full costs will be recovered.
That’s not targeted - the government still subsidises 70 percent of costs. According to the PM’s July announcement, for 2023 and 2024, the RON95 subsidy alone costs almost RM20 billion per year, which means it will still cost RM14 billion (70 percent of RM20 billion).
ADSRecovering 30 percent of that is still RM6 billion, but it could have been easily 60 percent of that or RM12 billion, double the RM6 billion.
All that the government needed to do was to subsidise only the B40 - the 40 percent bottom low-income group and make everyone else pay the normal rate, saving a further RM6 billion.
It could be even more than that, as the B40 group, many of whom are motorcycle users, may use a lot less petrol. If they use only half the petrol on average compared to the rest, then the amount of subsidy would be (20X0.4Xhalf) or RM4 billion, compared to the current bill of RM20 billion, and the RM12 billion if only T15 paid the full price.
This soft-pedalling by only targeting the top 15 percent is the opposite of targeted subsidies - it’s targeted taxation of those who earn the most, but which excludes a significant portion of those who can afford to pay the tax.
When the government subsidises those who do not need support through targeted taxation of very high income earners but excluding those who can afford to pay target rates - the middle income earners - it reduces the amount available for social purposes, especially in lifting the lot of the poor.
That kind of an approach is going to lead to a situation where the government spends too much on satisfying everybody for reelection, but fails to sufficiently consider the need for revenue, which is necessary for sustainable development.
A double whammy
That leads to another whammy, making it a double - the imposition of a cumbersome system which may result in lines of people filling up at stations and giving an opportunity to parlay cheap petrol across our porous borders.
By now, it should be an established principle that the pump price must reflect the market price for everyone; otherwise, leakages will become a natural consequence. Targeted taxation on top of not cutting leakage will result in an inconsequential result.
All this for the sake of optics - to try and show we are doing something when we are not doing enough, and to try to say we have targeted subsidies when we don’t! - Mkini
P GUNASEGARAM says going for appearances is not the way to run the country.
The views expressed here are those of the author/contributor and do not necessarily represent the views of MMKtT.

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