Sunday, December 5, 2010

Round 2 Subsidy Rationalisation

I almost missed this one (been out of town the whole day):

New subsidy cuts to save RM1.2bil

PUTRAJAYA: The prices of Ron95 and diesel have increased by 5sen per litre while liquefied petroleum gas (LPG) and sugar will go up by 5 sen per kg and 20sen per kg respectively.

Minister in the Prime Minister’s Department Datuk Seri Idris Jala said that the price hikes, effective midnight yesterday, were expected to result in a total savings of RM1.18bil.

He said the savings would be channelled towards the Government Transformation Programme including improving the urban transportation network, rural basic infrastructure and roads, education and efforts to combat crime.

There’s not much to remark on this, though the regional comparisons (prices in Singapore and Thailand contionue to be much higher) suggests a couple of things to me – first is that we still have some way to go to get to market prices; and second, other countries have done the obvious thing and taxed these items. I would have wished the government has that in mind for the future as well, both to fully cost the negative externalities involved (pollution and impact on health) as well as an additional source of revenue. Here’s one way to help raise some funding for public transport.

Looking at the timing, we’re probably going to see some further price increases in April-May, though there’s been no official announcement that the intervals suggested at the Subsidy Rationalisation Lab Open Day has been adopted. That gives some flexibility to the government to vary the timing of subsidy withdrawals depending on circumstances, though it doesn’t do much for their credibility.


  1. there's nothing so called reduced petrol nor sugar subsidies to help government to better use the money.

    the real reason is simply the increase of the price from world market.

    thus, the portion increased of sugar & petrol price is just used enough to cover the difference. Government still pay the same subsidies. why they're lying? only they know.

    Conclusion, there's no 'saved subsidies' to use for other areas as the government claimed.

    commodity price escalating due to increase of US liquidity from the recent US printing press!! more money chasing the same amount of goods. it happens all over the world since Nov. (worst to come)

    sooner or later, countries other than US will lost confidence in US dollar and starting abandoning it.

  2. Funny thing: since QE2 was announced and implemented, the USD has begun strengthening, concurrent with increases in commodity something else is going on.

  3. Dollar strengthening concurrent with commodities price? The reason/s?

    At the same time of QE2 announced, Irish just got bailed out. Sentiment throughout Europe was very gloomy. (QE2 amounted 600 billion, an additional 300 billion goes to Europe for this bailout by Fed)

    At about the same time too, North Korean fired missiles to its southern brother.

    These caused dollar looked as 'safe haven', of course only for short term.

    Increased money supply, more money chasing for similar quantity of goods, causing price of commodities escalating, and the trend will go on for months to come.

  4. @anon 8.50

    I wish people would actually look at the data, rather than just the theory.

    But with respect to the quantity theory ("too much money chasing similar quantity of goods"), it depends on a couple of assumptions that don't hold under the current circumstances - that money is exogenous, and that velocity is stable over time. Money is actually endogenous, and velocity has actually crashed.

    What a lot of people miss is that while the Fed has been creating a lot of USD, they're doing so in an environment where there's plenty of offsetting money destruction - corporates and individuals are deleveragng, and each loan dollar repaid is a dollar destroyed.

    If you actually look at US monetary data, you'll find that as big as it was, QE1's impact on the money supply was minor and short lived. Annual money supply growth has been below 3% for all of 2010, compared to a more normal 6%.

    QE2 will be more limited and over longer period - which means the impact on the money supply will be even more muted. BTW, the Irish bailout is being conducted by the EU and the IMF - the link with the Fed is highly tenous.

    So this idea that there's more USD chasing limited resources is hokum - it doesn't stand up to any kind of inspection.

    I reiterate, there's something else going on.