How Regressive Are Fuel Subsidies?

My colleague Nurulhana wrote this for our internal blog. Since its self explanatory, I'll leave it here without comment and unedited. Side note: this was written last month, so the drop in oil prices since then implies a lower retail petrol price and hence, lower subsidy. Nevertheless, the point remains valid.

Fuel subsidy helps the rich

A colleague highlighted this estimation by Tengku Zafrul today on the impact of high global oil prices on current fuel subsidy spending.

According to the article, the actual market price for RON 95 is currently at RM3.70/litre. And if the global oil price remained above the USD100/bl, the MOF estimated that the government would spend RM28bn on overall subsidy alone for 2022 (2021: RM11bn).

To put how much RM28bn is in context, the amount is almost equivalent to the operating expenses on healthcare in 2020, which cover the annual wages for all the overworked medical workers, spending on drugs and care for COVID patients during the year, among others.

The RM28bn if divided by the Malaysian population, each of us would be able to get a one-off RM843. 

Or if we want it to be targeted, the RM28bn could afford the government to pay households earning less than RM6,000 an additional RM375 PER MONTH.

Many have shown that fuel subsidies are regressive, such that they benefit the rich more than the poor. I tried to estimate how much Malaysians benefit from fuel subsidy by income group using the estimates provided by the MOF and also based on the spending patterns of households in 2019 (using the Household Expenditure Survey 2019 by DOSM) (refer to picture). It showed that the government would have to spend more than RM1,000/month in subsidies for a household who earns more than RM10,000 in a month! #undeserving (assuming they use RON95).

I believe we should definitely abolish the fuel subsidy policy. Considering its regressiveness and in the spirit of sustainability, we should definitely penalise those who pollute (so on top of abolishing the subsidy, we put on tax on fuel? Hehe). Of course, without subsidy, I would have to pay RM92 for a full Axia tank instead of the current RM50, but I guess now’s the time to increase those daily steps and walk to the nearest kedai runcit.