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).

Thoughts on Alternative Budget 2018

So, I’ve finally sat down to read through Pakatan Harapan’s alternative budget for 2018. There are some good ideas here, and a fair share of bad ones, but no more than expected. The numbers are bonkers, but I expected that since this is more a political manifesto than a real fiscal document. I’ll give most of it a pass except the more egregious ones, and like many, I note that some of the policy objectives and prescriptions are contradictory. At least one proposal has me upset, but I’ll leave that for the very last.

Can the (overall) numbers be achieved? I’d say yes. If the government really wanted to, they could go with a balanced budget tomorrow. But I think it would involve as much cutting the provision of public goods and services, as it would be some putative “savings'” from reducing corruption and improving governance. I’m sceptical that there’s that much savings to be had from that source.

A Case Of Gas

MISIF wants the government to maintain gas subsidies (excerpt, emphasis added):

Steel makers oppose gas price hike, wants govt to step in

KUALA LUMPUR: Malaysia’s iron and steel makers have opposed the proposed 10% hike in natural gas prices and they want the government to stop Gas Malaysia Bhd from going ahead with it on July 1.

The Malaysian Iron and Steel Industry Federation (MISIF) said on Thursday it was “utterly disappointed and deeply concerned” with the price increase as announced.

Why Fuel Subsidies Had To Go

All explained in two slides from last week’s BNM Annual Report Briefing:

You can find the box article these were taken from here.

Notes On Oil

I came up with some talking points for a presentation last week, and since so many people have been asking for a comment on the drop in oil prices, I thought I might as well publish them.

Why is the price of oil dropping?

Essentially, its a demand and supply imbalance. On the one hand, China has been slowing down while Europe has backslid and Japan went into technical recession after implementing a sharp increase in its consumption tax. The only two real bright spots of growth in the developed world is the US and UK, and the US has rapidly developed its domestic oil supply in the last five years. To compound this, the energy intensity of growth (how much energy is required to support a higher standard of living) has been declining for decades.

Bye-Bye Fuel Subsidies

The Government has had an outbreak of common sense (excerpt):

Hasan Malek: No more RON95 petrol, diesel subsidies from Dec 1

PUTRAJAYA: All subsidies for RON95 petrol and diesel will be stopped beginning Dec 1, said Datuk Hasan Malek.

The Domestic Trade, Cooperatives and Consumerism Minister, who announced this at a press conference here on Friday, said the retail prices for RON95 petrol and diesel will be fixed according to a managed float, similar to the mechanism dictating the RON97 petrol price.

Hasan said there would be an announcement at the end of each month to set the following month's fuel prices.

He said it would be determined based on a monthly average price….

There’s still the super-subsidy on diesel (for public transport and fishermen) and subsidies on natural gas (which are huge), but the latter has been starting to be phased out as well. The gas subsidy in particular has been prone to abuse, with businesses using gas cylinders intended for households.

In any case, we’re well rid of the dangerously complicated multi-income-tier subsidy idea that the government has been mulling over. With global oil prices so low – for November, it appears that consumers have actually been paying a small tax on petrol – there would have been no better time for this move to have been made. We had that opportunity once in 2009-2010, and missed the chance. I’m happy it wasn’t missed this time.

If global oil prices stay low, and this is the scenario market participants are looking at at least for the next couple of years, then well and good. If prices move back up, then the government will no longer have to bear the cost of subsidising petrol and diesel, and use the increase in revenue on something more important – like public transport for instance, or education, or *gasp* paying down debt.

Having said that, we’re still not home free. Prices going forward will still fall under the Automatic Pricing Mechanism, which means profit margins are guaranteed for distribution and retailing. Oil retailers in Malaysia have been used to competing on a non-price basis; that’s not necessarily the optimum for consumer welfare. The next step should be to free up the market, and let the oil companies compete on price. That should give back to consumers some of the welfare loss associated with being exposed to global oil price volatility, essentially sharing some of the risk with producers.

I know, I’m asking for the sky. Still, I’m pretty happy with the decision today. It’s been a very long journey over the last five years.

Tiered Fuel Subsidy System: Please Don’t Go There

The floodgates are opening (excerpt):

Full fuel subsidy only for those earning under RM5,000 monthly

KUALA LUMPUR: Those who earn more than RM10,000 per month will not enjoy any fuel subsidy under the subsidy rationalisation scheme to be implemented next year.

In announcing this Monday, Second Finance Minister Datuk Seri Ahmad Husni Hanadzlah said the programme would be divided into three tiers.

After early whispers before the budget, it’s now way out in the open. But, there’s much better ways of managing this than shifting to a convoluted system that’s going to be full of holes. Here’s one fellow Tweeter’s take on it (it’s in BM, but that shouldn’t be a problem, right?).

Subsidy Cut

So, effective yesterday, petrol prices at the pump have been raised to RM2.30 and diesel to RM2.20.

Ballsy move, and to me, completely unexpected. With the 20sen cut in the petrol and diesel subsidy, Malaysia is within striking distance of abolishing fossil fuel subsidies entirely – at least, at the retail level. We still have the gas subsidy to deal with, but that’s less important for a couple of reasons: gas is a cleaner fuel (no negative externalities) and there’s also less implications for the government budget.

Resistance, compared to the similar 20sen cut last year, seems to me to be a lot more muted this time around. Nevertheless, resistance there is.

Abolishing Fuel Subsidies: Lessons From Indonesia

From the East Asia Forum (excerpt):

Time for a new approach to Indonesia’s energy subsidies
Authors: Stephen Howes and Robin Davies, ANU

Indonesia’s new president, Joko Widodo (Jokowi), will face many challenges but none more pressing and immediate than dealing with Indonesia’s energy subsidies, which this year will constitute a quarter of total government spending…They were 20 per cent of expenditure when President Yudhoyono (SBY) came to power, and they will be almost 25 per cent when he leaves office later this year….

…A more radical reform program is needed: instead of one-off increases, a time-bound program with an upfront agreement that the end result would be the elimination of energy subsidies within, say, three or four years….

…Whether Jokowi will deliver remains to be seen….

March 2014 Consumer Prices

March is the first month that we can see the impact on inflation from all those subsidy cuts and rate hikes in the last six months. It’s also the first month where we’re completely clear from the seasonal effect of CNY. The prognosis – nuthin’ much going on (log annual and monthly changes; 2000=100):

While the headline rate is still elevated on a y-o-y basis, price increases have fallen back to “normal” levels. Core inflation is a little higher than the average for the last 5 years, but food and energy prices barely budged.

Prices Versus Rationing

Give credit where its due. Good policy is good policy, never mind the politics or election promises (excerpt):

Penang to go ahead with water tariff hike despite criticism

The Penang government is standing by its decision to increase water tariffs despite coming under fire over the move.

Chief Minister Lim Guan Eng (pic) said the state is willing to bite the bullet and raise water tariffs in view of climate change and the worsening drought.

He assured that Penang would still enjoy the lowest water tariffs in the country.

"We are facing a climate crisis and water consumption in Penang is the highest in the nation at 311 litres per capita per day. The national average is only 212 litres.

"Such high water consumption is not sustainable and if left unchecked, Penang will have no choice but to resort to water rationing in the future.

"We have to be a responsible government. We will bite the bullet and do this (raise the tariffs). We are willing to face the criticism," he told reporters today.

Estimating Costs Of Global Fuel Subsidies

There are costs, and then there are costs (abstract):

The Economic Cost of Global Fuel Subsidies
Lucas W. Davis

By 2015, global oil consumption will reach 90 million barrels per day. In part, this high level of consumption reflects the fact that many countries provide subsidies for gasoline and diesel. This paper examines global fuel subsidies using the latest available data from the World Bank, finding that road-sector subsidies for gasoline and diesel totaled $110 billion in 2012. Pricing fuels below cost is inefficient because it leads to overconsumption. Under baseline assumptions about supply and demand elasticities, the total annual deadweight loss worldwide is $44 billion. Incorporating external costs increases the economic costs substantially.

September 2013 Consumer Prices

I’m going to be late with my 2014 Budget assessment because of work deadlines on other things. Even this post will be a bare bones look at September’s increase on consumer prices, as interesting as it is (log annual and monthly changes; 2000=100):

Middle Income Pain? Try High Income

From the Edge Daily (excerpt; emphasis added):

Highlight - Middle-class pain

KUALA LUMPUR: Salary earners in the “sandwiched” middle-income group will soon find themselves at the losing end as the government continues its fiscal consolidation.

The middle-income group is defined as individuals who earn between RM2,300 and RM7,000.

This group forms 40% of the country’s workforce. The middle-income earners are mostly taxpayers and are the vast majority who drive consumer spending — a main growth engine for the domestic economy...

Erm...slight problem here. By all accounts, less than 20% of the workforce is eligible to pay tax and about 10% actually does, which is totally at odds with the numbers quoted here. And it turns out the problem is the definition – the text shouldn’t read individuals, it should read households.

The data compiled by DOS show the mean monthly household income level for the middle 40% is just RM4573 in 2012, or approximately RM2570 per income earner. A single person earning that amount who only deducts EPF contributions pays zero tax, and I don’t think they’re the ones referred to as, "The middle-income patrons of gourmet coffee outlets will have to either cut down their visits or opt for cheaper alternatives."

Sorry, if you can afford to drink gourmet coffee in Malaysia, chances are you’re not middle income. It doesn’t detract from the main point of the article, but it should’ve been made clearer who exactly we’re talking about.

Subsidy Rationalisation Rebooted

It’s about time (excerpt):

RON95 goes up by 20 sen

PUTRAJAYA: The price of RON95 petrol and diesel has been increased by 20 sen, as one of the measures to rationalise subsidies by the Government to reduce the country’s fiscal deficit.

Prime Minister Datuk Seri Najib Tun Razak announced the decision, saying that it would save the Government RM1.1bil from September to December this year and RM3.3bil annually.

Before the revision, the price for RON95 was RM1.90 per litre and RM1.80 for diesel. The [sic} price increase for RON95 was in 2010.

Penurunan Harga Kereta Disokong Analisa Ekonomi, Tetapi Peningkatan Subsidi Petrol Tidak

[This is a translation of a previous post that originally appeared in English, on request of a reader (original post here). I’m NOT going to take such requests very often, because translating some of the technical language from English to Bahasa is painfully laborious, and because for the sake of coherence this is not a direct translation. Feel free to send in requests anyway, but NO promises. A big thank you to my wife for a bang up job of editing my original translated text]

Salah satu topik yang hangat baru-baru ini ialah harga kereta yang mahal di Malaysia, satu isu yang telah diutarakan dalam Manifesto Pilihanraya Pakatan Rakyat. Seperti yang kita sedia maklum, industri kereta nasional telah lama dilindungi daripada persaingan asing melalui pengenaan duti eksais ke atas semua kereta impot samada yang dipasang diluar atau dalam Negara.

Walaupun dasar memperlindungi industri tempatan daripada saingan asing ada buruk-baiknya, perlindungan ini mempunyai kesan jelas pada harga kereta impot di Malaysia berbanding negara-negara lain. Sebagai contoh, Honda Civic di Malaysia harganya bermula dari kira-kira RM120k kepada lebih RM130k. Kereta yang sama boleh dibeli diantara USD18k (atau RM54k)dan USD28k (atau RM84k) di Amerika Syarikat. Pada kadar pertukaran Ringgit semasa, perbezaan harga ini adalah antara kira-kira 50% hingga 110% lebih tinggi di Malaysia daripada di AS. Walaupun mengambil kira perbezaan dalam harga jualan kepada pengguna (variasi enjin, insurans, aksesori, tahap trim dll), jurang perbezaannya masih lebih besar daripada yang berpatutan. Di rantau ini, hanya Singapura mempunyai harga kereta yang lebih tinggi.

Subsidy Rationalisation: Some Pointers From The IMF

(H/T Jason)

The cost of petrol and gas subsidies in Malaysia are likely to be in the region of RM45-50 billion this year, if not higher. Some of that comes directly from the government, while the rest are borne by Petronas or TNB.

Whether or not they appear on the government’s books, these subsidies simply have to go. First because of the actual fiscal costs of keeping the present subsidy system in place; second because of the opportunity costs for both the government and Petronas in terms of investment; and third because of the economic inefficiencies engendered by distorted prices. On top of that are the negative externalities arising from hydrocarbon use and the fact that the primary beneficiaries are corporations and the higher income households.

Cheaper Cars Makes Economic Sense; Cheaper Gas Doesn’t

An acquaintance asked me the other week when I was going to bash Pakatan Rakyat’s Manifesto. I don’t know that bashing would be the right word – I’d prefer “constructive criticism” – but I suppose this post will come close.

One of the hotter topics to arise in the last six months has been the price of cars. In Malaysia, of course, the national car industry has been protected by an excise duty on imports and non-“national” cars, even those assembled locally.

Wherever you stand on the desirability of industrial policy, this has had the obvious effect on car prices – cars in Malaysia retail for more than in other countries. For example, the Honda Civic in Malaysia ranges from about MYR120k to over MYR130k, but goes for between USD18k to USD28k in the United States.

At today’s exchange rates, that amounts to a difference of between about 50% to 110% higher. Even allowing for differences in on-the-road pricing (engine variations, insurance, accessories, trim level etc), the difference still amounts to a hefty chunk of change. In this region, only Singapore has higher prices.

September 2012 Consumer Prices

Consumer price inflation continued to slow marginally in September (log annual and monthly changes; 2000=100):

1Q 2012 Federal Government Budget Update

The 1Q2012 numbers for the government’s accounts were published along with the April 2012 Monthly Statistical Bulletin from BNM. There’s some good and bad points, but the general tenor is that there’s been some improvement in the government’s overall fiscal position (RM millions):