Thursday, May 26, 2011

A Pause In Subsidy Rationalisation

The cabinet’s turned chicken:

RON95, diesel and LPG will not cost more

PUTRAJAYA: Prices of RON95 petrol, diesel and liquefied petroleum gas (LPG) will remain at the present rates for now.

Domestic Trade, Cooperatives and Consumerism Minister Datuk Seri Ismail Sabri Yaakob said the decision to maintain the prices was in the interest of the people.

He, however, could not specify how long the current prices would be maintained...

...The decision to keep the current prices would mean that the subsidies borne by the Government will rise from RM8bil to RM18bil this year.

Ismail Sabri said the decision to maintain the prices was reached at a Cabinet meeting…

I’d have preferred even a token move, say just 5sen, even if it was more symbolic than real. That would have displayed some commitment towards continued rationalisation, even if the impact on the government expenditure minimal. As it is, the reaction was pretty predictable:

Consumer groups and economists voice concern

PETALING JAYA: Consumer associations and economists have expressed concern over the Government’s decision to delay its subsidy rationalisation exercise following the move to maintain fuel prices.

While consumers and businesses are undoubtedly happy over the decision, economists were concerned about the long-term impact on the country’s finances.

They said that government funds needed for development would now be utilised for subsidies...

I share their disappointment, though I don’t think there will be much shuffling of spending allocations. The truth is, Malaysian governments appear to have a lousy record keeping to their budget commitments. Since at least 2000, actual expenditure has exceeded planned expenditure by around 10% per annum. The expected increase in spending due to higher oil prices at around RM10 billion won’t actually push total actual expenditure much higher than that. There might be some belt tightening going forward but not to the extent of 2008, when the runup in oil prices was well above what anyone expected.

Nor do I think the MGS market will react much to higher borrowing – it’s not something they haven’t seen before.


  1. The govt must be more responsible.They are wasting too much money.It starts from the top and goes all the way down.Budget is a target for them to hit.
    Everyone is globetrotting aimlessly and with the slightest excuse.East coast civil servants arranges Friday and Monday KL meetings for a weekend sojourn and West Coast vice versa.
    The real productive and needed expenditures is sacrificed to feed this jolly fest of waste and celebrations.
    What is needed is Al Dunlap and his chainsaw.

  2. Subsidies is only a small portion of the government expenditure (around 10-12% of expenditure during times of high fuel prices). They should be looking at the bulging public sector (emoluments consist about 20-30% of expenditure) and procurement of supplies and services (13-15% of expenditure). These are where the problem areas are, and it is not like the Auditor General has not been highlighting it year after year after year

  3. Keynes talks of a paradox of thrift and Malaysian governments being persuaded for stimuli package that end up with bigger deficit. Let see how they going to reduce it if being blessed in coming election.

  4. I don't know how much they spent on consultants but everything seems to be outsourced.This preponderance for outsourcing thinking will not benefit the rakyat.
    And there is too much duplication.
    Why do we need Pemandu when there is EPU,ICU etc.And 2 Ministers to do the driving on top of the original EPU Minister.
    Learn to be mean n lean.

  5. If the Govt wants the rakyat's "buy-in" for the subsidy cut, they must form a "Subsidy Rationalization Commission" where this Commission must be given the power to monitor the subsidy saved and how it is utilized.

    For e.g. say, an increase of 10 sen in RON95 saved RM500 Million in subsidy. This commission will be monitor to ensure that the RM500 Million will be spent in purchasing new buses, improving bus stops, increasing the salary of bus drivers etc.

    All this expenditure must be done in a transparent manner, i.e. purchases must be done via Public Tender and an regular updates to be given to the rakyat via the mainstream media.

    Only then, the rakyat can be convinced that the savings from the subsidy cut are being used for their benefits.

  6. @anon 7.35
    I don't actually know of any governments that are very efficient - maybe Singapore's or Hong Kong's. The rest are less than ideal when it comes to controlling expenditure.

    Actually the peak was 22.9% in 2008. As a ratio to total expenditure, subsidies have been more or less climbing since 2000 - the average in the 1990s was just about 2%.

    Take away subsidies, and the government wouldn't have run a deficit in these last ten years.

    @anon 8.55
    Effectively, there was no stimulus.

    @anon 9.12
    I suspect there's some political economy considerations here. As funny as it sounds, it's probably easier to sell subsidy reduction to the public than it is to take on the civil service union and the vested interests involved in procurement. Civil servants are voters too, and are a big voting bloc. Politics, unfortunately, tends to follow the path of least resistance.

    @anon 9.25
    It was probably a unfortunate that they had to sell the idea of subsidy rationalisation on the basis of reducing costs, although that's a welcome side effect.

    The reason why some economists are concerned (and their opinion is reflecting that of foreign investors) is not really about deficit reduction, it's about reducing distortions in pricing and resource allocation in the economy. But try explaining that to the man on the street.

    The point of reducing subsidies is not about redirecting spending, the point is to cut spending period.

  7. I am not calling against subsidy cuts. I also understand the distortionary issues that come with prolonged subsidies. Just compare World CPI vs Malaysia CPI from 1970 as a base. Like YB Tony Pua says, Malaysia has become addicted to it.

    I am just saying that the public sector is bulging, amounting to about 1.3 million workers and our total labour force is about 12 million. This means that the public sector is a bit more than 10% of the labour force but takes up about 20+% of total expenditure. There is still too much leakage.

    This is not even taking into account the pension liabilities that are building up as we speak. Sadly, no data on that.

    In Singapore, any civil servant that is caught in a bribery case of any degree forfeits his whole pension. That is the degree of seriousness that Singapore considers corruption, which is the chief cause of leakage. The incentives and penalty structure in Malaysia does not coincide with the behaviour that it encourages.

    Just last year, even the a country like the UK started a plan to retrench about 400,000 civil servants over the course of 5 years. Can Malaysia push through reforms like these? Of course cutting it lean must be accompanied by productivity-linked wages. This is the most glaring omission in Malaysia. We have clearly failed in focusing on productivity improvements.

  8. is the size of civil servants in Malaysia too large?
    im not too sure about that.
    50% of government's emolument goes for primary and secondary education, 40% goes to defense, home security, higher education and health.
    only 10% goes for the rest of the administration.
    so, are we too big in this sense?

  9. @Shihong,

    I'm not arguing against fiscal responsibility either - just that I would prefer to take it as two separate issues.

    BTW, how do you figure the 20% expenditure?

    @anon 5.06

    I don't know. On the one hand, our government work force is bigger as a ratio to the total labour force compared to our East Asian peers. But against developed economies, it looks quite small. Most of the European countries have government administrations taking close to 20% of the work force (the US I think is around 15%), but then they have much bigger social security services.

    It depends on your perspective (and who you would consider to be a civil servant).

  10. The expenditure is in our 2010/2011 Economic Report, which is always released with our Budget.