Eye on fuel and food subsidies

In view of the Budget 2010 to be announced in Parliament by Prime Minister Dato' Seri Najib Razak this afternoon, my boss wrote on fuel and food subsidies.

KUALA LUMPUR: The 2010 Budget will address the need for Malaysia to be competitive and a major thrust of that will be a better distribution of subsidies. Prime Minister Datuk Seri Najib Razak will present his first Budget today as finance minister and indications are that a “fairer” method of distributing subsidies to the deserving will be announced.

The largest subsidies today are for petrol and diesel but the government also subsidises cooking oil (pure palm or blended), sugar and bread.

We want to cut the fat and we will stress value for money and efficiency,” said a senior government official.

The government faces a tricky balancing act as it is already spending more than it earns to stimulate the economy, as a result of the worst global recession since the 1930s.

The Malaysian economy has been officially forecast to shrink by between 4 and 5 per cent this year. With two stimulus packages worth RM67 billion, the government expects to report a 2009 deficit of 7.6 per cent of gross domestic product, the sum total of all goods and services produced in a country.

However, the government plans to narrow the deficit when the economy recovers, Second Finance Minister Datuk Seri Ahmad Husni Mohamad Hanadzlah said recently.

Analysts and economists are not expecting goodies like tax cuts as tax revenue will be lower following a tough 2009. There is also speculation that a goods and services tax (GST) might be introduced as the government seeks to broaden its revenue base. This has generated much debate in the business community as many argue that having a GST so soon could derail recovery with the public spooked and cautious about spending.

Still, the 2010 Budget is likely to show that the government continues to have the people’s welfare at heart. It may even give some breaks to “forgotten” segments of the population, such as film-makers, songwriters and actors.

At the same time, the Budget will continue to address the need to transform the economy into a high income one. Malaysia will unveil its new 5-year road map on June 10 next year under the 10th Malaysia Plan, a crucial document on the need to revamp its economic model.

It was just a few months ago that the price of oil was US$40 a barrel. A few days ago, it hit US$80 a barrel, its highest in about a year. This is US$20 shy of the US$100 mark, a price many once thought the imagination could only belong to an analyst.

Well, that Goldman Sachs analyst, Arjun Murti, probably had a big bonus last year when oil hit a record US$147 in July. He made the US$100 a barrel prediction in 2005. Last year, he made another forecast that oil could hit US$200 in two years or by the end of 2010.

The year 2008 was not a good one for Malaysian drivers because the price of petrol was allowed to spike as the government cut its subsidy. But the subsequent slump in oil prices meant that the government could afford to foot the subsidy bill.

Now that oil price has doubled in mere months, we really have to think about our long-term needs. Can we afford to continue fuel subsidies? Are we prepared for a future with expensive oil? Where do we stand in the so-called green revolution?

The short answer to question one is no, not at this level. Fuel subsidy is probably needed for public transport and for small-engine motorcycles but car owners will eventually have to live with more expensive petrol. Clearly the government needs to spend more money to keep its people safe from crime, improve public transport and the education system to produce the much-needed workers for industries of the future.

The current global recession will not make it easier for the government to organise its finances. However, it does provide the government with a unique chance to lower its subsidies and give to those who really need them.

The answer for question two lies in Budget 2010, which will be presented today. The government needs to send a message that Malaysians must learn not to depend on subsidies and prepare for the transition to a high-income economy. I believe Tan Sri Amirsham A. Aziz, chairman of the National Economic Action Council, was right when he said that measures under Budget 2010 will send signals to investors about Malaysia's long-term direction.

And what of question three? I think it is still too early to answer that question, but we need to carefully plan where we want to be in the overall scheme of the green industry. So far, we have successfully attracted a few major foreign investments in renewable energy like solar panel makers, but we are very far behind when it comes to our own targets for green energy.

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