The rich enjoy more subsidies than the poor, says Khazanah report

A study by Khazanah Research Institute shows that those driving luxury cars are enjoying more fuel subsidies than those riding motorcycles. – The Malaysian Insider file pic, November 23, 2014.

A high-income BMW owner enjoys as much as four times the amount of petrol subsidies that is received by a low-wage earner who rides a motorcycle.

According to a recent study by the Khazanah Research Institute, the rich actually enjoyed 80% of total fuel subsidies that went to Malaysian households in 2013.

The figures highlight how skewed the blanket fuel subsidy system is in Malaysia as the public adjusts to the announcement that the scheme will end on December 1.

However, a policy analyst with think tank Institut Rakyat said that while it was right to reform the subsidy system, the government should first put in place a way to cushion the impact of its decision.

The study, called the “State of households in Malaysia”, revealed that a BMW owner who used RON95 fuel enjoyed a subsidy of RM22.5 per 1,000km .

On the other hand, the owner of a Honda EX5 motorcycle, who also used RON95, only got a subsidy of RM5 per 1,000km.

“As motor vehicles get more expensive, from a motorcycle to a German saloon, the subsidy the owner gets per 1,000 kilometres increases dramatically,” the study said.

The figures were calculated using the RON95 price of RM2.30 per litre where the subsidy rate was 27 sen per litre.

“Subsidies are regressive. Most subsidies go to businesses rather than households.

“Of what goes to households, the high-income group benefits the most – a household that only has a motorcycle and ceiling fans enjoys far less subsidy than a multiple-car and air-conditioned household in Damansara Heights,” the study said.

The study estimates that in 2013, less than 23.8%, or RM5.6 billion, of the entire fuel subsidy went to households.

The remaining 76.2%, or RM17.9 billion, or more went to businesses, corporations and other sources.

When it came to the gas subsidy through Petronas, only 20%, or RM4 billion, went to households.

The remaining RM16 billion or more went to businesses, corporations and elsewhere.

“Only 22% of the entire energy subsidy went to households. On average, each household receives an annual subsidy of RM625 per year for electricity and RM885 per year for fuel.

“But, most of this is enjoyed by the high-income households, who get about 80% of the subsidies,” the study said.

Putrajaya announced on November 21 that it would stop subsidies for petrol and diesel next month. Prices for RON95 and diesel will then be determined through a managed float mechanism.

Yesterday, Prime Minister Datuk Seri Najib Razak said that the decision would save the government between RM10 billion and RM20 billion which would then be funnelled into improving rural development, education and health sectors.

The Khazanah study also echoed this point saying that subsidies create distortions in the economy and deadweight loss in the economy, or wastages.

“The money spent for subsidies could have been better allocated in more productive sectors that improve economic growth or development projects that are better-targeted at helping vulnerable groups,” the study said.

Instead of blanket subsidies, the report’s authors argued that cash transfers are the most effective way of helping vulnerable groups.

Institut Rakyat executive director Yin Shao Loong, however, said the government should have put in place a mechanism to cushion the impact of its decision first before announcing an abrupt end to fuel subsidies.

This is since a rise in fuel prices have always been used as an excuse by businesses to hike up the prices of goods and services, whether justifiably or not.

“The way the government reforms the subsidy system sparks off knee-jerk inflation. The government then warns businesses not to gouge prices but then there is no enforcement from the ministry.”

Yin said that although targeted cash transfers were more efficient than blanket subsidies, the government has yet to come out with an over-arching plan to elevate household incomes.

As it stands now, the median household income is RM4,600, meaning half of Malaysian households are earning below that threshold.

Almost half of those below the median income qualify for cash transfer assistance through the 1Malaysia People’s Cash Aid scheme (BR1M) which is given to families earning below RM4,000 a month.

“In essence, almost half of Malaysian households are still struggling to make ends meet,” said Yin.

“So what is the government’s long-term plan for graduating these people out of that category?”

The Economic Transformation Programme, which Putrajaya brands as its strategy to reform the economy, still perpetuates a system of producing low-value goods for low wages, he said.

- TMI