Govt subsidy proposal draws flak from cash transfer fan

 

An economist argues that providing the poor with cash would be cheaper than paying for subsidies on goods.

PETALING JAYA: Economists are at odds on whether the government should opt for cash transfers or targeted subsidies in assisting the poor.

Geoffrey Williams, a professor at Malaysia University of Science and Technology, was in favour of the government giving cash transfers to people rather than providing subsidies on goods.

The government has said targeted subsidies would now be used to ensure that only those deserving would benefit.

However, Williams said “cash transfers in the form of a negative income tax or reverse income tax will provide direct income to people below the minimum threshold for them to spend as they choose.

Geoffrey Williams.

“For example, if the threshold is set at RM2,500 per month, a person earning the minimum wage of RM1,200 would receive a tax credit of RM1,300. This would support their income and would not require employers to pay a higher minimum wage,” Williams told FMT.

“It will also cost the government less as they are targeted at a small group of people based on objective income-based measures of need,” he said, adding that the current subsidy programmes are prone to wastage, leakages and corruption.

“As we can see in the diesel market, subsidised products are resold in the black market, which causes billions in losses to the government,” he added.

Last year, Prime Minister Anwar Ibrahim said almost RM10 billion worth of diesel was misappropriated.

Williams said the new Padu database on Malaysian households could provide targeted assistance to people based on their income rather than through subsidies on selected goods.

The system is expected to be ready in January, but a pilot project with selected households will take place next month.

Carmelo Ferlito of the Center for Market Education said he is in favour of providing targeted subsidies through vouchers, which would allow the emergence of voucher markets, through which there would be more targeted distribution of aid.

“If I receive petrol vouchers due to my low income, I can sell my vouchers to individuals who require them more than I do since I work from home,” he said.

Universiti Kebangsaan Malaysia economist Lai Wei Sieng said targeted subsidies could help the poor obtain essential goods, but noted cash transfers could also be a viable approach “if a mechanism is in place to ensure that the funds are not spent elsewhere”.

Recently, former second finance minister Johari Ghani said cash transfers are the best mechanism to provide aid to groups in need instead of subsidies.

Johari said the current subsidy system is regressive because it benefits high-income groups and exposes itself to wastage through misappropriation and the smuggling of fuel out of the country. - FMT