The move is seen as necessary to avoid public unrest over the escalating cost of living, as well as to counter Pakatan Rakyat’s (PR) attacks on the government’s previous plans of phasing out subsidies.
Prime Minister Datuk Seri Najib Razak said on April 1 that the recent surge in the cost of living may force the government to slow subsidy cuts, and that while the government was committed to reducing the nation’s deficit, “we don’t want rising prices in Malaysia to be a major burden for the people.”
He has already announced the government’s willingness to fork out an additional RM4 billion in addition to the RM10 billion allocated for subsidies this year.
Analysts and politicians believe that problems affecting the economy — distorted and inefficient markets, lack of competition, low wages and a weak ringgit — will be the biggest problem for the BN administration as the country heads into the next general election, speculated to be held by year end.
Umno supreme council member Datuk Abdul Rahman Dahlan said the reason why the government was currently subsidising so many items was because it understood the problems of a developing country coping with a high cost of living.
He said the Najib administration was currently torn between pumping more money into subsidies or implementing subsidy cuts.
“Right now we do not have a choice in the matter, prices are going up and we are not in a position to cut subsidies. If we do not increase subsidies, prices will go up.
“We are waiting for the day when the country is efficient and productive, only then can subsidies be removed,” Abdul Rahman told The Malaysian Insider.
The Kota Belud MP explained however that this was only a temporary solution, and that the government still wanted to carry out “subsidy rationalising” — handing out subsidies to only those who truly needed and qualified for them.
“For the time being the government will do this but we have to strategise... at the end of the day the government’s aim is to still rationalise subsidies.
“We want to make it so that the intended groups get the subsidy they deserve... the government is already spending so much money and our resources are not without limits... we can save money if we know how to use subsidies properly. A person who can afford to drive a Mercedes Benz should not be complaining about expensive fuel prices,” said Abdul Rahman.
“The government is already pumping billions, spending on the social safety net for the welfare of those who need assistance... all the money that is being spent, this goes back to the people,” he added.
The 2010 Prices and Wages report by Swiss bank UBS AG shows that residents in KL have only 33.8 per cent the purchasing power of their counterparts in New York, 42 per cent that of London, 33.7 per cent that of Sydney, 32.6 per cent that of Los Angeles and 31.6 per cent that of Zurich.
The same study showed that on average KL residents have to work 22 minutes to afford a loaf of bread compared with 18 minutes in Los Angeles, 16 minutes in Sydney, 15 minutes in Tokyo and 12 minutes in Zurich.
The figures grow much worse for imported items. To buy an iPod Nano, a KL worker would have to labour a whopping 52 hours compared with just 9.5 hours in Los Angeles and Sydney, 12 hours in Tokyo and nine hours in Zurich.
A check on salaries and prices in selected developed country cities by The Malaysian Insider showed that despite being touted as one of the world’s least expensive cities, KL residents pay as much or even more for chicken, broadband, cars and mobile phones as a percentage of their income.
Despite government assurances that inflation is under control, Malaysians are becoming increasingly restive over the cost of goods in relation to wages, especially those who are able to compare the corresponding price-to-wage ratios in developed economies.
“If Malaysian workers want a higher salary they would first have to increase their productivity... we’ve got to be more productive, and we are not right now.
“The government cannot increase the salaries of its employees just for the sake of increasing salaries,” said Abdul Rahman.
Dr Sivamurugan Pandian feels that BN risked a further backlash from urban voters if the administration did not take immediate steps to address the specific problem of a poor purchasing power.
“The biggest problem Najib will face is the economy. You can see the middle class voters are now struggling to purchase property, everything is becoming more and more expensive. This is Najib’s biggest challenge for the next general election,” the political analyst told The Malaysian Insider.
“We need to remove the policies surrounding the automotive industry for starters.
“Having said that what country do we follow? What model do we use? As PM, only Najib has the answer for that and he needs to guide us there,” said the Universiti Sains Malaysia (USM) lecturer.
A Honda Civic in KL costs about RM115,000, or 20 times the average monthly salary of an auditor.
In Melbourne and London by comparison, a Honda Civic costs A$25,000 (RM80,000) and £19,000 (RM95,000) respectively, or only about three times the average salary of an auditor in those cities.
The high cost of cars is part of the reason that Malaysians have leveraged themselves to a record 76 per cent of the country’s GDP.
Bank Negara statistics show that at the end of last year, 20 per cent of Malaysian household debt was due to cars, an asset which depreciates over time.
But Merdeka Center director Ibrahim Suffian argued that the issue of inflation and high cost of living was “not new” and that Malaysians have already reacted to these issues before the 2008 general election.
“In terms of the rate of increase, prices have already risen... while things are more expensive, the price has not doubled or tripled. People can cope by cutting back on goods.
“This has not yet translated into a voting pattern or affected the bulk of voters living in rural areas,” Ibrahim told The Malaysian Insider.
But, he said, this might change if the government were to cut back on subsidies.
“But Najib has been doing relatively well in gaining public support. If he cuts fuel subsidies then we might see more opposition from the public,” said Ibrahim.
“In the end, ending subsidies is a convenient justification to plug government deficit. Yet, mind boggling when placed next to heavy government spending through other avenues.
“He (Najib) must consider a review of all subsidies, including the infamous IPPs (independent power producers). Datuk Seri Idris Jala’s promise to concurrently review the rakyat’s and power producers’ subsidies has not been fulfilled to date,” she said.
She pointed out that PR was well aware of the problems surrounding the BN government’s inability to address economic woes effectively.
“The BN government will continuously be plagued by structural economic difficulties faced by urban electorates, ranging from stagnant wages, soaring of prices and substantive lack of purchasing power,” she said.
“For example, the misguided solutions provided by Talent Corp have only aggravated the sense of injustice and unequal playing field between Malaysians because they fail to address the core reasons for the brain drain, which goes beyond the compensation package being offered.
“Under Talent Corp’s new incentive, Malaysians will be tasting the difference between playing a flat rate of 15 per cent over five years (for returning talents) and those (who stayed back) who will continue to be milked between 20-26 per cent by way of personal income tax, a real demotivator of sorts,” she added.
The Najib administration launched Talent Corp last year which is tasked to lure back the Malaysian diaspora and scout for foreign skilled professionals.
The revised Returning Experts Programme (REP) under Talent Corp is aimed at luring Malaysian professionals working abroad to come home to work with a flat income tax rate of 15 per cent for five years.
The new 15 per cent transitional income tax incentive will be introduced alongside other incentives for returning Malaysian experts.
Other changes in store include limiting the tax-free incentive for two cars under the REP to locally-assembled vehicles.
This demonstrates Najib’s failure to understand the need to implement immediate political reforms. The economic transformation programme is missing the core and heart that drives economic growth — which is political reform.
“If Najib is really serious about solving these economic challenges, then there is only one thing left that he must do in the efforts to stimulate our economy, increase our attractiveness and competitiveness and unite this nation — it is by implementing political reforms. These include revocation of all emergency laws, ensuring a free media, guaranteeing free and fair elections to pave the way for a more conducive environment for human capital and the potential for Malaysia to be fully realised,” said the Lembah Pantai MP.
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