October 2, 2012
Budget 2013: Need to Focus on Structural Aspects of our Economy, not subsidies per se
by Dr. Lim Teck Ghee@www.malaysiakini.com
COMMENT: In their joint statement released on September 28, the Institute for Democracy and Economic Affairs (Ideas) and not-for-profit research institute Research for Social Advancement (Refsa) drew attention to the “shocking federal government subsidy bill for 2012”.
According to them, this is now expected to hit RM42 billion, a massive RM9 billion or 27 percent above the RM33 billion originally forecast for the year.
While it is true that subsidies have quadrupled in the past five years, and
some of it is wasteful and not efficiently targeted at the most needy or priority sectors, the Refsa-Ideas contention of the debilitating effects of subsidies on our economic health needs to be challenged.
Yes, blanket subsidies for cheap petrol and sugar do result in a degree of excessive and wasteful consumption. However, the extent is debatable and, even if considerable, is not a sufficiently compelling reason for their immediate removal.
The other argument that such subsidies “discourage investments in improving productivity and efficiency” and “benefit upper class Malaysians who consume much more than their poorer cousins” also needs dissecting.
There is little empirical research to back what has become an increasingly popular line of argument. For it to be useful or credible, echoing of popular opinion is not sufficient. The Refsa and Ideas team need to substantiate their position with hard data and rigorous analysis of these so-called negative effects.
It is necessary to remind the Refsa-Ideas team that subsidies have an important role to play in providing a safety net for vulnerable groups. These help bring down the cost of living as well as enable access to healthcare, education, transport and other necessities.
They are a necessary burden in a highly skewed capitalist economy such as Malaysia’s where the lower classes of labour do not get the fair remuneration to which they are entitled or deserve. We already have one of the highest levels of income inequality in the region.
In pushing for a free market system without due attention to the structural defects of our political economy, proponents of a neo-liberal ideology run the risk of throwing out the baby with the bathwater.
Government spending on itself
In their final argument Refsa-Ideas state that “restructuring subsidies is the low-hanging fruit that will help restore fiscal balance and improve our dwindling national competitiveness.”
In fact, subsidies and price controls to help poor households comprise a small 
proportion of the total government operating budget. The largest part of the budget is spent on salaries (to civil servants); pensions to retired civil servants and supplies and services – the last bloated by “excessive and wasteful” procurement and projects whose costs are inflated by rent-seeking and patronage charges.
There is a credible counter-argument that the ballooning deficit and growing mountain of debt in the country is mainly due to government spending on itself, rather than spending on the rest of the country or on the poor.
The Refsa and Ideas team would be doing the country a greater service if they shift their focus onto this lower hanging fruit, especially the allocations provided to the political ministries which have been overrun with staff, whose main function seems to be to look after the political and economic interests of the ruling coalition and its supporters rather than provide services to the public.
Very lucid arguments.
Yes, leakages due to rent-seeking & patronage charges need to be plugged but direct and targetted hand-outs are much better and more effective than the general subsidies.