THE management of subsidies has been a nightmare to governments. The government of Malaysia provides subsidies to producers and consumers that constitute a significant portion, or about one-fifth, of its total operating expenditure.

They have pervaded many areas of our lives, especially in transport and energy, and also in public education and health, as well as in industry and agriculture. Invariably, the pricing system in subsidised sectors often does not reflect the true or real costs to society.

We know that while the subsidies may bring down the costs and prices, they do not come free. Someone has to pay the difference between the costs and the prices charged. There is no such thing as a free lunch. In this regard, the government has to shoulder the large cost of the subsidies.

Now, as the government has decided to do away with fuel subsidies come tomorrow, it is an opportune moment to do so with the significant drop in international oil prices recently, which is expected to remain so in the near future.

The sharp price decline reflects the increase in oil supply and lower global demand.

This sharp price decline, happening amid international and regional conflicts, is quite unprecedented. In the past, oil prices generally accelerated when there were threats to world or regional political stability.

With our attempts to rein in fiscal deficits, the move to do away completely with fuel subsidies is logical and right. Malaysians will pay the actual market prices for energy, a practice observed in many other countries in the region, such as Singapore, Thailand and the Philippines.

Having subsidised energy prices will incur many hidden costs to society. It can lead to misallocation of resources and encourages inefficiency. The practice makes energy cheap but the resource is not often used to maximise returns, and instead, is largely used as fuel.

In addition, there are marked leakages as the subsidies are also enjoyed by those who are rich and by foreigners, such as Singaporeans in the south and Thais in the north of Peninsular Malaysia.

Enforcement is never the full-proof answer to this quandary as many Malaysians themselves are involved in unethical activities, including fuel smuggling.

By doing away with fuel subsidies, the government’s aim of bringing its deficit down significantly will be easily achieved while the savings that ensue can be used for productive and purposeful expenditures.

We know that the actual price of fuel may burden the poor and low-income communities, especially at times of high prices. But now, as the international prices have lowered, the retail prices of fuel can be lowered, too.

The government has implemented the 1Malaysia People’s Aid (BR1M), which is paid directly to the low-income population. This assistance can, in fact, be used as a compensating formula for any rise in energy prices later.

BR1M aims to assist the low-income population, who are most affected by inflation, slow wage increase and threats of unemployment. Thus, a mechanism already exists in BR1M to insulate, although not totally, the welfare of the poor from rising prices.

In addition, strengthening the public transport system is another way to assist the public in dealing with rising costs, especially in urban and suburban areas where most wage earners reside.

Getting people acquainted with market-based prices is good because they will undertake their business and investment decisions based on actual cost-benefit analysis for all their input and output. Thus, their undertakings will lead to greater efficiency in the economy.

It is also beneficial at the individual level because people will be using their fuel wisely. To sell fuel at subsidised prices encourages consumers to consume it for less essential reasons, thus contributing to wastage.

Thus, the decision by the government to float the petroleum price is right from many angles. The move will indeed send the message that the government is bent on controlling the fiscal deficit and use of subsidies, and that Malaysians must use their resources wisely, including fuel and water.

In the long run, it is good to have the right prices because things then will fall into the right places.

source