Editorial: Slashing subsidies
By The New Straits Times
June 5, 2008


SUBSIDIES are unsustainable, which is why we should do away with them, say economists. While there are economic imperatives for passing on the increase in prices to consumers for social and political reasons, it's never easy for policy makers to remove subsidies. Subsidising basic necessities to protect the people has long been considered the mark of a caring government. It is a sacred cow in populist politics and a proven vote-getter.

For this reason, it is understandable that the government has been hesitant about raising pump prices although the crude oil price reached a record US$135 (RM432) a barrel last month. After all, the 30 per cent increase last year did not go down too well with an electorate so used to thinking that as long as Petronas is making a lot of money, the petrodollars should go towards making petrol dirt cheap.

But as a responsible government, the administration has no choice but to roll back the subsidies and increase the price. Raising the price of petrol to RM2.70 a litre and diesel to RM2.58 may not be a popular move, but in trying to bring local fuel prices closer to global market levels, the government is doing the right thing.

No one is happy about having to bite the bullet, but with subsidies biting a third of the budget and crude oil still trading above US$120 a barrel on the world market, it is past time the government pruned the bloated bill for subsidies. We can't keep on splurging the windfall from high oil prices to provide cheap fuel when we could soon become an oil importer well before our reserves run out.

We can no longer afford to shield all but the poor from soaring prices. Narrowing the differential between domestic and regional prices will be a painful exercise, but it will reduce the incentive for smuggling and send the right signals about fuel efficiency and energy conservation.
What is needed now is to implement the short-term income-support mechanisms to mitigate the effects of higher prices on the poorest segments of society. Since the information campaign during the last round of increases appeared to have been less than convincing, there should be a lot more explaining to gain acceptance.

In this context, nothing will more clearly demonstrate to the man on the street that revamping the subsidy system is the sensible thing to do than measures to cut down on waste in public spending, crack down on abuses, and make public transport more accessible, affordable and reliable.