Saturday, 7 June 2008

Price Hikes 4

Can we assume this is the Government's official rationale behind the fuel price increase? This is Second Finance Minister Tan Sri Nor Mohamed Yakcop's 270 sen in a interview with The Edge as reported in The Malaysian Insider.

Short-term pain for long-term certainty

KUALA LUMPUR, June 7 — If the government did not address the subsidy issue head-on, the government’s coffers would have been stretched to a dangerous level. The country’s budget deficit would have grown from 3.1 per cent to 6 per cent and some RM28 billion would have had to be set aside to keep pump prices low.

This scenario was sketched by Second Finance Minister Tan Sri Nor Mohamed Yakcop. He defended the decision by the administration to allow fuel prices to increase by 40 per cent under its revised subsidy scheme.

“We all have to share the burden of higher oil prices. Every country is facing it, and we have to adjust … all of us — businessmen, individuals — will have to adjust to higher prices. It is with a heavy heart that we came out with this major move and implemented these very significant measures. All things considered, we thought that this was the most optimal way to move forward.

“There will be short-term pain but there will be certainty in the medium and long term; we are creating a more efficient economy,” he said in an interview with The Edge. Below are extracts of the interview:

On the subsidy situation

The actual subsidy last year (meaning the money taken from consolidated funds and literally handed over to oil companies for the subsidy) was RM8.8 billion. This year, if nothing had been done, it would have been RM28 billion, RM20 billion more. To put the RM20 billion in context, our whole development expenditure is RM40 billion. It can only get worse over the next period. But does this RM28 billion really go to the poor? Not really. It goes to all sorts of sectors and it also encourages smuggling.

So we have to come up with a system that is sharper, that addresses the needs of the group — the lower-income group that needs help.

On the RM625 rebate

We did a simple calculation … if we assume a person travels 50km a day, his cost will go up by RM60 a month, and this is RM625 for 10 months … because the price is for 10 months, the last two months’ prices were still low, this will work out to RM62. The impact on a person who travels the 50km a day would be neutral as far as the increase is concerned. If he travels less, he is better off. If he travels more, he will be slightly worse off.

On the possibility of reducing income tax to lighten the burden on Malaysians

We have 10.5 million workers, of whom only 1.2 million pay income tax. Anyone earning RM3,000 and lower does not have to pay tax. You see so many rich people around and you would expect of the 1.2 million, many of them will pay the highest rate of 28 per cent. Do you know how many pay 28 per cent? 38,500.

On how the savings of RM13.7 billion will be spent

The money goes into a pool … Basically it’s a consolidated fund, whatever money that we save, the RM13.7 billion that we save, we have to use it for high priority development projects, including food.

On what would have happened to the budget deficit if the subsidy system had not been addressed

Our estimate is 6 per cent, if we don’t address it. If it goes 6 per cent or higher, our sovereign rating would have been affected. The cost of borrowing would be much higher. The investments into the country will be affected because people do look at the rating of the country before they invest.

You also lose complete freedom on fiscal stimulation if there is a major crisis in the world. If you are already at 10 per cent deficit, then how much more can you spend your way out? For these reasons, it will be a major disaster if the deficit climbs further.

On saving for future generations

The government today is responsible for the people today and for future generations. That is why we find it so sad that there are people arguing, why don’t we just use the Petronas money and give it away?

We can do more — sell Petronas and distribute the money. But that would be irresponsible because Petronas’ resources are finite … There is also the need to transfer wealth from this generation to the next. We think that to live happily, eat, drink and be merry because tomorrow you may die is not the right philosophy.


DBozz said...

I like the simple calculation approach but it is flawed. Let's just look at the assumption:

50km per day = +RM60 per month

Now assuming a normal car with fuel efficiency at 10km/liter, this equates to additional cost of RM3.89 per day (5 liters x RM0.78)

For a month: RM3.89 x 30 days = RM116.70!!

Does a Kancil or a Proton run on a 20km/liter mode? Am just wondering who did the simple calculation for the Government....

KS Cheah said...

Hi dbozz,

I too realized the calculations (or maybe the assumptions behind the calculations) were flawed. For it to have purportedly come from the mouth of none other than the Finance Minister (2) himself adds more salt to wound; we not only have to accept the increase, they "tell" us we are imbeciles.