PETALING JAYA: Malaysia’s total subsidies, which is set to hit a record high of nearly RM80bil this year, will come at a necessary cost as the government strives to curb the rising cost of living.

Given the current economic environment, Malaysia University of Science and Technology professor Geoffrey Williams said the need to increase subsidies is justified, but only as a short-term measure.

“There is no free lunch. If the government was not paying the subsidy then the rakyat would have to pay higher prices.

“It is better for the government to carry these costs than the people, because the government has the resources to do it,” he told StarBiz.

Given the current economic environment, Malaysia University of Science and Technology professor Geoffrey Williams said the need to increase subsidies is justified, but only as a short-term measure.

For petrol subsidies, Williams explained that the amount is estimated at between RM28bil and RM30bil for this year.

“But Petronas, which is 100%-owned by the government, made RM23bil profit in the first quarter. This almost covers all of the petrol subsidies. So the government has the resources to cover the petrol subsidies.”

For the utilities price hikes, Williams said the power companies have seen revenue increases due to higher activity.

“They are all government-owned and can cover these costs.

“Without subsidies and price caps on specific products, there is a risk of general inflation, which would see huge hikes in interest rates that would harm everyone with a loan or credit card and that would damage recovery.”

As painful as it is for the country’s subsidy bill to continue ballooning, Williams said the move by the government is justified.

“Although we don’t like it, the current policy is correct. But it is short-term and we must look at structural reforms for the long-term,” he said.

Centre for Market Education chief executive officer Dr Carmelo Ferlito, however, believes that raising subsidies to keep costs down for the rakyat is an “illusion.”

Carmelo Ferlito: First of all, you have more businesses that will be forced to close and therefore will fire people.

“In fact, it is precisely because of the expansive fiscal policies of the past two years, which brought money into circulation while the national output was declining, that we have inflation.

“So, we cannot cure something that comes from an excess supply of money… with even more money.”

Ferlito emphasised that new subsidies will only give the illusion to the rakyat that they have more cash in their hands.

“But the value of that cash will keep on deteriorating. Unless that subsidies are financed with more taxes.

“But, is this what we want? More taxes?”

Last week, Finance Minister Tengku Datuk Seri Zafrul Abdul Aziz said the projected consumption subsidies for this year will cover petrol, diesel, liquefied petroleum gas (RM37.3bil), cooking oil (RM4bil), flour and electricity to reduce the people’s cost of living, and subsidy bills (RM9.7bil), excluding welfare assistance from 2018 to 2022.

Added to other assistance such as social welfare assistance, including Bantuan Keluarga Malaysia (RM11.7bil) and other subsidies (RM14.6bil), he said the total subsidy so far is RM77.3bil for 2022.

Williams said the benefits of implementing various consumption subsidies is that inflation in Malaysia is low, compared with international peers and also big economies like the United States and the European Union.

“This means we avoid massive interest rate hikes. The costs are covered by the government rather than falling on the rakyat and this is another big benefit.

“The downside is that subsidies and price caps distort the market and use money for subsidies which could be used for other projects. There is also abuse and corruption as the government has highlighted. Corruption and abuse is very common in controlled markets.”

Ferlito meanwhile believes that there are no benefits to implementing the various consumption subsidies.

“It just means more inflation is coming; and with more inflation, we have artificial support to the economy, more artificial demand and more growth that does not reflect the actual structure of demand and supply.

“The way to tackle inflation is not more inflation but rather deflation, to restore the purchasing power of the people. Subsidies will make people poorer by further reducing the actual value of the currency.”

Ferlito emphasised that there is a need to push for more savings and a cut in government spending.

“Will it be painful? Yes. If we did not want to face this, we should have avoided costly and useless lockdowns in the first place. Now it is too late to pretend to go out of the current scenario without paying the bill.”

On how the government can potentially offset the spike in subsidy expenditure this year, Ferlito said this can be done by either increasing taxation or avoiding that spending.

“There is no middle ground and both ways are painful.”

Williams meanwhile said tiered pricing must be used in the petrol market, so that the subsidy is only charged on low volume sales and benefits the lower income groups more.

“This can be done immediately using point-of-sale technology already in the petrol stations.

“We have tiered pricing in electricity so this is not a strange idea. For utility price hikes, again, high industrial users should pay higher tariffs which can be offset against their costs.”

In the long-term, Williams said there is a need for full market reform, ending cartels and monopolies and opening up domestic and import markets to competition.

“This is the best way to keep prices down. But the other side of the coin is incomes, so cash transfers through a tax credit or negative income tax scheme should be used.

“This is a form of universal basic income which can revolutionise how Malaysia deals with low-paid jobs, low incomes and welfare inequality.”