Subsidy cuts come with spending reforms, experts say

KUALA LUMPUR, May 28 — Several economists have lauded the Najib administration’s proposed wide-ranging subsidy cuts while warning that such a plan can only be sold to the public if accompanied by reforms in government spending.

Former Finance Ministry deputy secretary-general Tan Sri Dr Ramon Navaratnam said the public will not stand for subsidy cuts while alleged government corruption remains unresolved.

“Subsidy alone is not the issue. There is a big question of corruption... The public will not tolerate inefficiencies and poor productivity in government departments and ministries and slow service

if, at the same time, they have to suffer from subsidy losses.”

Navaratnam, who is a past president of Transparency International Malaysia, pointed out there has to be a comprehensive review of the economy’s structure with a view to enhancing integrity, quality,

productivity and fairness in the allocation of resources before the public will get behind the idea.

“Subsidies cannot be looked at in isolation. It’s too big to treat as an element... The NEP (New Economic Policy) has to take into account a review of the whole structure of the economy and not look the reduction of subsidies in a piecemeal manner,” he cautioned.

“It will be a big mistake if the subsidy issue is regarded in isolation of overall planning and management of economic policies and management.”

However, he stressed that it was important for subsidies to be phased out gradually to limit the impact of such cuts on lower income groups. 

He said this was particularly true for “sensitive” food items like sugar and cooking oil, which he suggested could be phased out more gradually than within the proposed five-year period.

Navaratnam also suggested the government could use other instruments such as food stamps to help the poorest groups ride out short-term difficulties arising from the removal of subsidies.

Lee Heng Guie, chief economist for CIMB Investment Bank, also said spending reforms are needed if the government intends to manage public expectations.

“Tackling subsidy alone is not good enough... What we require is greater openness in the government expenditure programme including plugging leakages in expenditure,” he said.

“Expenditure leakages is a progressive problem that has an impact on the overall economy.”

He said the government has to be “holistic” in tackling debt and suggested the government implement a more broad-based consumption tax as part of revenue reform.

Lee also said law enforcement has to be strengthened to that ensure corrupt practices are stamped out.

“There must be enforcement and empowerment for the A-G (Attorney-General) to prosecute people who misappropriate resources,” he said, adding that at the moment many reports to the A-G were not

followed up on.

RAM Holdings chief economist Dr Yeah Kim Leng said the subsidy cuts will only work if government implements them as part of comprehensive fiscal reforms to ensure efficient and effective government spending.

“[There will be] a substantial reduction in our outlay if the government can exercise more prudence and less wasteful... spending,” he said. “That has to be included as part of these subsidy reforms.”

He argued that if subsidy cuts were implemented outside of broader fiscal reforms a “big portion” of the public will believe the government administration had prioritised wrongly.

“You can achieve [savings through spending reform] without any adverse impact. Of course, there will be some impact in terms of vested interests... [but] public preference is to cut expenditure and then

only reduce subsidies,” he said.

Yeah also said the task of reducing weight in government spending was difficult to budget for as it has to be part of an ongoing process to improve public sector governance.

“Politically, any reduction in subsidies or any moves to raise prices is always unpopular but you cannot stick to populist policies all the while without running the country down,” he added.

“It’s easy to spend in terms of governing... to please people. The challenge is how to make the necessary hard decisions that are correct.”

The Cabinet was reported to have met on Wednesday to discuss politically unpopular changes to its subsidy regime for petrol, natural gas, food and road tolls.

The regime, which cost RM24.5 billion in 2009, accounted for 15.3 per cent of Malaysia’s federal government operating spending and pushed the country’s budget deficit to 7.4 per cent of GDP, its highest in more than 20 years.


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