Targeted subsidies will have an impact on consumers beyond just the hike in fuel prices, say economists

With the Pangkalan Data Utama (PADU) socio-economic database on the way to being done and dusted, for the most anyway, the focus and attention is back on the topic that is intertwined with it, that of targeted subsidies. Although the government has stated it plans to implement it this year, with that for RON 95 petrol previously stated to begin sometime in the second half of 2024, nothing has yet come in the way of a mechanism or how subsidies will be dispensed.

However, there’s no doubt that it will come, and when it eventually does, there’s a larger, darker picture beyond wondering whether one qualifies for aid or not, as the hike in petrol and diesel prices as a result of the removal of a blanket subsidy means that things beyond that are also inevitably going to go up.

As The Star reports, economists are unanimous that petrol subsidy rationalisation is almost certainly going to bring about a general increase in the prices of goods and services, including logistics.

Executive director at the Socio-Economic Research Centre (SERC), Lee Heng Guie, has no doubt that the gradual removal of petrol subsidy via targeted rationalisation will stoke inflation. This is because the increase in petrol and diesel prices will have indirect effects on prices of goods and services, which are related to fuel and transportation, he said.

“The magnitude of price increases, which will contribute to headline inflation, will depend on the degree of the petrol price adjustment, which we believe will be on small steps rather than an outright free floating of the RON 95,” he told the news publication.

Given that inflation is presently on the rise, amplified by the impact of a weak ringgit, he said that a complete removal of fuel subsidies would exert significant price and cost pressures on households and businesses.

While all households will be affected by an increase in fuel prices, he nonetheless reiterated the fact that the targeted fuel subsidy intiative remains integral to the government’s overall fiscal reform. “This would be carried out with other rationalisation of other subsidised items and expenditure, as well as revenue enhancement to consolidate the fiscal deficit,” he said.

Senior economist at UOB Global Economics & Markets Research, Julia Goh, echoed Lee’s sentiments, saying the extent of the effects stemming from the removal of a blanket subsidy will depend on the size and timing of the implementation, adding that the scope of the targeted assistance aimed at easing the burden of increased living costs will also be a factor.

Professor of economics at Sunway University, Yeah Kim Leng put forth some numbers as an impact gauge. Citing the 2022 Household Expenditure Survey, which reported the average monthly household expenditure on petrol being RM305, a 20 sen to 30 sen increase in the RON 95 pump price would see the average household incurring a RM30 to RM45 increase in monthly fuel spending, he said.

“The spending increase is less than 1% of total monthly expenditure of RM5,150 for the average household,” he told the publication. He said the estimated rise in monthly household expenditure, which is spread over a three to six-month interval, suggests that the subsidy rationalisation will not be overly disruptive to the middle class, given that average income or wage is projected to rise at 2% to 3% annually.

As put forth by the report, this mention should ease concerns of the M40 group, who are – with some exceptions – most likely to miss out on government aid. That’s with the initial wave, of course, because the subsequent rounds of impact from increased fuel prices is harder to estimate, Yeah said, as this would depend on the extent of cost pass-through by businesses, change in inflation expectations and the overall price environment.

Meanwhile, Centre for Market Education CEO Carmelo Ferlito suggested that one way to minimise the effects of the fuel rationalisation was to start it off as a modest experiment. “The mechanism (of the execution) is yet to be tested and may need to be fine tuned. To avoid too harsh an effect, a small-scale test should be carried out, after which it may be developed according to the operational feedback,” he explained.

He said that it makes sense that blanket subsidies be removed to depart from the dependence mentality that has been created over time and considered as a way of life. “To switch models will take time but it is unavoidable. It will not happen without disruptions and therefore the way in which the rationalisation is implemented matters a lot,” he said.

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