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Fuel Subsidies and EEV

In 2002, when crude oil price averaged at USD25.50 pb(per barrel), the total subsidy paid was only RM3.7 billions, of which fuel subsidy was probably RM2 billions.

In 2006, when oil price averaged at USD70 pb, the total subsidy paid was RM10 billions. Of this RM7.6 billions were captured by motor vehicle owners and operators.

The fuel subsidy in 2008 was estimated at RM45b versus the projected total development expenditure of RM40b.

In 2004, the total Government revenue was around RM100b. But only RM8.8b was generated from taxes on motor vehicles. However, petroleum products were enjoying a subsidy of RM4.2b during that year. Less the fuel subsidy, net revenue from taxes on motor vehicles was only RM4.6b.

In 2008 motor vehicle owners were likely to end up enjoying a subsidy on a net basis of around RM10b.

Collecting taxes on motor vehicles through a duty on petroleum products is also more efficient as the duty payable will be related to usage. Therefore, it will create the right incentive for users to be less wasteful and to economise on their fuel usage, when prices are higher. Which also encouraging the use of EEV(Energy Efficient Vehicles) more widely.

Road tax as well as import and excise duties on motor vehicles are a less efficient form of taxes. They cannot be justified as a wealth or luxury tax as other forms of wealth or luxury consumption are not subject to such taxes.

Conclusions

Price control and price subsidy hava been on the rise in Malaysia from Dr M's early years as PM. There is no sign of its fall under the DB(Abdullah Badawi) administration.

Price control is inefficient for attaining economic or welfare goals for several reasons.

  • Firstly, it distorts resource allocation.
  • Secondly, it dispenses with the services of the price mechanism which provides a costless way of coordinating economic activities which are by their very nature extremely complex and involves,
  • Thirdly, beneficiaries cannot be targeted and thus ends up benefiting those who do not deserve any assistance. Often those who deserve the assistance are only a small minority and there are other more efficient and less inequitable ways (such as income transfers) of reaching out to them.
  • Fourthly, price control encourages illegal and immoral activities including bribery, corruption, smuggling as well as illicit manufacture.

The size of consumption subsidy, (and almost entirely due to the control of fuel price), has gone almost completely out of control. Ineptitude, opportunism or lack of grit is now threatening the integrity of the government's finances as well as the very fabric of the economy.

 - Source: mylivingwall