Charles Santiago

Posted by : Unknown | Ahad, 12 September 2010 | Published in

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Charles Santiago

Subsidy debate exposes social development gaps

Posted: 12 Sep 2010 07:10 PM PDT

AT FIRST glance, it looks like the government has no option but to progressively cut the subsidy bill, which stood at a hefty RM24.5 billion in 2009. If education and social subsidies are included, the figure is a massive RM74 billion or one-third of the 2009 Budget.

However, the view that the growing subsidy bill is resulting in funds being redirected from socio-economic development has to be tempered with a more informed analysis about where the money is going and who benefits from the allocations.

A frequent criticism about the present subsidy regime is that most of the funds do not reach the poor. It is estimated that only about 3% of the national subsidy bill benefits the economically disadvantaged.


Indeed, a substantial portion of the population who earn paltry incomes would suffer serious hardship as a result of cost of living increases fuelled by subsidy cuts, a forum on the government's subsidy rationalisation exercise heard last Wednesday.

One study shows that about 34% of over 1.2 million Malaysian workers take home less than the poverty level income of RM720 per month, Klang MP Charles Santiago of the DAP told the forum, entitled "No More Subsidy. What do we do?" The event was jointly organised by the Institute for Democracy and Economic Affairs (Ideas) and the KL Selangor Chinese Assembly Hall Socio-Economic Committee.

For an average household size of four persons, the quality of life at this income level for a substantial segment of the population leaves much to be desired.

Santiago cited a World Bank study commissioned by the Malaysian government which reported that the cost of living had increased by 10%-15% in the last 15 years, but workers' wages had risen by only 2.6% in the same period.

Considering that over 60% of the population is now urban-based, and therefore subject to higher cost of living pressures, it is pertinent to ask whether the basic needs of the bottom half of the population are being adequately met. This has implications for the human development of the future generation, on a whole range of fronts such as nutritional status, access to education and economic opportunities.

While a reduction in subsidies is among the necessary measures for the rationalisation of government expenditure, another aspect that needs attention is the reduction of the civil service, which is among the highest in the world on a per capita basis.

This point was emphasised by Umno Youth chief and Rembau MP Khairy Jamaluddin. He noted that subsidies for the economically disadvantaged must be distinguished from those that benefit corporations and the rich. For example, in its current form, the fuel subsidy benefits those who use more fuel over those who use less. Similarly, the gas subsidy benefits independent power producers.

"The subsidy problem must be addressed now, because unless the government does something, it will be in serious fiscal trouble," he said. "The subsidy bill of RM70 billion a year compounded over five years will bust the development budget of the 10th Malaysia Plan."

Khairy added that there will not be a situation where there are no subsidies, as some subsidies are productive. For example, subisidies for social goods like education and health produce dividends for the economy through a better educated and healthier workforce. However, subsidies for big businesses, eg subsidised gas for independent power producers and toll concession agreements that are extended to give concessionaires continuing profits distort the market. Vanishing subsidies, for fuel, for example, are non-productive and have to go, he said.

Means-testing needs to be more rigorous, said Khairy, so that people who need assistance will not be left out.

Dr Ong Kian Ming, who lectures on economics and policy science at UCSI University, drew attention to a warning in June by Minister in the Prime Minister's Department Dato Seri Idris Jala that if subsidies were not reined in, the country could end up like Greece, on the perilous path to bankruptcy.

Although the government debt to GDP ratio, at 35%-40%, was not high compared to Greece's, which was over 100%, the debt situation was worrying because of the upward trajectory, he said.

"Idris projected that debt would grow at about 12% pa while GDP is growing at 5%-6%. It's not difficult to see why our debt to GDP ratio will very soon balloon to 100%," said Ong. This could make investors jittery and cause a downgrade of the ringgit, and there may be a run on the currency. Investors, both short and long-term ones, may want to leave as well.

Although Petronas' contribution to national tax receipts amount to about 40% of the federal budget, it is not sustainable in the long term, he said.

However, reducing subsidies is not enough to solve the country's economic problems, because of massive leakages, and other policy changes are needed to improve the budget deficit and national tax scenario, Ong noted.

For example, at the current rates of loan disbursements, the national higher education fund, PTPTN, will face a RM22 billion deficit by 2020 if the loan recovery rate of around 50% continues.

With such leakages, and the government's unwillingness to address the issue, it will be very difficult to tackle the budget deficit, said Ong.

"The RM750 million savings from the latest subsidy cut pales in comparison with PTPTN's loan recovery problem," he said.

Ideas chief executive Wan Saiful Wan Jan decried the dependency culture among Malaysians, pointing to the subsidy syndrome as a symptom of this mindset. All aspects of life from education, healthcare, transportation fuel and even household expenses like sugar and flour are subsidised by the government, he pointed out.

"Accepting subsidies implies giving up freedom. The people hand over the responsibility for deciding what their children will learn, what health treatment they will receive and even what they will eat by allowing the government to subsidise these goods and services," said Wan Saiful.

Decades of dependence on the government has caused society to lose its ability to decide for itself. "After 53 years of independence, we have become a very dependent society," he said.

As for the poor, Wan Saiful exhorts those who want to help the disadvantaged to go out and do so themselves, instead of calling on the government to pay for their priorities.

"The government must take the blame for undermining the culture of charitable giving to the poor. Over several decades, it has taken over control of numerous charitable organisations at federal and state level and set up various foundations for channeling aid to the people, and so undone the spirit of doing good to others," said Wan Saiful.

Santiago invoked the right to development, which the government has a responsibility to ensure is realised. This responsibility includes creation of an enabling environment, and to eliminate obstacles for the realisation of this right. All people should be given equal opportunity for upliftment, he said.

To address the economic distress of the working class, said Santiago, a minimum wage needs to be introduced across the board, and an appropriate poverty cut-off point must be established. The bar needs to be raised to RM1,500 or RM2,000, he said.

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Posted: 12 Sep 2010 06:59 PM PDT

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