ANY kind of subsidy reform is a tricky business as it often comes with a backlash.

Remember when former prime minister Abdullah Ahmad Badawi broached the need to reform the fuel subsidy before the 2008 election? He backed down after an unsatisfactory win at the polls after the opposition used the pledge to turn voters against him and the Barisan Nasional coalition.

Prime Minister Anwar Ibrahim has the political will, at least for now, to keep advancing the energy subsidy reform even as the state elections loom.

If there are any lessons to be learnt from Badawi, it is that the administration must be careful in conveying the message. It must ensure that the idea is effectively sold to the people without creating confusion and resentment.

The general tone of the message now is: Electricity and fuel subsidies will only affect the top 20% (T20) income households. They can easily afford to pay the full amount.  

But this is truly a bad way to persuade people to accept the cuts. After all, what’s wrong with T20 households receiving the subsidies? Yes, it’s true they are the major beneficiaries of the subsidies, but they are also major contributors to the the government’s tax revenue.

Electricity and fuel subsidies are probably the only direct perk they enjoy from the government in return for their tax contributions. They don’t deserve to be demonised simply because they earn more.

Should we adopt the national definition of T20, more than half of households in Kuala Lumpur, Putrajaya, Selangor, and Labuan will be affected along with nearly half of households in Johor, Malacca, and Penang.

All of a sudden, the energy subsidy reform has become an instrument of division. The fissure between rural and urban folk turns into a gaping crack.

Most ironically, the reform will mostly be penalising Pakatan Harapan supporters.

What about the idea that the government can save money for deficit consolidation and economic development if T20 earners no longer receive subsidies?

T20 households reap about 35%, or RM17 billion, of the fuel subsidies last year.

If we apply this ratio to the past 10 years, the fraction of fuel subsidies for T20 households was between RM6 billion to RM17 billion, or between 2% to 6% of the total operating expenditure.

It is not non-trivial but not worrisome either. The savings from cutting the T20 subsidy is just too insignificant to be effective for fiscal consolidation.

So the rationalisation that the savings from subsidy cuts for the rich will help the government is not useful at best and harmful at worst.

Subsidy reform must happen for the sake of economic efficiency, but it should come with a greater purpose and neither demonise the T20 nor aim to reduce the budget deficit. 

By this I mean to suggest that the government tie electricity and fuel subsidies reform with the green transition. The net zero goal cannot be achieved without putting a price on carbon emission.

However, it would be political suicide to introduce a carbon tax at this point.

Abolishing subsidies for electricity and fuel is akin to setting a shadow price of carbon emission as users will have to pay a price for consumption.

Savings can then be spent on the affected households, not others, to compensate for their transition to renewable energy.

If there must be personal pain for the future generations’ gain, but the pain is alleviated, who can say no to reform? – June 22, 2023.

* Wong Chin Yoong is a professor of economics at Universiti Tunku Abdul Rahman, Kampar campus.

* This is the opinion of the writer or publication and does not necessarily represent the views of The Malaysian Insight. Article may be edited for brevity and clarity.