Petrol Tax at the Worst Possible Time

It is a fact that current pump prices are higher than what the market would dictate. This indicates that the government is effectively imposing a sales tax on petrol. The government has admitted to pocketing windfall revenue from the differential. The quantum of RM16m per day reported by the Star may be over-stated. But that is not important. The crucial issue here is that – is this the right time to collect petrol tax?

When the price of petrol was raised by a whopping 40% back in June, the government took a “shock therapy” approach – by announcing one huge price hike instead of a series of smaller increases, or the gradualist approach. Perhaps it was the spiralling costs of the subsidy that prompted the government to brave public backlash. Whatever the reasons, in one single day businesses saw their costs soaring as a result of higher energy costs while consumers have less money to spend after filling up their car. There was no adjustment period given.

In the 6 months since the 40% price hike was announced, crude oil prices has tumbled from above USD120 per barrel to about USD42 per barrel today. That is a fall of over 65%. In contrast to the manner in which petrol price was raised in one big swoop, the price reduction was announced in a series of small instalments. Traders were then taken to task for not reducing their prices quickly enough in tandem.

But can you really blame local businesses, whom the government hit with a double whammy – 1) unexpected huge increase in operating costs overnight; and 2) while reducing domestic spending power– for being cautious in re-adjusting their prices less crude oil prices reverse course and the government singularly increase price again? Without information on the government’s pricing mechanism, how does it expect businesses to plan their pricing strategies?

With the global economic crisis, the only silver lining for businesses and consumers is falling energy prices. Every penny counts for cash-strapped business owners and middle class Malaysians. Expectations of the future are bleak among most Malaysians. Under such dire circumstances, the responsible family head or company CEO will want to save more cash and spend less. Finance Minister Najib must find ways to put more money in these worried Malaysians’ pockets fast, as the only catalyst left for our economy’s growth is strong, sustained domestic consumption.

The government knows this – which is why they announced the 3% reduction in employees’ contributions to the EPF. But it is hypocritical to ask Malaysians to spend more now by dipping into their retirement savings fund, while the government sits on millions of windfall tax collected on a daily basis. We do not need more tax now. We need fewer taxes, and more government spending on those items which has high multiplier effect. If the government has no clue how to spend these windfall proceeds, let us have our money back by charging market prices for petrol in these difficult times. Responsible Malaysians are unlikely to be rushing out to drive more or switch en masse from public transportation to private ones as a result of substantially lower fuel prices. More likely, it will be a welcome relief for millions struggling to balance their stagnant real incomes against the significant increase in costs of living, caused by the fuel price jump in the first place.

Granted, petrol subsidy is not good for the economy – it distorts consumption choices and it is not particularly equitable. The billions should be spent on health care or education where everyone can benefit. But swinging from a petrol subsidy to a petrol tax just when every Malaysian is looking to tighten his or her belt is perverse, and does not make economic sense. With so many bad economic reports out there, give Malaysians a break – let us enjoy some savings, while the market still allows.