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Sugar, Sugar

02 Feb
White Sugar

Sugar Subsidies - Bad or Good?

The Malaysian government subsidises a number of goods, to keep the prices at certain levels. Unfortunately for them, commodity prices have risen in recent years. So, they announced last week that they would increase the sugar subsidy to compensate. They were quick to say that the decision is to “ease the people’s financial burden,” and is nothing to do with the fact that there’s an election coming up.

However, that’s just silly. If they really want to “ease the people’s financial burden,” they should completely scrap the subsidy, not raise it.

Imagine, if you will, a sugar consumer we shall call Rakyat. Suppose Rakyat earns $1000. He pays $200 in tax, and gets to spend the other $800 on whatever he likes. One thing he likes is sugar, so he spends $10 on sugar at the subsidised price of $1 per bag. The remaining $790 he spends on other things. He has chosen this spending pattern to make him as happy as he can be, under the existing tax and subsidy system.

Suppose the government scrapped the subsidy. Rakyat might be sad, at first, that sugar is more expensive, thinking that his sugar bill will now be $5 more. The government will save $5, which means $5 less tax they need to collect, so they give a tax refund. With the $5 now back in Rakyat’s pocket, he can, if he wishes, subsidise his own sugar. Or, he can do anything else he wants with the cash. In summary :

  • With the subsidy, Rakyat gets 10 bags of sugar (for $10), and $790 to spend on other things, and this is the best he can do.
  • Without the subsidy, Rakyat can still get 10 bags of sugar (for $15 now), and still have $790 to spend on other things. He would be just as happy as before.
  • Alternatively, Rakyat can decide not to subsidise his own sugar, and spend the $5 on something he wants more than those last few bags of sugary sweetness. This will make him happier than before, happier than possible when the subsidy existed.

So, Rakyat will be happier, with less financial burden, if the government lowers taxes instead of raising subsidies.

Now, some caveats. Rakyat is not just one person. He is a whole citizenry of 28 million. Some of these pay no tax. Some consume no sugar. An individual citizen can’t always re-create the effect of a subsidy by carefully spending their tax refund. There are four groups of people

  • Those who get more from the tax break than they lost through the subsidy, These will be truly happy campers. They can make up for the lost subsidy (if they wish) and have cash left over.
  • Those, like Rakyat, for whom the tax break equals the subsidy. As we have seen, these people are also better off with no subsidy.
  • Those whose tax break is not quite enough to compensate the rise in sugar prices, but by cutting back on sweets, still find themselves better off than before.
  • Those who enjoyed the subsidy so much, or who paid so little tax, that they really are worse off after the subsidy is removed.

There’s no policy that pleases everyone, but it’s not correct to say that the subsidy “eases people’s financial burden.” Instead, it shifts the burden from one group of people to another, making the rakyat (citizenry) economically worse off overall. The only sensible way to justify the subsidy would be to identify those it helps and those it hurts, and try to prove that the needs of the former outweigh the needs of the latter.

As a final word, note that we got this conclusion without considering the harm excess sugar consumption has on a person’s health. The same argument could apply to many of the other products the Malaysian government subsidises, including petrol and rice, and to the completely subsidised water Selangor residents have enjoyed since the opposition won that state in the 2008 election.

 

 
1 Comment

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  1. Kaven Kan

    February 7, 2012 at 9:24 am

    You are so right!