Fuel Subsidy
Hong Kong should not renew the $3 per litre diesel subsidy when it expires in early July. Instead, it should use the funds to launch a crash programme to accelerate electrification of public transport as quickly as possible, starting with the minibus fleet.
As everyone knows, the crisis in the Middle East has had a serious impact on fuel prices. In response, a government task force has recommended a package of measures to provide temporary relief, including a $3 per litre diesel subsidy, to be paid direct to the fuel companies, and a 50 per cent cut in tunnel tolls for commercial vehicles (only). There is no relief for petrol-driven vehicles or private cars. The diesel subsidy alone will cost $1.8 billion.
While the measures are no doubt well intended and will be welcomed by the public in the short term, there are several fundamental problems with such subsidy schemes. This one in particular has weaknesses not least that sooner or later – in this case quite quickly -- it will become fiscally unsustainable. And there are other more compelling areas where a degree of subsidy may become inevitable and which should have priority.
The problem all subsidy schemes have in principle is that they distort market forces. What the increase in prices is telling us is that it has become more difficult to export oil and gas from the Persian Gulf because of the ongoing war launched by the United States of America and Israel against Iran. Because the Gulf is the source of around a fifth of world supply, there is now a global shortage which is pushing up prices. Softening the blow by limiting retail price increases to the consumer here is all very well, but it does nothing to shorten the war.
Which brings me to the next weakness: nobody has a clue when the war will end, not even the participants. The two sides are very far apart in their negotiating positions, and even the task of getting talks going is proving difficult. The one round facilitated by Pakistan was conducted indirectly with both sides conveying their stance to the intermediary and indirectly to each other via the media. The only thing we do know for certain at this stage is that even when the fighting stops, no more bullets flying or bombs being dropped, it will take a very long time – certainly many months – for the infrastructure damaged by the hostilities so far to be repaired.
A related but separate problem is that we will not know the outcome until peace has been restored and there has been a chance to survey the damage done in Kuwait, Bahrain, the UAE, Iraq, Oman, Saudi Arabia and of course Iran itself. Estimating repair costs and arranging funding will all take time. So both the timing and the final outcome are uncertain.
Therefore any proposal to continue the subsidy when the two months expires would be committing to an open-ended drain on public resources without any limit. That would not be financially prudent.
We know, all governments know, that scaling back, let alone eliminating, a subsidy once it has become an established part of life is extremely difficult. The UK government, for example, is gradually being bankrupted by its so called “triple lock” on state pension increases. There is a commitment that every year they will go up by inflation, or wage increases, or 2.5% whichever is higher. Everyone in UK realises that this formula is unsustainable but no politician seems ready to say so. In Hong Kong we could soon have a similar problem with our $2 transport fare scheme. Currently more than a third of the entire population enjoys the subsidy.
A further problem with subsidising consumption is that indirectly it encourages consumption (by failing to deter it). It would be far better in the long term to take firm action to permanently reduce our dependence on fossil fuels. We already know it is possible to power minibuses, buses, and even ferries using electricity. So that is where we should be putting our resources. If the switchover process requires help commercially to cover costs, then that is worth considering.
There is one further important factor that we need to take into account, and that is food supply. The gulf also supplies a significant percentage of the world’s fertiliser. Planting season in various countries is imminent. If the fertiliser cannot be transported in time to the farms where it is needed then crops will be lower and there will be food shortages. In poorer countries this will mean outright famine. Even in wealthier ones, there will be price increases, this time for food. In Hong Kong we won’t starve but family budgets will struggle to cope with higher prices for necessities. This will impact the less well-off more profoundly as they tend to spend a higher proportion of their income on food.
Now when it comes to transportation there are choices. People can walk, or ride a bike, or go by bus instead of minibus, or carpool. Companies can make greater use of working from home. But however you travel and wherever you are based, you will need food. Electricity and gas prices will also go up, but if the worst comes to the worst people will find ways to cut back. But for food there is an irreducible minimum. And if prices rise too high there, then that is where public subsidies must go, most likely on a means tested basis. If we are going to have to raise taxes or run a deficit in the government accounts, then let it be to pay for food vouchers.