Question

Revision Q1 Malaysia Budget 2014: 6% New Tax Effective April 2015, Sugar Subsidy Abolished Prime Minister Najib Razak unveiled a Malaysian Budget for 2014 on Friday that includes decisive changes like the new Goods and Services Tax (GST) and the elimination of the sugar subsidy. The budget aims broadly to address Malaysia's large fiscal deficit, shrinking current- account surplus and growing debt pile. The Southeast Asian nation's debt load at 54 percent of gross domestic product at the end of the second quarter prompted ratings agency Fitch to downgrade the nation's sovereign credit-rating outlook to negative in July. As analysts expected, the 6 percent GST tariff will replace a current sales and service tax now in place on April 15, 2015. The new tax will exempt piped water and the first 200 units of electricity per month for domestic consumers in order to protect low-income households. Transportation services, education and health services are among the other sectors exempt from the tax. International Business Times By Sophie Song October 25 2013 1:13 PM a. In Malaysia, who benefits and who loses from the sugar subsidy program? Explain the possible economic impacts of recent cut in sugar subsidy. Use appropriate demand-supply diagrams to illustrate your answers. [15 marks] b. Price elasticity and income elasticity of demand both play an important role in the problems of the health care industry. Most health care services are a necessity with few substitutes, making the demand for them relatively price-inelastic. Using appropriate demand-supply diagrams, explain the possible impacts on health care market if i. Malaysia has achieved the high income status by 2014 ii. the authority is to further reduce health care subsidy in the near future. [5 marks] [5 marks]

Answer 1

a. With cut in sugar subsidy, the cost of production of sugar will rise. This will make the supply curve shifts upward forming a new equilibrium. Sugar consumer will get sugar at higher cost and lesser output will be traded as price rise. This will make the domestic producers and buyers both looser.

However if we consider the open market, and the country imports sugar at world price (w in given figure) then earlier domestic suppliers were supplying Q2 and imports were Q3-Q2. Now when subsidy gets removed then domestic supply shifted upward and hence now domestic supplier supply only Q1 and import is Q3-Q1. Thus, domestic supplier loses and importers gain.

b) i) If high income status is acheived it implies consumers will be with higher disposable income than before. However as we know the income elasticity of healthcare is also relatively in elastic, thus there will be no significant effect on the market of healthcare.

ii) SImilar to part (i) as the price elasticity is inelastic, hence any tax will not make much difference and only the price will rise, output will not reduce.