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We have all heard of the famous local words, “left hand give you, right hand take back”. Why is this so?
The quick answer: to neutralize the cost of living.
One of the roles of any Government, is to manage scarce resources and redistribute income for the better good of society. For the needy, lower percentile, a common approach by some Governments is to charge lower (even below cost). For example, water: if the price of water is $1.20 per cubic meter, the government could charge households with a monthly income of less than $1200 a discounted rate of $1 per cubic meter.
Let’s do this a little slower and observe:
- Normal price of water (for example): $1.20 per cubic meter
- If family income is less than $1,200: charge less.
- Family now pays $1 and saves $0.20 per cubic meter
- If family’s original bill was $30, the price off will now save them $5/month or $60/per year
There are two ways of helping this family:
a.) Give this family a price-off as painted above, or
b.) Give a handout of $60 credited to this family.
Option B is a better way of managing subsidies, for these reasons:
- When a good is cheaper, people can be careless in it’s use and end up using more, possibly creating waste. By predetermining a price beforehand, the consumer would be careful with it’s use.
- If the consumer does not use such large amounts of the good (in this case water), there is real money to assist him/her to pay for other things.
To use economic terms, this method of subsidy is more “efficient” (better at distributing public goods). So that is why in Singapore, we prefer to give cash and handouts rather than price-offs, food stamps, free transport and free healthcare.
GST credits is another good example of such a subsidy. The Government realizes that lower-income households should be relieved of paying GST, however, instead of creating a bureaucratic nightmare, direct cash is credited to us instead.
This is why we feel that while the Government is giving you money… they’re still taking back. Actually, the cash handouts are supposed to neutralize the rising cost of living… it is up to the individual to manage his/her spending responsibly, but how many of us actually went out and spent it all in one evening instead?
[plinker]
