PLUMMETING OIL PRICES: DOES IT MATTER FOR TAX SUBSIDIES REFORM IN ASIA-PACIFIC COUNTRIES?1
by Nam Foo, Ph. D student Department of Economics Curtin University Perth, Western Australia Phone: (61)403662915/Email:
[email protected] Abstract The importance of energy as a primary driver of economic growth and industrial development is historically clearly evident. Energy trends show how the world’s energy consumption patterns have evolved over the years. It shows there is uncertainty in the energy industry, with the highly volatile current trends as a result of fluctuations in the international crude oil market. The trend of such changing crude oil prices continues to affect the economic growth prospects particularly of the nations in the Asia-Pacific region. The decline in crude oil prices indeed can affect a country’s economy, especially having macroeconomic, financial and policy implications. However, plummeting crude oil prices present another window of opportunity for oil exporting countries in the region to move toward more effectiveness and fairness in energy pricing. The objective of this paper is to discuss policy issues relating to the effects of fuel subsidisation in the Asia-Pacific region as a result of a sharp decline in the crude oil price. Accordingly, a fuel subsidy by governments in the developing Asia-Pacific countries comprises more than five percent of these countries’ subsidies. This study uses three variables, namely gross domestic saving, gross domestic income and trade balance in Malaysia, Indonesia and Papua New Guinea, to apply using the Vector Autoregression model (VAR). Findings of this study show that these three variables are not cointegrated with fuel subsidisation schemes in Indonesia and Malaysia. However, there is cointegration among these variables in Papua New Guinea (PNG). Overall, the study shows that there is no short-run causality among these variables in relation to the government energy subsidies policy. Based on these results, therefore, the study addresses some policy issues around energy prices that relate to policy implications. Policymakers will be able to apply this analysis to implement a sound policy with many benefits, including reducing the tax burden of the country’s citizens.
1 The first version of this paper is published in the forthcoming issue of the Energy Forum newsletter under the title ‘Falling crude oil prices: The impact on the economy of the Asia-Pacific region.’
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1. Introduction The importance of energy as a primary driver of economic growth and industrial development is historically clearly evident. In particular, energy trends show how the world’s energy consumption patterns have evolved over the years. It shows there is uncertainty in the energy industry with the highly volatile current trends as a result of fluctuations in the international crude oil market. The trend of such changes in the crude oil prices continues to affect the economic growth prospects particularly of the nations in the Asia-Pacific region. Falling crude oil prices certainly impact investment decision-making in terms of monetary, fiscal and structural policy perspectives. In fact, the impetus to shift these policies depends on whether a country is an oil net importer or exporter.2 The objective of this paper is to address the effects of fuel subsidisation in the Asia-Pacific region as a result of a sharp decline in the crude oil price. Accordingly, a fuel subsidy by governments in the developing Asia-Pacific countries comprises more than five percent of these countries’ subsidies. There are considerable concerns about the contentious issue of energy subsidy reform on the international policy agenda. The plan has been to pay attention to the International Monetary Fund (IMF) to address the issue of whether or not net oil exporting countries should eliminate their fuel subsidisation policy. World crude oil prices have dropped almost 50 percent in the past year to $56.57 per barrel, as at July 2015. Since then many oil producing countries believe that fuel subsidisation should be abolished with a move toward international crude oil prices. Energy subsidies can generate inequality and inefficiency. Energy subsidies in the majority of Asian economies benefit middle-income households disproportionately. In 2013–14, many governments in the Asia-Pacific countries had undergone structural tax reform and decided to abolish this subsidy policy. For instance, the government of the United Arab of Emirates (UAE) has decided to deregulate the fuel subsidy policy. The purpose of the deregulation of this policy is to diversify the country’s income, strengthen its economy, and increase competitiveness, as well as develop a healthy economy that is not reliant on government subsidies. The decline in crude oil prices indeed can affect a country’s economy, in particular having macroeconomic, financial and policy implications. However, plummeting crude oil prices present another window of opportunity for oil exporting countries in the region to move toward more effectiveness and fairness in energy pricing. The responsiveness of the government to the tax subsidy policy issue is the main issue discussed in this study.
2 Plante
(2013) states that fuel subsidies for net oil importing countries comprise one to two percent of GDP. For net oil exporting countries, the subsidies are often larger than expected. 1
Fuel subsidisation is an important policy issue for many Asia-Pacific emerging economies. Petroleum products consumed in these countries are usually subsidised by governments under fuel subsidy policies. This paper, therefore, addresses some policy issues around energy prices that relate to policy implications. Policymakers will be able to apply this analysis to implement a sound policy with many benefits, including reducing the tax burden of the country’s citizens. To find out how successfully abolishing fuel subsidies can help a country’s economy in terms of the macroeconomic perspectives, the researcher asks two interrelated questions in regards to this. First, how do these subsidies affect consumer behaviour and aggregate welfare as a result of elimination of this policy? Second, why do governments in the Asia-Pacific region still favour this policy even though it introduces inequity and inefficiency? To answer these questions, the researcher applies the autoregression (VAR) model to solve these problems. The paper is organised as follows: after the introduction the second section gives a brief overview of the impact of falling crude oil prices that relates to the debate about fuel subsidisation in Asian economies. The third section addresses the model applied in energy subsidisation by Asia-Pacific governments, which incorporates household consumption. The model examines the impact of a fuel subsidy, how household consumption can be affected as a result of the removal of energy subsidisation and why the government chooses to implement this even though this policy can diminish the nation’s economic growth. In the fourth section, the researcher discusses the empirical outcomes, and in the final section policy implications and conclusions are derived.
2. Literature review A sharp decline in recent crude oil prices has affected everyone involved in the market economy. The volatility of oil prices creates uncertainty and undermines the global economy in many ways that impact producers, exporters, governments and consumer behaviour. Tumbling oil prices threaten global investments, the oil and energy industry, and the economies of the oil-producing countries. Global investment, particularly in the oil and energy sector, has been hit hard by the extreme level of record oil prices. The seven major internationally well-known oil companies – Royal Dutch Shell, BP, Exxon Mobil, Chevron, Total, ENI and Statoil, have agreed that they need at least a crude oil price of $125–135 per barrel to be profitable (Salameh, 2015). Oil supply and demand have played a significant role in the plummeting oil prices. Barunik, Kocenda & Vacha (2015) support this statement and state that volatility of crude oil prices is driven by distinct demand and supply shocks. The sharp decline in crude oil prices in recent years certainly can contribute to these factors, but supply side factors have played a somewhat more prominent role (Husain et al, 2015). For instance, in the absence of a major oil producing cut by OPEC, the crude oil price has dropped 54 percent of its value since September 2014 (Salameh, 2015). There is no indication that this 2
will be the end point of the falling crude oil price. A significant fall in the price has drawn attention to world leaders of the need to take steps to restore economic growth. Figure 1 shows the Brent crude oil prices using daily price for over 30 years. Oil prices have remained stable for over 20 years since 1987. Brent crude oil prices began to fall dramatically in the 2008 global financial crisis (GFC). Since then, oil prices remained high until 2014, then started to fall sharply to $48 per barrel in September 2015. Figure 1: Brent crude oil prices (US $ per barrel) 160.00 140.00 120.00 100.00 80.00 60.00 40.00 20.00
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Source: Fred (2015); and author’s calculations
Based on data shown in Figure 1, there are several agencies from different sources, such as British Petroleum (BP), International Energy Agency (IEA) and the World Bank, who are sharing a common view that the global energy markets are under stressed. The reasons for the declining oil price are echoed in world economic conditions, such as a downward revision of energy demand forecasts following global economic stagnation, emerging differences in global economic performance, geopolitical uncertainty, and ongoing debates about the proper roles of governments and markets. Many factors affected 2014’s steep fall in crude oil prices. Among them are the increase in the United States (US) shale oil production, slowdown in economic growth in China, the European Union (EU) reducing demand for oil, and concerns of political insecurity and uncertainty across the world. Among these factors, geopolitical risk has increasingly involved most countries. The recent crisis in Ukraine and political collusion between Saudi Arabia and the United States are major contributors to the current uncertainty of the energy market. 3
Falling energy prices have raised many issues from world organisations such as the World Bank and International Monetary Fund. These agencies address the concern of energy tax subsidisation imposed by government in emerging and developing economies (Arze del Granado, Coady & Gillingham, 2010; Coady et al, 2015; Husain et al, 2015; Mourmouras, 2015). The issue of energy tax subsidisation reform remains a critical policy agenda around the world, created by low energy prices and continuing fiscal pressures in many net oil exporting countries. 2.1. Fuel subsidisation and conceptual framework World crude oil prices have been exceedingly volatile during the last decade. Brent crude oil prices have dropped significantly, more than 50 percent over the past year. A recent study from the IMF estimates that global energy subsidies for oil producers and consumers account for more than $5 trillion per year. Petroleum subsidies themselves accounted for about $1.5 trillion of the total global energy subsidies (Frankel, 2015). The extremely large amount governments inject into fuel subsidisation and the recent falling crude oil prices have induced governments to reconsider the reform of energy subsidies. Since 1st August 2015, emerging Asia-Pacific economies such as Indonesia and Malaysia have abolished such subsidies to transportation fuel. Asia-Pacific economies follow different oil pricing subsidy policies. There are several fuel pricing mechanisms implemented in this region. Some Asia-Pacific countries have liberalised fuel pricing, where the agents have the option to set their prices or there are automatic formula-based fuel price regimes. Other countries in the region impose price controls and administer, regulate, or adjust prices on an ad hoc basis. Accordingly, the majority of countries in the region rely on fuel or tax subsidy as the major source of revenue (Jha, Quising & Camingue, 2009). Figure 2: Oil consumption in major regions of the world, 1965–2014
35000 30000 25000 20000 15000 10000 5000 0
Total North America
Total S. & Cent. America
Total Europe & Eurasia
Total Middle East
Total Africa
Total Asia Pacific
Source: BP, author’s calculations 4
Figure 3: Oil production in major regions of the world, 1965–2014 30000 25000 20000 15000 10000 5000 -
Total North America
Total S. & Cent. America
Total Europe & Eurasia
Total Middle East
Total Africa
Total Asia Pacific
Source: BP, author’s calculations Figures 2 and 3 show the Asia-Pacific region has become one of the major oil consumers as well as producers in the world in the last 50 years. Many south-east Asian countries in this region remain active in energy consumption as a result of rapid urbanisation and industrialisation. Fuel subsidisation has a long history in the emerging Asia-Pacific economies. Governments in these countries subsidise fuel prices by paying a price below the international market. The purpose of support fuel prices is to help improve the living conditions of the poor by making fuel affordable and accessible. Figure 4 presents fossil fuel subsidies in south-east Asian countries. Oil comprised 68 percent or $34 billion of fossil fuel subsidies, which is the largest share of energy production in the south-east Asia-Pacific countries (IEA, 2013).3 Figure 4: Economic value of fossil fuel subsidies in south-east Asia-Pacific countries
Source: IEA, 2013 3 Fossil
fuel comprises coal, natural gas, electricity and oil. 5
Accordingly, Indonesia and Malaysia are among the Asia-Pacific countries in which governments have spent a substantial amount on fuel subsidies. These two countries are net energy exporters but starting to become increasingly reliant on fuel imports. The IEA world economic outlook estimates that from 2007 to 2012, the changes in the cost of fuel subsidies in the Asia-Pacific countries were mainly driven by the volatility in international crude oil prices. Unpredictable and extreme volatility of world crude oil price fluctuations highlight that there are risks involved in regulating domestic prices of products imported from the international energy market. Other factors causing change in fuel subsidies include policy effort toward energy pricing, exchange rate volatility and change in the demand for energy consumption. There are substantial studies (e.g. Coady et al, 2015; Foo, 2015; Anand et al, 2013; Cottarelli, Sayeh & Ahmed, 2013; Jha, Quising & Camingue, 2009) that recognise that fuel subsidies are not sustainable and are having many unintended consequences. The purpose of imposing fuel subsidies is to protect low-income consumers. However, fossil fuel subsidisation can aggravate fiscal imbalances, crowd-out priority public spending, and depress private investment, including in the energy sector. Energy subsidisation also distorts resource allocation by encouraging massive energy consumption, creates artificially capital-intensive industries, lack of interest in or incentives for investment in renewable energy, and an increase in the depletion of natural resources. In general, the research study shows that most subsidies benefit mainly high-income earners, which creates inequality. The responses of policy issues to plummeting oil prices are still being formulated in many Asia-Pacific countries. Dealing with these policy matters is complicated. Governments imposing these policies in these countries will depend on a complex set of factors such as the size and direction of the term-oftrade shock, the exchange rate regime, fiscal and external buffers, balance sheet mismatches, exchange rate valuation, the output gap, and inflation. Figure 5: Policy response to low oil prices
Fiscal vulnerabilities
•Public debt •Balance sheet mismatches •Financing
External vulnerabilites
•External buffers •Exchange rate valuation •Balance sheet mismatches
Inflation risks/advance cycle
•output gap •infaltion gap
Source: Husain et al, 2015, p.39
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Figure 5 above presents a flexible policy framework for governments in Asia-Pacific countries to determine the appropriate mix of adjustment of fiscal, monetary and exchange rate policies. Fiscal vulnerabilities, external vulnerabilities and the cyclical position are frame choices, where governments in the Asia-Pacific region can access flexibility to allow for other country-specific circumstances such as the future direction of oil trade and exchange rate regimes.4 3. The model This section describes application of the model. There are numerous empirical and theoretical evidences showing that macroeconomic variables can be affected by the changes in oil prices (see Arora, Gomis-Porqueras & Lee, 2013; Chang et al, 2011; Kilian, 2008). The VAR model in this paper follows the study by Kilian (2008). Application of the VAR model uses three variables in three AsiaPacific oil exporting countries to develop a research. These three countries are Asia-Pacific Economic Cooperation (APEC) member countries, namely Indonesia, Malaysia and Papua New Guinea. These countries are the major oil producers in the region. The Asia-Pacific region has overtaken the rest of the world in terms of oil production and consumption in recent years. Three variables used to estimate the impact of fuel subsidisation are household savings, consumer disposable income and trade balances, using yearly data from 1992 to 2015. The motivation of this study is to shed light on new research in this region which can address whether the removal of fuel subsidisation issues is one of the policy agenda items at the forefront of the agenda in response to the country’s economy, using real oil prices. To investigate the linear interdependencies between the changes in real oil prices and country’s economy in relation to the response of changing government fuel subsidisations, the VAR model is used to conduct an analysis. Theoretically, a VAR model is used to examine the interdependencies between oil price and macroeconomic variables when these variables are not cointegrated. Chang et al (2011) state that an advantage of using VAR model is that assumptions made about response and explanatory factors (oil prices, household saving, disposable income and trade balances) is not needed. This is because these variables are all treated as endogenous. The VAR model in this paper has followed the studies in Chang et al (2011) and Kilian (2008). A primary VAR model can be written as follows: 𝑝
𝑦𝑡 = ∑ 𝐵𝑖 𝑦𝑡−𝑖 + 𝑢𝑡
(1)
𝑖=1
where y is an n-vector of endogenous variables. 𝐵𝑖 is a (𝑛 𝑥 𝑛) matrix of regression coefficients to be estimated. 𝑢𝑡 is an error term. The error term is assumed to be independent and identically distributed with a zero mean and constant variance. p is selection of the appropriate lag length. 4 See
Husain et al (2015) for details of the responsiveness of policy implication of lower oil prices. 7
In order to distinguish between these three macroeconomic variables (household saving, disposable income and trade balances), the structural VAR model of the oil markets is estimated using yearly data from 1992 to 2015. The included variables are: ∆𝑝𝑟𝑜𝑑𝑡 , the percentage change in world crude oil production; 𝑟𝑒𝑎𝑡 , which denotes an index of real economic activity that affects government fossil fuel subsidisation, and 𝑟𝑝𝑜𝑡, which represents the actual price of oil. The VAR is estimated using yearly data, with three lags. Applying equation (1), the structural VAR for the oil market in relation to government fuel subsidisation can integrate as follows: 24
𝐴0 𝑧𝑡 = 𝛼 + ∑ 𝐴𝑖 𝑧𝑡−𝑖 + 𝜀𝑡 (2)5 𝑖=1
where 𝜀𝑡 is an error term and represents the vector of serially and mutually uncorrelated structural −1 innovations. 𝐴−1 0 has a recursive structure. The errors can be decomposed according to 𝑒𝑡 = 𝐴0 𝜀𝑡 .
The reduce form errors 𝜀𝑡 can be written as follows: 𝑒𝑡∆𝑝𝑟𝑜𝑑 𝑎11 𝑒𝑡 ≡ ( 𝑒𝑡𝑟𝑒𝑎 ) = [𝑎21 𝑎31 𝑒𝑡𝑟𝑝𝑜
0 𝑎22 𝑎32
ℎ𝑜𝑢𝑠𝑒ℎ𝑜𝑙𝑑 𝑠𝑎𝑣𝑖𝑛𝑔
𝑒𝑡 0 0 ] (𝑒𝑡𝑑𝑖𝑠𝑝𝑜𝑠𝑎𝑏𝑙𝑒 𝑖𝑛𝑐𝑜𝑚𝑒 ) 𝑎33 𝑒 𝑡𝑟𝑎𝑑𝑒 𝑏𝑎𝑙𝑎𝑛𝑐𝑒
(3)
𝑡
The researcher has applied equation (3) to determine the decision to eliminate government subsidisation based on oil prices, oil productions and global real economic activity. 6 The researcher strongly believes that these three variables have a direct relationship to household saving, income and trade balance, and shift the demand curve as a result of plummeting world crude oil prices. Factors causing a shift in the demand curve for oil are either by fluctuations in the global business cycle or by changes in the demand for oil that are specific to the oil market. The weather impact or change in preferences for holding oil inventories can be key factors that affect the demand for crude oil. 3.1 Data The data used in this study is obtained from various sources. IEA and BP are the main sources for obtaining world crude oil prices. Specific government sources and websites such as APEC website, the Malaysia Department of Statistics, Indonesia Department of Statistics and the Bureau of Statistics Papua New Guinea were used for the country-specific time-series. Sample periods of oil price series and three macroeconomic time-series variables are varied and subjected based on data availability. Time-series variables are obtained from the World Bank Databank and IMF world economic outlook databases. There is difficulty in collecting quarterly data that can be
5 Chang
et al (2011) state that in the majority of studies, the VAR is usually limited to four lags with quarterly data or six lags with monthly data. 6 The researcher believes that an increase in the price of oil can affect consumers’ disposable income as a result of lower global real economic activity. 8
applied to VAR model. As a result, the researcher has to use annual data to conduct the VAR analysis.7 Statistic and data analysis (STATA) special edition, version 11.0 is applied in this study.
4. The empirical analysis The research has conducted two analyses in this study. The first analysis is the Johansen cointegration test and the second is the VAR model. The Johansen test is used to determine variables applied in this study. Gross domestic saving, gross domestic income and trade balance are used to examine the cointegration among these variables and fuel subsidisation schemes. In other words, the test can determine the interrelationship among these variables. For instance, if the test shows that the values of trace statistics or maximum statistics are higher than the critical value, which is set at five percent confident interval, the null hypothesis can be rejected. In this case, it explains that these three variables are interrelated. In the long run, these variables have significant impact in relating to government fuel subsidisation policies.
Table 1 Indonesia Johansen tests for cointegration
7 There are data limitations for
PNG. Gross domestic saving, gross domestic income and trade balance are among variables only available until 2004 and data has not been updated since then. The researcher, therefore, has to rely on short sample periods to conduct a VAR analysis. 9
Table 2 Malaysia Johansen tests for cointegration
Table 3 Papua New Guinea Johansen tests for cointegration8
8
The researcher used all four variables except oil production to estimate Johansen cointegration test. By adding oil production as a variable, the values of trace and maximum statistics become nil. One reason that causes the trace statistics value to be not available is limited sampling data in gross domestic saving, gross domestic income and trade balance. The researcher then has to rely on only these four variables in order to conduct a cointegration test. 10
Tables 1 to 3 show the Johansen tests for cointegration for Indonesia, Malaysia and Papua New Guinea. Outcomes of these analyses show that gross domestic saving and gross domestic income as well as trade balance are closely linked to the government fuel subsidies policy. The uncertainty in fuel subsidies policy can impact the country’s savings, incomes and trade balance. Overall, the Johansen cointegration test shows that there is cointegration among these variables in Malaysia and Indonesia relating to fuel subsidisation. However, the result has shown these data are not cointegrated in Papua New Guinea (PNG). The researcher believes that PNG has imposed different tax credits or incentives rather than subsidies to target its oil and gas investment. For example, the PNG government has imposed tax credits for infrastructure development by mining petroleum and gas companies. There are also some special incentives and rules such as interest deductions, capital allowances, off-licence capital expenditure, and management fees which apply to mining as well as oil and gas companies (Pwc, 2015). In the second analysis, the researcher has conducted a VAR model for investigating macroeconomic performances in relation to fuel subsidisation in Asia-Pacific countries.
Table 4 Indonesia VAR analysis
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Table 5 Malaysia VAR analysis
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Table 6 Papua New Guinea VAR analysis
As a repetition, the VAR also uses three variables – gross domestic saving, gross domestic income and trade balance – with three lags to conduct a study. When applying this model, pretesting for unit roots and cointegration can be carried out and the analysis can be completed by one of the outcomes shown in the model. Causality is undertaken within the model using different specifications. To further explain these specifications, Tables 4 to 6 illustrate the empirical outcomes of macroeconomic performances in these three countries. 13
Findings of this study indicate that there is no significance among macroeconomic variable performances and fuel subsidy except gross domestic income, which shows some impacts against the government fuel subsidisation scheme. The outcome indicates that domestic savings indeed have declined as a result of removing the fuel subsidies scheme. Abolishing this scheme can indeed impact the low-income earners in these countries. In the model, by setting 95 percent confident interval, p values of these variables are quite substantial. The majority of these three variables achieve greater than five percent of confident interval. In other words, using the hypothesis testing, the researcher believes that these variables have been shown to be insignificant to any one of these dependent variables. This study shows similarity to the empirical study conducted by Chang et al (2011). The study of Chang et al (2011) investigated how oil price fluctuations influence the macroeconomic performances of economies in Association of Southeast Asian Nations (ASEAN) and the Asian-Oceanic region and South Asia, and find that ‘the direction of causality is given by the short-run relationship while the long-run relationship shows the impact of oil price on the macroeconomic performances’ (p.1). Followed the method used in Chang et al, the researcher then applies Granger causality and diagnostic tests to investigate the robustness of empirical outcomes. The Granger causality test is used by the researcher to examine the short-run causality. Not surprisingly, the tests show that there is no shortrun causality among these macroeconomic variables in relation to the government fuel subsidisation scheme. However, the long-run causality does show a relationship between macroeconomic variables and fuel subsidies scheme. Fossil fuel subsidies are the most pernicious and distorting of subsidies (The Guardian, 2014). The fossil fuel tax credit subsidies scheme is among the most contentious debates in the recent energy industry. The current record low crude oil prices have raised attention about the reform of this policy. Despite this, the study has shown that macroeconomic variable performances have an interrelationship with the fossil fuel subsidy scheme. Governments in the majority countries such as Australia and other emerging Asia-Pacific countries have no intention to remove this policy to benefit entire communities. To answer the question in this study, the researcher believes that the government’s support fossil fuel scheme is mainly due to corporate welfare. For instance, in Australia itself, the Australian government has spent approximately $10 million a year in the form of subsidies on resource and oil and gas industries (Environment Victoria & Market Forces, 2014). Attempts to reduce subsidies have failed in majority countries because of the cosy relationship between the government and the energy industry. In 2011–12, oil, gas, and coal companies on the other side of the Pacific Ocean, in the United States of America (USA), have spent $329 million in campaign finance
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contributions and lobbying expenditures and received $33 billion in federal subsidies over the same two years – a more than 10,000 percent return on investment (Oil Change International, 2015). In oil exporting countries such as Malaysia, Indonesia and PNG, tax credit schemes are an incentive to attract energy and mining investment in the country. Resource and energy industries, in particular, have generated the primary source of national income for these countries’ economies. Therefore, a decision to opt to abolish fuel subsidies certainly raises some issues for governments, particularly in countries heavily relying on oil and gas as well as natural resources as a primary export, just to balance the government fiscal revenue. 5. Conclusions Tax incentives offered by governments to attract foreign investors certainly can stimulate local economic activities. However, the government handouts, particularly in the context of the current economic crises, can also distort local economic activities in many ways such as creating environmental externalities, inequality of social welfare, increased energy consumption and greenhouse gas (GHG) emissions, straining government budgets, diverting funding that should prioritise on other sectors (such as health and education) and reducing the profitability of alternative energy sources (OECD, 2013). Many agencies such as the IMF and the World Bank have urged the government that a tax subsidy reform is urgently needed because of its inefficiency. One way the change can take place is through transparency in recording subsidies in the budget and running a public information campaign, which can help to identify the shortcomings of subsidies and gain public support for subsidy reform. This study examines the relationship of variable macroeconomic performances in relation to fossil fuel tax subsidy schemes. Five variables, namely oil prices, oil production, gross domestic saving, gross domestic income and trade balance in three Asia-Pacific countries have been applied using the VAR model. These macroeconomic variables show that there is cointegration in the government fuel subsidy decision-making. The outcome of this study shows that there is no short-run causality among these variables in relation to the government fuel subsidisation scheme. There is vast literature that has raised concerns about the eliminating of fuel subsidy policy because of its inefficiency and unfairness. However, some governments, in particular those of oil exporting countries, have no intention of abolishing this system. The unwillingness for some states to remove this system is attributed to the energy sector being the primary source of income to sustain their whole nation’s economy. Besides, companies in the resource sector are also major sponsors of business and government activities in these countries. In other words, there is a corporate welfare and cosy relationship between the government and resource companies which closely link to the energy subsidies scheme. 15
This study has some limitations. The researcher has applied only a short period to conduct an analysis in this study. Data restriction to the Asia-Pacific region is one of the key factors preventing the researcher from continuing this study further. By extending the study to larger data and longer periods, indeed a different outcome can be produced. This work is relatively new and covers only a small area in relation to fuel subsidies and macroeconomic relationships in the Asia-Pacific region. Several interesting results observed in this study need to be identified and examined for robustness in subsequent research. These include the choice of model application as well as testing the validity of the cointegration relationship among these variables, which could be further explored in future research. The researcher also believes that regional economy incorporated with the government fuel subsidisation scheme should not be neglected. It would be interesting for future research to be carried on to further investigate how the change in fuel subsidies can impact the local and socially disadvantaged communities in the regional economy, which have been segregated by most politicians.
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