Though there is a common belief that the cost of living would increase due to the hike in fuel prices, Assistant Governor of the Central Bank, Dr. H. N. Thenuwara said that would not be so as the fuel hike would only bring down inflation because it would reduce government borrowing money to subsidize fuel and electricity.
`Maintaining subsidies causes a large impact on the inflation because the government has to borrow money,` Dr. Thenuwara said.
He said that changing the price of a litre of kerosene by one rupee alone would cause a 0.1% increase in the price index. However, the subsidy cost on long-run inflation would be more.
Inflation is calculated based on the Colombo Consumer Price Index which is based on a fixed basket of goods and services.
The commodity basket of CCPI doesn`t include diesel and petrol but covers transport under services list.
Dr. Thenuwara said that according to CBSL statistics, change of the price of a litre of all three fuel oils, ie. Diesel, petrol and kerosene by one rupee would cause some change in the price index.
He said that the government has to borrow to subsidize fuel because there isn`t sufficient tax revenue and when fuel is subsidised, people use more fuel, causing the government to borrow more to pay for subsidies.
Dr. Thenuwara further said that using taxes to fund subsidies cause `distribution effects` or a disparity in wealth distribution.
`When the government uses the VAT revenue to subsidise diesel and petrol, the rich who are using fuel inefficient vehicles get more benefits out of subsidies than the poor, who uses public transport, because both rich and poor equally have to pay indirect taxes such as VAT,` Dr. Thenuwara added.