What Are Subsidies?
Source details
- Canonical URL
- What Are Subsidies?
Other formats
Bibliographic details
- Authors: BENEDICT CLEMENTS, IAN PARRY
- Published: September 1, 2018
What subsidies are and common forms
- Subsidies are fiscal tools governments use to encourage economic development, help disadvantaged groups, or advance other national objectives.
- Examples provided:
- Exempting owners of electric vehicles from paying highway tolls (Norway).
- Government paying part of wages when businesses hire young people, indigenous Australians, or older workers (Australia).
- Tax breaks to companies that establish global or regional headquarters (Singapore).
- Common forms of subsidies:
- Keeping prices artificially high to boost incomes of producers (for example, farmers).
- Offering services at below cost (for example, university education or subway rides).
- Paying some interest on loans used to finance infrastructure (for example, roads or power plants).
- Granting relief from taxes on certain products or technologies.
When subsidies make sense
- Subsidies can correct market imperfections when private markets fail to deliver socially desirable outcomes:
- Encourage businesses to invest in research and development that benefits broader industry or society.
- Help start-ups survive an initial period of losses until they grow large enough to be profitable (requires government information to assess likelihood of future success).
Impact on inequality and efficiency
- Energy subsidies intended to help low-income households can be inefficient and regressive if available to everyone; targeted cash transfers cost far less.
- Distributional evidence: across Africa, Asia, Latin America, and the Middle East, the top 20 percent of households capture on average seven times as many of the benefits of energy subsidies as do the bottom 20 percent (Coady, Flamini, and Sears 2015).
- Distortion and misallocation:
- Subsidies that do not address market imperfections can distort prices, causing misallocation of labor and capital and undermining growth.
- Examples:
- Propping up petroleum prices may keep firms afloat in energy-intensive sectors and damp investment in alternative energy.
- Producer subsidies in agriculture that increase prices received by farmers above prices for imported food reduce incentives for improving efficiency.
- European Union example: these subsidies averaged 20 percent of gross farm receipts in 2014–16 (Organisation for Economic Co-operation and Development, 2017).
- Environmental harms and scale of fossil-fuel-related subsidies:
- Harmful subsidies, particularly for fossil fuels, are expensive and conflict with environmental objectives such as reducing air pollution deaths and meeting Paris Agreement commitments.
- Using a broad measure that includes environmental costs, global subsidies in 2015 are estimated at $5.3 trillion, or 6.5 percent of global GDP (Coady and others 2017).
- Country breakdown of largest subsidies in 2015:
- China: $2.3 trillion
- United States: $700 billion
- Russia: about $300 billion
- India: about $300 billion
- These global subsidies are characterized as pervasive across both advanced and developing economies and, on this measure, exceed what governments spend on health care throughout the world.
Reform strategies and policy recommendations
- Challenges:
- Subsidy reform often involves raising prices of widely used goods (for example, gasoline or food), which immediately affects consumers and can provoke public and interest-group pushback.
- Many reform attempts have been reversed under such pressures.
- Recommended components of an effective reform strategy:
- A comprehensive and detailed reform strategy specifying clear long-term objectives for future price paths and the use of revenues.
- A far-reaching communications strategy to explain how subsidies crowd out more efficient and equitable public spending.
- A gradual approach to allow consumers and firms time to adjust.
- Complementary measures to protect and assist affected groups, such as:
- Cash transfers to protect vulnerable households.
- Retraining for displaced workers.
- Experience to date:
- Many (mostly energy-producing) countries have managed to raise domestic prices in recent years, including Angola, Egypt, India, Mexico, and Saudi Arabia.
- Further reform is needed, particularly to reflect environmental costs in fuel prices as part of strategies to implement the 2015 Paris Climate Change Agreement pledges to reduce carbon emissions.
Benedict J. Clements and Ian Parry; F&D Magazine, September 2018.
Content in this bundle
- عودة إلى الأسس
- Subsidios: Algunos sirven; otros, no
- Subventions : avantages et inconvénients
- basics
- What Are Subsidies? – IMF Finance & Development Magazine | September 2018
- 政府补贴：喜忧参半 - 返归基础 - 《金融与发展》- 2018年9月号·第55卷·第3期 - 国际货币基金组织季刊