Economic implications of subsidies
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Subsidies are core part of fiscal policies. There are several kinds of subsidies and each has its own economic implication.
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Economic implications of subsidies
- 1. Economic Implications of Subsidies M. Ali Kemal
- 2. Definition • Given by Government • Financial aid or support to an economic sector – Institution – Business – Individual • Direct – Cash grants – Interest-free loans • Indirect – Tax Breaks – Insurance – Low-interest loans – Depreciation write-offs – Rent rebates
- 3. Types • Production subsidy • Consumer/consumption subsidy • Export subsidy • Employment subsidy • Tax subsidy • Environmental externalities
- 4. Production Subsidy • Encourages suppliers to increase the output • Production will increase at the same price • Infant Industry Argument • Automobile Industry
- 5. Consumption Subsidy • Directly use by consumers • Food Subsidy • Water Subsidy • Education • Health • Electricity and Gas • Price go down and demand goes up
- 6. Exports Subsidy • Assisting the exporters to export more • Duty Drawback • Exports Financing Scheme • R&D subsidy
- 7. Employment subsidy • Assistance to employer to increase more employment to reduce unemployment • Could be in the form of training subsidy • Employ persons with disability • Problem of wage seeking (illegally) • UK-Employer Subsidy • Australia-Wage Subsidy
- 8. Tax Subsidy • Tax Breaks • Exemptions – Charity • In exports category whosoever spend R&D will get 6 percent tax rebate
- 9. Environment Externalities • Indirect Subsidy • Polluter gets benefit in a way that he is not asked to either pay tax or reduce its production
- 10. Normative Vs Positive • Equity • Support for Poors • Rentseeking • DWL – the cost of subsidy exceeds the benefits of subsidy – Lower efficiency, less competitive. • Opportunity cost of subsidies – The amount spent on subsidy could have been spent on other. Metro Bus – Subsidy
- 11. Political Economy of Subsidies • https://www.iisd.org/GSI/effects-subsidies
- 13. Definition • Subsidies, Grants and Transfers • Financial Support by the Government • 203 billion subsidies • 370.7 billion grants and transfers • Education 64 billion
- 14. Subsidies Subsidy to WAPDA/PEPCO Budget 2013-14 Revised 2013-14 Budget 2014-15 Inter Disco Tariff Differential 165.1 245.1 150 Tariff Differential for Agri Tubewells in Balochistan 3 3 1 Receivables from FATA 12 12 5 Exchange Rate Differentials for USAIDs grant to GENCOs 0.1 0.1 0.1
- 15. Subsidies Subsidy to KESC Budget 2013-14 Revised 2013-14 Budget 2014-15 KESC’s Tariff Differential 55 64 29 KESC’s payable to PSO and PKGCL - 0.317 - Subsidy to USC Budget 2013-14 Revised 2013-14 Budget 2014-15 Ramzan Package 2 2 3 Sale of Sugar 4 4 4
- 16. Subsidies Subsidy to PASSCO Budget 2013-14 Revised 2013-14 Budget 2014-15 Cost differential to sale of wheat (Wheat Support Price) 4 4 4 Wheat Reserved Stock 5 2.5 4
- 17. Subsidies Subsidy to Others Budget 2013-14 Revised 2013-14 Budget 2014-15 Oil Refineries and OMCs 4 - 2 Fauji Fertilzer Bin Qasim Ltd 0.231 - - Sale of wheat in Fata 0.283 0.283 0.293 Sale of Wheat in Gilgit- Baltistan 0.815 0.815 0.850 Sale of Salt in GB 5 5 5
- 18. Grants and Transfers • Special Grants to Provinces • Railways • ZTBL loans • National Internship Program • Aid to GB and AJK • Subsidy for markup on housing loans
- 19. Development Expenditure Outside PSDP Program Ee loan, Budget 2013-14 Revised 2013-14 Budget 2014-15 BISP 75 70.28 97.15 PM schemes Interest free loan, Business loan, fee reimbursement, youth training scheme, etc 25 - 21 Import of urea Fertilizer 30 30 25
- 20. …! • Crop loan insurance scheme • Pakistan Development Fund • SME Business Support Fund • Relief, Rehab, Reconstruction and Security of IDPs • PPAF • Textile Policy • etc