Subsidy
[8] For this reason, having a thorough subsidy policy is essential as its inadequacy can potentially lead to financial hardship and problems for not only the poor or low income individuals but the aggregate economy as a whole.
This type of subsidies are most common in developing countries where governments subsidise such things as food, water, electricity and education on the basis that no matter how impoverished, all should be allowed those most basic requirements.
[6] Evidence from recent studies suggests that government expenditures on subsidies remain high in many countries, often amounting to several percentage points of GDP.
[5] China's shores have also collapsed from overfishing and industrialization, which is why the Chinese government heavily subsidizes its fishermen, who sail the world in search of new grounds.
That was because "… under normal industrial-commercial conditions their own interests soon oblige loss-making businesses to deploy their capital in other ways – or to move into markets where the sales prices do cover the supply costs and yield ordinary profits.
Therefore, it is important for governments to carefully consider the potential consequences of offering tax subsidies and ensure that they are targeted towards achieving the greatest public good.
Despite these concerns, tax subsidies remain a popular tool for governments to promote various policy objectives, such as economic growth, job creation, and environmental sustainability.
In conclusion, tax subsidies are a powerful tool for governments to achieve policy goals, but they come with their own set of challenges and limitations.
It is important for policymakers to carefully consider the potential unintended consequences of tax subsidies and to design them in a way that maximizes their benefits while minimizing their costs.
The European Union, for instance, criticizes Germany for its high number of money-losing airports that are used primarily by low cost carriers, characterizing the arrangement as an illegal subsidy.
The fact that long-distance buses in Germany do not pay tolls has been called an indirect subsidy by critics, who point to track access charges for railways.
[21][22] Energy subsidies may be direct cash transfers to suppliers, customers, or related bodies, as well as indirect support mechanisms, such as tax exemptions and rebates, price controls, trade restrictions, and limits on market access.
During FY 2016–22, most US federal subsidies were for renewable energy producers (primarily biofuels, wind, and solar), low-income households, and energy-efficiency improvements.
Or they may be free or cheap negative externalities; such as air pollution or climate change due to burning gasoline, diesel and jet fuel.
[28] The International Energy Agency says: "High fossil fuel prices hit the poor hardest, but subsidies are rarely well-targeted to protect vulnerable groups and tend to benefit better-off segments of the population.
In the United States, the so-called Section 8 is a direct payment program subsidising the largest amount of money to renters for rental assistance.
[37][38] The report spans the period 2008–2012 and notes that: "for all companies and all years, the economic cost to society of their CO2 emissions was greater than their after‐tax profit, with the single exception of ExxonMobil in 2008.
An example would be an increase in disposable income arising from a decrease in price of an essential good or service that the government has enforced in a form of monetary support.
It has proven to be effective in many cases but price controls have a potential to dampen investment activity and growth, cause heavy fiscal burdens for the government, and may even complicate the optimal performance of monetary policy.
To prevent the undesirable negative effects, price control regimes may be replaced by creating social safety nets and proposing sound reforms to encourage competition and growth.
Subsidies are intended to support public interest, however, they can violate ethical or legal principles if they lead to higher consumer prices or discriminate against some producers to benefit others.
[49][50] In the Netherlands, audits are performed to verify whether the funds that have been received has indeed been spent legally (and all requirements of the subsidy provider have been attained), for the purpose intended.
Perverse subsidies are now so widespread that as of 2007 they amounted $2 trillion per year in the six most subsidised sectors alone (agriculture, fossil fuels, road transportation, water, fisheries and forestry).
[56] Indirectly, they cause environmental degradation (exploitation of resources, pollution, loss of landscape, misuse and overuse of supplies) which, as well as its fundamental damage, acts as a further brake on economies; tend to benefit the few at the expense of the many, and the rich at the expense of the poor; lead to further polarization of development between the Northern and Southern hemispheres; lower global market prices; and undermine investment decisions reducing the pressure on businesses to become more efficient.
[7][55][57] Over time the latter effect means support becomes enshrined in human behaviour and business decisions to the point where people become reliant on, even addicted to, subsidies, "locking" them into society.
[59][60] When cuts are suggested many argue (most fervently by those "entitled", special interest groups and political lobbyists) that it will disrupt and harm the lives of people who receive them, distort domestic competitiveness curbing trade opportunities, and increase unemployment.
[57][61] Individual governments recognise this as a "prisoner's dilemma" – insofar as that even if they wanted to adopt subsidy reform, by acting unilaterally they fear only negative effects will ensue if others do not follow.
[7] Multilateral actions by several countries are more likely to succeed as this reduces competitiveness concerns, but are more complex to implement requiring greater international collaboration through a body such as the WTO.
However, the main recipients had been larger, established companies – while most of the firms pioneering radical technical-product developments with long-term economic growth potential had been new small enterprises.
The study concluded that instead of providing subsidies, governments wanting to benefit industrial-technological development and performance should lower standard rates of business taxation, raise tax allowances for investments in new plant, equipment and products, and remove obstacles to market competition and customer choice.
