Reflecting on subsidies

Budget being a statement of income and expenditure of a country for a period of time, the entire financial system comes under spotlight at the time of preparing the country's budget. Budget envisages how the income of the country will increase and how higher expenditures can be met from the incomes earned. Evidently, apart from foreign aids and grants, revenue earnings constitute the bulk of a nation's income. A major part of a nation's expenditure is also met from revenue earnings that include collections through various forms of fees, tax, VAT, supplementary duty and other regulatory payments.
The governments can not retain all its income for revenue and development expenditures only. It has to set aside a part of it to extend subsidies to industries and organisations that can not run on their own incomes. In this way the actual income of the government is lowered which could otherwise be utilised elsewhere. It is also called subvention.
Theoretically, subsidy is actually a financial aid provided by a government to (1) support exports, (2) keep prices of staples low, (3) maintain the income of the producers of critical or strategic products, (4) maintain employment levels, and (5) induce investment to reduce unemployment. It is generally extended to an economic sector with the aim of promoting economic and social policy.
The most basic and commonly pursued form of a subsidy is still known as "cash" grants or payments. Alternatively, a government may regulate the consumer price for a good or service, and instead pay a subsidy to the supplier of that good or service to cover its losses. These cash subsidies should not, however, be confused with general tax reductions. Subsidies are also provided in kind, that is, in a form other than money. Such benefits provided by governments include subsidised housing, specific infrastructure like roads and transportation facilities etc.
The importance of subsidy for social and economic development of a country can hardly be overemphasised. The WTO Agreement on Subsidies and Countervailing Measures (ASCM) recognises the indispensability of a subsidy for a government. As subsidy is not a permanent feature it may be squeezed or withdrawn depending on circumstantial factors. All governments review from time to time the state of existing subsidies provided by them, more so prior to drafting their annual budgets.
There are indications that subsidies in our country are going to be cut by nearly 26 per cent in the revised budget for the current fiscal year. It will be done so in view of decline in prices of fuel and fertiliser in the international market. The amount of subsidy in the revised budget will be re-fixed at Tk.189 billion, that is about Tk.70 billion lower than the originally budgeted amount and the total subsidy of Tk.8 billion given to Bangladesh Petroleum Corporation (BPC) is going to be fully withdrawn. BPC earned over Tk.50 billion prior to fixation of new prices for its products. As most of the rental power plants are operated with fuel and as price of fuel has been reduced, subsidy on electricity alongside petroleum products will be reduced by Tk.60 billion. Furthermore, power tariff was raised on a few occasions in recent past to cover increased cost of production. According to reliable sources, subsidy on food will, however, be increased by Tk.20 billion even though prices of food items came down at both domestic and international markets.
Since subsidies are being curtailed for the revised budget for last two months of the current fiscal, it is very likely that the process will continue for next year's budget as well. However, it remains to be seen how the government is going to handle the subsidy issue for the next annual budget. There are obviously some areas where subsidy not only helps keep the price down but also helps the government fulfill its welfare objectives. For instance, some kind of subsidy is going to be retained to help stabilise the market price of food grains.
Since there has been a massive decline in price of oil, it will be unwise to reintroduce any subsidy for the Bangladesh Petroleum Corporation (BPC). Instead, some kind of subsidy may be awarded to higher education sector in line with the monthly pay order (MPO) for secondary schools and the amount of subsidy hitherto extended to BPC may be utilised to develop higher education in engineering, medical and IT disciplines in the country. This will help higher institutions to flourish outside the metropolitan areas and eventually produce skilled and managerial manpower in the country comparable to global standard.  
In all considerations, higher subsidies should be allocated for the health sector to enable greater number of people to have access to improved treatment or increased health facilities. More hospitals and clinics may be set up in this way or the existing ones may be further upgraded.
An employment subsidy may be considered as another choice which offers multiple benefits. It will serve as an incentive to businesses to provide more job opportunities to reduce the level of unemployment in the country or to encourage research and development. It may also be called income subsidies. With an employment subsidy, the government provides assistance with wages. Another form of employment subsidy is the social security benefits. Employment subsidies allow a person receiving the benefit to enjoy some minimum standard of living and in this way the overall standard of living in a country is raised.
Policymakers are divided as to whether subsidies assist economic growth or whether extension of subsidies help or hinder economic growth. Although proponents of smaller government have an opposite view, advocates of bigger government argue that government programmes provide valuable "public goods" such as education and infrastructure. They also claim that increases in government spending can bolster economic growth by putting money into people's pockets. On the other hand, some argue that government subsidy undermines economic growth by transferring additional resources from the productive sector of the economy to government, which uses them less efficiently.
With relevant objectives in view, the government should formulate judiciously its policies on subsidy. Subsidies have become an integral part of budget of developing countries to bolster socio-economic development. A careful evaluation of the impact of subsidies over the years on the economy as well as on society should, therefore, be done to optimise social and economic gains through formulation of an effective subsidy package.
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