The burden of economic subsidies

ECONOMICALLY, subsidies are a burden on budgets. Politically, subsidies are advantageous because they win politicians quick public approbation. But the political interests of a few should not be allowed to take precedence over the damage subsidies do to the economy. Subsidies mostly benefit those who don’t deserve them. Only a fraction reaches the people who need

support. Also, they have undesirable social and environmental consequences. Many of us, for example, still remember that kitchen stoves were left burning throughout the day as gas in the ‘good old days’ was cheap. For that matter, not many of us turned off unneeded lights when power prices were only a fraction of what they are today. Although power conservation is not yet a national habit, the reduction in fuel and power price subsidies has made people more conscious of the need to cut costs at home.

Also, governments in economies like ours are forced to cut expenditure on socio-economic infrastructure to create fiscal space for inefficient spending on subsidies. This can lead to a balance-of-payments crisis as experienced last year due to the Musharraf government’s failure — for political gains — to pass on the rising global oil prices to consumers.

In spite of subsidies being inefficient, no government easily agrees to do away with subsidies due to political advantages. It is only when a government can no longer bear the expense of subsidies that it agrees to abolish them. The PPP government must be given credit for doing what it takes to reduce the burden of power subsidies on the budget, gradually though, in spite of this move’s political fallout. If it had not done so it might not have been able to get financial backing from multilateral lenders like the IMF, whose support is crucial to stabilising the sliding economy. The government has substantially reduced the size of subsidies and their burden on the federal budget. But a lot more still needs to be done as the government would still be spending Rs55bn on unproductive power subsidies — that would only benefit the affluent — this fiscal year despite the proposed 18 per cent increase in electricity rates between January and April next year. Imagine what the government could do with this money — for instance, it could provide educational and healthcare facilities in remote and underdeveloped areas. Or, it could simply put cash in the hands of those who require protection against the rising cost of living. Clearly, the government effort to abolish subsidies must be supported as these harm the economy and do little to provide relief to the common man.

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