Subsidy is not bad after all

Subsidy is a globally accepted economy-paying cushioning concept. It is the responsibility of every government to make provision of goods and services available to its citizens, especially public and quasi-goods. It ranges from health to education, transportation, energy, and etcetera. When the government makes certain payments on behalf of its citizens, especially for a good […]

Subsidy is a globally accepted economy-paying cushioning concept. It is the responsibility of every government to make provision of goods and services available to its citizens, especially public and quasi-goods. It ranges from health to education, transportation, energy, and etcetera.

When the government makes certain payments on behalf of its citizens, especially for a good considered private, we say that good is being subsidised. It could also be in the form of financing such as soft loans with low interest rates to individuals, incentives to businesses to produce certain goods that could induce positive externality, and stabilise the economy. It should also be noted that transfers to households are not considered to be subsidies, since they neither involve the sale of goods or services nor do they alter price.

What every country subsidises differs, as they’re mostly based on the needs of the citizens and the financial prowess of the government. For instance, during the outbreak of the coronavirus pandemic, global activities were abruptly halted, and businesses were shut except for those who were providing essential services. During this period, the United Kingdom government created a job retention scheme. The scheme provided grants to employers so they could retain and continue to pay staff during the lockdown.

In a bid to cushion the debilitating effect of coronavirus in the United States of America (USA), the Senate passed an unparalleled $2.2 trillion economic rescue package steering aid to businesses, workers, and healthcare systems that were affected by the pandemic. Among many other things, the bill provided roughly $500 billion in guaranteed subsidised loans to larger industries, one-time direct payments to Americans of $1200 per adult, and $2400 to married couples, with $500 payments per child.

According to last year’s report, the German government was expected to end price subsidies for electricity and gas in March 2024. This subsidy was introduced during the energy crisis to shield consumers from excessive financial burdens during the winter.

Fuel subsidy in Nigeria has been perceived as an avenue to help the rich instead of the poor. According to several literatures, it is the rich who unevenly benefit from Nigeria’s fuel subsidy, as richer households consume larger quantities of PMS than the poor. However, the life of an average Nigerian depends on fuel to power small generators, for public transport, and for transferring agricultural produce from farms to the market.

It was disheartening to listen to a former vice-presidential candidate in 2019 saying that Nigeria’s budget priorities are misplaced. According to him, FG spent about N340 billion on health and N400 billion on education, which are crucial for development, yet, the country allocated nearly a trillion naira to fuel subsidies. This expenditure is seen as wasteful because it doesn’t address the basic drivers of economic growth. He further mentioned that Nigeria has estimated two million cars, (10 per 1000 people) and 87 million people are living in poverty. He concluded that the fuel subsidy disproportionately benefits a small segment of the population and asked for it to be suspended.

So, invariably, it is wastefulness to continue to be paying for fuel subsidy but many other things can be subsidized

It is the fiscal responsibility of the government to make provision of certain goods for the citizens. We have seen the government rolling out food stamps to help low-income citizens to cover the costs of their food. Chinese farmers are one the strongest in the world of international trade because of the production subsidy they enjoy from the Chinese government. Even in the USA, agricultural production is one the sectors that benefits from government subsidy. It was reported last year that the US government spent more than $30 billion a year on subsidies for farm businesses and agriculture. It is not as if we don’t have similar schemes in Nigeria, but many of them are not well coordinated, and sometimes, those who really deserve the production subsidy don’t usually get it.

Subsidy has been so controversial in Nigeria because the government has refused to understand the teeming need of the citizens. The country is divided into six geo-political zones, but their needs are not the same. Not everyone is benefitting from petroleum subsidy.

A man living in the North East might not need a house subsidy, but a man living in Lagos. While some residents in the North East, North West and North Central may be clamouring for subsidy on farm inputs, the Lagosians and those who live in Abuja could be calling for a housing and transportation subsidy. The needs of each region are different, so, government must tailor subsidies to the needs of groups of people, professions, tribes, and regions.

 

Oluwole Crowther, Economist, Researcher and Data Analyst wrote from Lagos