Who pays for subsidies?

30 Aug, 2019 - 00:08 0 Views

eBusiness Weekly

Business Weekly Last Word

Among the many economic reforms being tackled by the new dispensation is the emotive issue of subsidies, direct and indirect, and either abolishing these or, where Government policy requires a move that an economist might label as a market distortion, ensuring that the subsidy is identified, is transparent, is properly funded and preferably targeted.

In addition, via better auditing and a major upgrade in the struggle against corruption, the Government is trying to ensure that subsidies are properly and efficiently used.

At the heart of every subsidy debate must be the first two questions: Who benefits? and Who pays? Human nature being what it is there is normally strong support for subsidies from those who benefit without paying and strong opposition from those who pay without benefiting. Even if people cry that the Government should pay, that still means a new tax or a cut back in other spending, such as a lower salary rise for civil servants. The next set of data must be a reasonable estimate over the effects of the distortion introduced over a pure market system.

Such distortions are not necessarily undesirable. In fact in many cases they are the desired goal. But that assessment is the next level and is a political decision, based on the economic data.

In one sense every Government service paid out of taxes is a subsidy of sorts. That is why until recent centuries governments limited their spending to defence, internal order and the provision of justice. This is because everyone needs these services as a basis of society. The next three serious large additions in most countries were the provision of public education, that is affordable schooling, basic transport infrastructure, that is roads, and at least basic public health. In one sense spending taxes on these services is subsidising parents and subsidising the sick. However, since most adults become a parent at some stage and most people fall sick sometime in their life, these are near universal benefits. In any case the advantages of having alliterate an educated population and a healthy population are benefits even to the naturally healthy and childless taxpayer. Usable raods slash transport costs for everyone and so have a universal public benefit.

But generally the debate on subsidies is more limited. And here there are increasingly more options as subsidies are more carefully costed and the targets better identified. To take one example, cheap food. Food subsidies have been tried in many societies. They are generally, in the end, found to be inefficient and unfair. The rich person usually benefits more than the poor person, who was the target, because they can afford to eat more. Increasingly countries are instead of giving everyone a handout are instead sending direct payments to those who actually need help to avoid starvation. Means tests are required, whether formal or informal, but generally you get a lot more help given to those who actually need it once you eliminate from the largesse those who do not.

Even the Third World is now switching to these systems, and Zimbabwe now has the rudiments of such a scheme which is being reintroduced using mobile money transfers rather than attempts to make more expensive cash payouts some distance from the homes of beneficiaries. All will hope that the better administration we are now seeing will help to ensure that all getting this help are in genuine need and that all who need it do get it.

One subsidy introduced this year, or perhaps an abandoned subsidy reintroduced in a different form many years later, was the Zupco ticket subsidy. As part of the new fiscal discipline, this was done properly. There was a political decision, to have a policy for urban workers to get affordable public transport. The costs were calculated and the increase in excise duties on fuel were adequate to fund the subsidy with enough left over for other government programmes. The benefits were almost all going to the lower-paid workers, because in Zimbabwe public transport is still regarded as second best, and the payers were fuel users, either private motorists or businesses which rely on having their workforce coming to work. The costs are budgeted and were announced, $30 million by the end of June.

Many years ago Harare employers were charged a small sum each month as a levy to subsidise city transport to the high density suburbs, another targeted subsidy Part of the reason Zupco services collapsed in the years after nationalisation was the informal and uncosted subsidy to bus travellers that came from setting fares that were so low Zupco could not buy replacement buses, even if it was run efficiently, a dubious proposition at that time. In effect Zupco had to pay its own subsidy without revenue, unlike the old and the now the new subsidies.

Most hope that as part of the subsidy deal, the Government is insisting on decent accounts from Zupco and its franchise holders and has set efficiency and honesty standards that are being audited and met.

Public debate is needed on whether fuel taxes should all be allocated to transport, including public transport subsidies. The USA has a strict policy that all federal and state taxes on fuel are so earmarked. Germany has a general informal policy that the budgeted expenditure on transport should be roughly the same as the amount raised in fuel taxes, but also splits those taxes so that a fixed number of cents a litre goes directly on public transport infrastructure. This is not a subsidy to the poor, since almost all Germans own a car or could afford to buy one. Rather it is part of a raft of measures, which include traffic and parking restrictions, to make it cheaper, quicker and easier to leave your car at home and go to work by train and bus, cutting pollution and inner city congestion. Again we see a careful subsidy system being used to implement specific society policies, a political rather than an economic decision.

It is this need for policing a subsidy that must be part of the debate that erupted this week over the new retail fuel prices announced by Zera, with fuel buyers outside Harare paying higher prices largely based on far they lived from the Msasa terminus and storage depot in Harare. In Victoria Falls, as far from Harare by road as you can get, the additional transport costs add 55c/litre to the fuel price.

Now that we all know the actual extra costs of driving tankers around Zimbabwe, we can all do the sums that are needed to restore a common maximum retail price. This would involve a cross-subsidy. Fuel buyers in Harare, and in towns moderately close to Harare, would have to pay more to cover the cost of driving the trucks to Bulawayo and beyond. As Harare is easily the largest fuel market in Zimbabwe the price rise near Msasa would be lower than the price drop in the west of Zimbabwe, so there is potential for a different model.

Regrettably, however, more is required than just adding 10c/litre or whatever the required sum is to Harare fuel prices. We also have to take into account the fact that fuel companies each have different shares of their product going to different parts of the country, and then we have the problem of possible, or probable dishonesty, with at least some company increasing its Harare market share at a higher profit while starving markets elsewhere. These problems would require, presumably, payments into a central fund that would be disbursed against certified deliveries, a cumbersome system that has its own corruption dangers and administration costs. But those who wish a policy change need to address these issues and come up with sensible plans before making their submissions for a standard national price.

In other words, everyone in the new dispensation who wants the Government’s economic managers to change a tax or a pricing system has to present a workable alternative, properly costed, so that the Government can then make the political decision to do something better, backed by decent economics and accounting, rather than just crash the economy.

This should be the general approach by all contributing to economic debate. The Government’s economic team, formidable as it is, does not have a monopoly on ideas. But others contributing to the debate need to go beyond old-fashioned opposition naysaying and come up with something better, and better in all senses, both economic and in terms of acceptability.

 

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