What is subsidy?

Subsidy is one of the most important financial policy instruments that the government has at its disposal. The government tries to influence positive behavior and to end negative behavior through financial incentives. In the use of language, subsidy is broadly explained, namely financial students, originating from the government and intended for certain activities. But what does subsidy actually mean?

Subsidy and forms of subsidy

A subsidy is intended to influence the amount or quality of activities through financial support from the government. This definition includes grants to individuals, families, non-profit institutions, companies and governments. When governmental bodies subsidize each other, they are generally referred to as co-financing or specific benefits.

The concept of subsidy

There are many types of subsidies and in all kinds of modalities. A definition of definition must therefore necessarily remain broad. Reinders (1981) also does that. He gives the following definition: "A monetary or value-for-money payment from the government to private institutions for certain activities that the government judges in the public interest but which it does not undertake for various reasons".
'The public interest element means that the government attaches value to the subsidized activity from the point of view of the public interest, without having to support the content of that activity, either wholly or in part. This is clear from subsidies for art and culture. A state prize for literature does not mean that the government automatically identifies itself with the content of the lauded work or with the literator. Subsidies for industrial product innovation are often awarded from the general motive of employment and stage productions from a cultural promotion point of view.
Subsidy is a policy institution that is typical of the welfare state. Two important features of the welfare state are based on the application of this instrument:
  1. A network of mostly private-law subsidized independent organizations around the government that produce services of general interest on a non-commercial basis.
  2. The government directs economic processes in the market sector through subsidization and regulation (guided economy).

Forms and modalities of subsidy

There are five basic forms of subsidy schemes in administrative practice:
  1. A certain amount in one go
  2. A fixed or standard amount per performance or activity
  3. A percentage contribution to the costs or certain cost types
  4. A percentage addition to the income
  5. Coverage of (a portion of) the shortfall (operating deficit)

For subsidies, a further distinction can be made between income transfers and capital transfers. Income transfers are contributions from the government from ordinary resources to support the exploitation of the institutions or the subsistence of families. Examples are the social assistance benefit, the unemployed benefit and the individual housing benefit. Capital transfers or capital transfers are capital contributions to alleviate the financing problems of the receiving party, for example the establishment of a school as a contribution to the purchase of land and buildings.
Different grant modalities can be distinguished:
  • Operating grant
  • Budget subsidy
  • Valuation subsidy
  • Incidental subsidy
  • Linking subsidy
  • Incentive subsidy

An operating grant is given to institutions that are dependent on government funding for a certain part of their funding. The objection to this form of subsidization is that the recipient of the subsidy has no interest in limiting the operating deficit, the deficit should only be kept within the limits of the subsidy made available by the government. The government may supervise, but the criteria for such supervision are missing.
The budget subsidy was created to meet the objections associated with the operating subsidy. The grant provider will demand guarantees that the agreed production or activity volume will be achieved.
With a valuation subsidy, the existence of the institution does not depend on the subsidy. The subsidy is intended solely as a material token of appreciation from the government. If the subsidy is not of a structural nature, but for a one-off performance or activity, this is referred to as an incidental subsidy.
A cross-subsidy has the condition of co-financing: an administrative body only subsidizes on the condition that another administrative body does the same.
The incentive subsidy is an incidental nature subsidy. The subsidy is of a supplementary nature. It is often provided to finance a project because if the government does not participate, the project would not go ahead.

Motives for granting a subsidy

There are various reasons for granting subsidies. To know:
  • The cost motive
  • The paternalistic motive
  • The external effects motive
  • The development motive

The cost motive applies if the costs of the subsidized activity are reduced with a financial government contribution. In this way, subsidies can lead to a reduction in the price of the provision to which they are spent and can therefore lead to greater use. They can also make such a large contribution to the cost price of a facility that it could not be produced or sold at all without a subsidy (for example, youth and youth work). The paternalistic motive means that from the point of view of the public interest the government feels it is right to subsidize the service. The external effects motive aims to achieve much more with the subsidy than just the subsidized activity. The development motive occurs when a certain activity or service is introduced with a subsidy.

Subsidy scheme

The conditions for granting a subsidy are usually laid down in a subsidy scheme. This scheme contains the procedure for granting the subsidy. It also regulates the way in which the required information must be provided, whether an advance is given and the way in which the subsidy is determined and paid out.
The subsidy scheme can also include conditions that the subsidized institution must meet and conditions that can be linked to the subsidy. These conditions may relate to the legal form and control. The decision with which the subsidy is granted contains the subsidy basis. This basis can be the operating deficit, a standard amount per performance or another quantitative measure. In order to provide legal certainty to the subsidized institution about the continuity of the source of funding, a cancellation period can be included. If it is clear beforehand that the subsidy will be terminated after a certain period or for another reason, a horizon provision will be included in the decision.

Video: Subsidies Explained in One Minute (February 2020).

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