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| October 19, 2023

GT verdict: Cross that all out! Are subsidies really such a bad thing?

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While the Wise Old Man from a fairy tale by Jára Cimrman suggested that the biggest evil are the dwarfs who get everywhere, many political statements from the recent weeks may have led you to the impression that subsidies are exactly such a vicious dwarf for the economy. And the best cure for sick public finances should be to fight against them.

We have learned, for example, that we build forest roads instead of highways. What does it matter that this is money from a completely different pot and that the author of such ideas has no idea that the European Union is implementing a number of separate policies and that it is not possible to finance public infrastructure using money for agriculture. The public space is full of such statements, and unfortunately, they are only indicative of the broader problem, with which we are actually struggling.

The final version of the so-called austerity package sees the cuts in subsidies as an absolutely essential and key instrument for consolidating public finances and presents it as such. The paradox is that about 70% of these savings are not related to subsidies at all, as we understand them, but to shifting payments related to RES and distribution fees back to consumers. Never mind that the original promise was that the spectre of the solar barons of the early part of the last decade would be abolished altogether.

These payments, taken from off the consumers’ shoulders at a time of extreme increases in energy prices, can only be considered subsidies if we view, for example, social benefits, pensions, etc., in a similar way. But one is almost afraid to say that, because the next saving could be pension cuts presented as a reduction in subsidies to a select group of the population. These payments are subsidies for the solar barons, for example. But they get to keep them. The only thing that changes is, who will pay them.

Apart from this episode that elicits a rather constrained smile, it turns out that cuts of other transfers are made more or less randomly and, unfortunately, especially where there is no one, who could defend them. While many subsidies to big business remain despite spectacular statements, much-needed subsidies for landscape care, volunteer fire departments, civic amenities, regional transportation infrastructure, regional education reform, etc. are disappearing or being reduced.

Simply put: areas that not only have a positive impact on the quality of life, but also make a real and undeniable contribution to balancing social and economic disparities between regions. This is an important social mission, in which subsidies are extremely effective and their role is de facto irreplaceable.

Libertarianism, often bordering on anarcho-capitalism, is taken within a kind of society-wide consensus as the only acceptable option for a correct economic policy, and the presentation of subsidies then logically slides down to merely saying they distort the market and nothing else. Never mind that the global mainstream is going the other way and a number of Nobel laureates consider public sector economics to be an important part of effective economic policies.

Just as humanity has had to travel a significant distance to understand, for example, the role of profit and interest in the economy without getting emotional, we have an equally long and necessary road ahead of us to understand the general role of subsidies in the economy as a motivational tool to address natural barriers or imbalances. As with any economic policy instrument, the ability to use it properly is crucial.

Unfortunately, we haven’t even gotten to the edge of that discussion yet. At the moment, the consolidation package is just a result of the fact that the business of the big players, which in our country is the most dependent on public space in the world (after Russia), is untouchable. Savings must be made primarily on ordinary people. That is why we are where we are, and the baton in the form of subsidies is proving to be an extremely effective tool. Too bad it is not used for the good of our society.