Year: - 1st Year

Semester: - 2nd

Semester

Lecturer Name :- Prof.Samarawikrama

Student’s Name :- D.M.Manawadu

Reg. No :- A/12/BBA/118

Definition of Subsidies –

There is no common definition of a subsidy. According to OXFORD ONLINE DICTONARY “a sum of

money grant from public funds help an industry or business keep the price of a commodity or

service low”

Large number of government programs may be considered as subsidies, these programs can be

grouped into these categories.

(1), Government may transfer funds to producers or consumers. (Direct payments)

(2), Government may provide goods or services without cost or below market price, such as

university education, public transport.

(3), Regulatory policies may be seen as subsidies. (Tax concessions)

Main aims of subsidies,

(1), Keep market price down.

(2), Boost market demand for certain goods and services.

(3), Increase the revenue and products.

(4), Maintain a service that is thought to bring positive externalities.

(5), Reduce the cost of capital investment projects.

(6), Protect employment of particular market.

(7), In some industrial subsidies are on alternative to tariffs placed on imported products.

Effect of a subsidy for consumer,

A subsidy for a consumer cause to outward shift in demand curve at each price level .We can

illustrate the effects which arisen from a consumer subsidy as follows,

Before Subsidy After Subsidy Change

Consumer Surplus A+B A+B+D+E +D+E

Producer Surplus G+D G+D+B+C +B+C

Government Spending 0 B+C+D+E+F -B-C-D-E-F

Net Change -F

Effect of a subsidy for production,

A subsidy cause to outward shift in supply curve at each price level .Now consumer pay less for

the product (This will cause to increase consumer surplus). Now firms receive higher price for

their output.

Total effect of the subsidies,

Free market Subsidy

Consumer surplus A+B A+B+C+F+G

Production surplus C+D B+C+D+E

Gov. revenue 0 -(B+C+E+F+G+H)

Total surplus A+B+C+D A+B+C+D-H

Does subsidies always bad for a society? Despite some inefficient situations of subsidies, is not

necessarily the case that subsidies are bad policy. For example subsidies can actually rise rather

than lower total surplus when positive externalities are resent market.

2015 Budget subsidy proposals and its effect to the economy

In the budget proposal 12 part is consider about Agrarian Development.

- Abstract from budget speech 2015.

Economic effect - According to 2015 budget, it is proposed to continue the fertilize subsidy.

It may cause to motivate farmers and to increase the production of agricultural products. And

also agricultural products takes major part of GDP and by increasing these products it will help

to increase the economic growth rate too. By exporting these agricultural products, we can gain

more income and it will help to reduce the budget deficit somewhat. And also such subsidies will

act as a alternative to traffic of imports. By proposing a guaranteed price for agricultural

products, it also may cause to motivate the farmers.

Budget proposal’s 13th part is considered about Small holder plantation.

-

- Abstract from budget speech 2015.

Economic effect – By proving subsidies for replanting, new planting

allowances for tea and replanting and rehabilitation of coconut lands, it will cause to increase the

level of outputs and the landowners are motivated to plant again and again in their lands.

Because of this it will increase the level of outputs and will be able to gain more foreign

incomes. By granting subsidies to estates, it will cause to increase the employment rate of the

country . It will also help to increase the livehood of the people.

Last few years it reduced the level of importable goods like tea, rubber ,and coconuts because of

lack of such strategic subsidies. Following statistical data shows that clearly,

Budget proposal’s 16th part is considered about farmer pension and crops insurance

scheme.

Budget proposal’s 21th part is considered about Health Services.

- Abstract from budget speech 2015.

Economic effect – Propose to grant Rs 3000 per month to kidney deceased people can be

consider as a social welfare. It will cause to increase the consumption level of the economy.

Budget proposal’s 27th

part is considered about Higher education and Research.

Economic effect – By proposing to increase the “Mahapola” scholarship monthly allowance

to Rs: 4000, it will cause to increase the consumption level in the economy. And also it will help

to make intelligent work force and researches may be helpful to find new production processes

which are caused to reduce the production cost. The work force with excellent skills will helpful

to increase the efficiency and effectiveness of the production. In long run it may be achieve

higher rate of production level and growth rate.

In short run these transfers are not finding as an effective payments.

Following data shows that the “Mahapola” scholarship has increased in previous years rapidly.

Government has to expend much money for such scholarships and there has an opportunity cost

for spending money such scholarships.

Budget proposal’s 44th

part is considered about Social Security.

- Abstract from budget speech 2015.

Economic effect – Providing allowances for elder person can be consider as a positive

externality of a economy. This will cause to increase the consumption level and no any long term

advantage can be found.

Budget proposal’s 49th

part is considered about private transport.

- Abstract from budget speech 2015.

Economic effect – It will be able to provide comfortable transport service to people. And also

transport is a element of the GDP so it will helpful to increase the GDP somewhat or possible.

Good transport system helpful to increase the efficiency of a country. By considering such

strategic subsidies in last budgets, it caused to increase the transport’s quota for GDP.

Following statistical data show that clearly. It was 9.4% change of the contribution to the GDP in

transport sector by granting such subsidies in previous budgets. So furthermore we may be able

to achieve a significant contribution to GDP in transport sector.

Source - Central Bank of Sri Lanka.

Budget proposal’s 54th

part is considering about Thi services.

- Abstract from budget speech 2015.

Economic effect- There has positive externalities when granting such payments. It may cause

to increase the consumption level of the economy furthermore.

Budget proposal’s 58th

part is considering about pensions.

- Abstract from budget speech 2015.

Economic effect – Pension is a payment to people who are retired. According to 2015 budget

it is proposed to grant interim allowance of Rs 2500 per month to all pensioners and Rs 3000 to

al public servants in addition to their salaries and allowances. Pension is consider as one way

transfer because there have not any efficient output o the economy.

Economic effects which are commonly arise because of subsidies.

To provide subsidies, Government has to collect bunch of money. Governments may

have to increase the tax rates significantly to collect funds because tax income is the major part

of government income. Following data provide evidences for this statement.

From these tax revenues major part is collected by VAT. VAT is imposed for consumer’s

essential goods like esential food items, vehicles etc.. So it may cause to bear higher tax expense

to the peoples and the consumption level may also get reduced.

(02) Subsidies distort market price. Many economists believe the free market mechanism works

best.

(03) Ever present risk of fraud when allocating subsidies payments.

(04) Subsidies can artificially protect inefficient firms.

(05) Subsidies can be considered as a form of protection or trade barrier by making domestic

goods and services artificially competitive against imports.

- Budget summary 2015

References

1. Budget speech 2015,

http://www.treasury.gov.lk/images/depts/fpd/docs/budgetspeech/2015

2. Performance report 2012,Inland revenue department,

http://www.ird.gov.lk/Site/preports.html

3. Annual Report 2013,Central bank of Sri Lanka,

http://www.cbsl.gov.lk/pics_n_docs/10_pub/_docs/efr/annual_report/AR2013/English/co

ntent.html

4. Mahapola Fund, http://www.mahapola.lk/images/PDF/scholarshipaward.pdf