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HomePolicy Articles Article Summary

Are business subsidies efficient?

Economic Note by Nathalie Elgrably

Nathalie Elgrably begins her economic note by explaining several categories of subsidies to business: 1) direct subsidies in the form of unconditional or conditional transfers; 2) tax expenditures, which are tax advantages such as exemptions, deductions, lower tax rates, and refundable or non-refundable tax credits; 3) interest-free or low-interest loans; 4) loan guarantees; 5) financial involvement in a commercial company through shares or units; and, 6) non-monetary assistance such as consulting services.

Elgrably states it should be possible to reduce subsidies and help companies by reducing their tax burden. She discusses federal subsidies and Quebec provincial subsidies, citing relevant statistics. The author contends that subsidies, regardless of their form, create distortions in normal market operations and bring about a ‘malinvestment.’ By investing in subsidy programs governments artificially favour a company, production or sector, sometimes at the expense of more productive ones. Further, governments use taxpayer money to bet on “the potential success of risky subsidized projects, as determined by politicians and civil servants for reasons that may depend more on political than on economic value.”

Elgrably elaborates on how the subsidies she outlines in her economic note produce disadvantages and burdens. She concludes that subsidies end up reducing business efficiency and wealth creation. They are also inefficient but hardy, occurring in varied forms, yet always with undesirable effects that harm economic performance. A better alternative, she argues, is to reduce the tax burden on all businesses.

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Policy Publication Details

Author(s): Nathalie Elgrably;
Publisher: Montreal Economic Institute [ Visit Website ]
Year Published: 2006; Publisher Type: Research Institute
Publicly Available: Yes Research Focus: Provincial;
Registration Required: No Language: English
Payment Required: No Publication Format: Adobe PDF, Hard Copy

Subjects / Categories:

Policy Articles / Fiscal & Budgetary / Business Subsidies
Policy Articles / Regional & Sectoral / Quebec
Policy Articles / Fiscal & Budgetary
Policy Articles / Regional & Sectoral
Policy Articles / Fiscal & Budgetary / Business Subsidies / 2006
Policy Articles / Regional & Sectoral / Quebec / 2006

Keywords / Tags:

business subsidies; direct subsidies; transfers; tax expenditures; tax credits; non-monetary assistance; tax burden; malinvestment; wealth creation; economic performance;