Subsidy Programs and Financing

Governments provide subsidies to stimulate certain economic activities or support more general national goals. They typically come in the form of cash payments, grants, tax breaks as well as low-interest guaranteed loans. Subsidies can help communities that are disadvantaged obtain healthcare, education or housing. They also can provide benefits for businesses, such as lower taxes and government purchases of their products.

Many people who criticize subsidy programs point at the unbalanced incentives that result from the programs. They claim that subsidies create an entanglement between politicians and businesses, encouraging them to donate to campaigns and to demand a higher level of treatment from decision makers. They also argue that subsidies can discourage innovation and inefficiency because they make firms that rely on them less likely to invest in new technologies, or to change their business model to meet consumer demand.

These subsidies could have significant effects on the budget, even if they are specifically designed for a particular purpose. They could also be difficult to calculate. They may also crowd out more efficient and equitable public spending.

For instance when governments provide subsidies to energy production, they are able to make solar panels cost-effective for homeowners, and assist companies that sell them subsidized child care assistance by lowering the price of their products or providing tax credits. They may also encourage the consumption of a product or service, such as offering families subsidies to cover a portion of their health insurance premiums. The government can also help people to take out federal loans by offering low interest rates, deferment of payments or flexible payment plans.