22 - 28, 2011

The subsidy is the benefit usually economic benefit to an individual. It eliminates the burden of high prices on public.

The government normally reduces the tax or sometime, it entirely removes the taxes and surcharges. This phenomenon reduces the prices of commodities and public acquire the economic benefits.

It means after inflation the subsidy is linked with the taxes. Commonly, it has connection with the indirect tax that could be defined in local term, "it is consumption surcharge" like sales tax, value added tax, good and services tax etc... it has been paid by public on consumption of any single product because the market prices have the effect of indirect taxes. The government imposes the indirect tax to collect the revenues from public and generates welfare for them.

Now let's see the combination, taxes are collected to finance the social security and government expenses and subsidy is financed to reduce the prices of specific commodity but the inflation has unique relationship among all. It increases the rate of taxes and of course it reduces the subsidy.

If the rate of subsidy is increased by the government it shall pass the benefit to the public otherwise it would again increase the inflation.

In 1998-99, the subsidy was eight percent of the indirect tax although it was enhanced by the government and in 2005-06 it stood at 18 percent. The 18 percent was again passed on to public and rest of this 82 percent was deposited for the government expenditures and the social security.

In year 2007-08, there was historic subsidy pass by the government which even crossed the half of indirect taxes with 52 percent. Again rest of amount was for government and social security. That year government share considerably decreased and gap of expenditures was financed by other sources.

But, this situation remains an ideal and it jumped down at 14 percent in year 2008-09. Moreover, it again stayed at eight percent of the indirect taxes in year 2009-10.

It looks like the seasonal cycle that started from eight percent and reached at eight percent but after twelve years. Or, we are back to 1998-99. If we calculate the average change occurred in subsidy from 1998 to 2010 that is negative 0.02 percent that indicates twelve years performance is even less than zero.

There would be at least two hypotheses behind this out of many. First, the expenses of government increased and other source of revenue contracted. According to State Bank of Pakistan, it is producing more than two billion rupees on average daily to finance the government expenses.

Secondly, the rate of inflation increased around above 20 to 60 percent in daily consumable items within last seven years.

Around 800 billion rupees have been spent on security expenditures with loss of around 68 billion USD in war on terror. And, thousands of terrorist attacks pushed the investment out of Pakistan.

All above scenario puts the pressure on policymakers to take action of restoration and two measures are in practice by authorities first to cut the subsidy and second to increase the taxes. Both the actions are opponent of relief and comfort of common persona.

There is need to discover the consistent economic policy that can construct the impact of recovery and progress and an ideal situation would be if the government controls the inflation that would transfer the economic benefits to the public as alternative to subsidy and saves the subsidy for further enhancement in quality and quaintly of social security.

The writer is a Research Fellow & Scholar Ph.D (Economics), Department of Economics, University of Karachi.