Implicit Subsidies

An implicit subsidy is support provided without a separately identified subsidy payment, commonly when a government supplies a good or service for less than its cost and does not recover the difference from users. An explicit budgetary subsidy, by contrast, is support expressly provided for as subsidy expenditure in the government budget.

How the distinction works

The main distinction concerns budgetary identification, not whether the beneficiary receives an economic advantage.

• An explicit subsidy has an identifiable budget provision and expenditure, such as a government payment compensating suppliers for selling a subsidised product.
• An implicit subsidy arises when charges collected from users do not cover the relevant cost of public provision, but the resulting support is not separately shown as a subsidy payment.
• A subsidised price alone does not establish whether support is explicit or implicit: the government may finance that price through an identifiable budgetary payment or absorb the unrecovered cost within the service provider's finances.

Where implicit subsidies appear

Suppose a publicly provided service costs more to supply than the fees collected from its users. The unrecovered cost represents a subsidy to users, even if the budget records expenditure on salaries, maintenance and other inputs rather than a separate subsidy.

• Low charges for public irrigation or water supply can therefore involve implicit subsidies when user receipts fall short of the relevant costs.
• Implicit does not necessarily mean off-budget: the underlying expenditure may already appear in the budget, although its subsidy component is not separately identified.
• Where a public enterprise bears the shortfall, support may initially appear as lower earnings or losses rather than as government subsidy expenditure.

Why the distinction matters for budgeting

The published total of explicit subsidies need not capture the full extent of government-supported benefits. Assessing implicit subsidies requires examining service costs, user charges and who receives the benefit.

• Replacing an implicit subsidy with an explicit budgetary payment improves visibility but does not, by itself, eliminate the economic cost.
• An enterprise's losses do not automatically become the government's fiscal deficit; the budgetary effect depends on whether and how the government finances the shortfall.
• Subsidies should be assessed for equity and social benefits as well as fiscal cost; incomplete cost recovery alone does not establish that support is unjustified.