Are public subsidies beneficial to help the productive fabric

Are public subsidies beneficial to help the productive fabric?

First of all, this is a very subjective issue. There are many ways to support our companies in difficult times, and today we will see two possible solutions to this problem.

In times of crisis, our productive fabric needs stimuli to be able to survive, so if the government thinks it is convenient to subsidize certain sectors, companies or SMEs, it is a good idea so that they continue to have opportunities in the market.

However, it would be necessary to carry out a more in-depth study on whether these stimuli benefit or may harm our economy.

Let’s take a somewhat drastic example to understand it better. Let’s imagine Pedro, an important CEO of the company Jardinerías S.A. There are times of crisis, so Pedro is going to have to make reforms within his company in order to cut costs and thus be able to survive.

Here the government comes in and issues a communiqué telling us that it is going to subsidize the agricultural sector, and these reforms include aid for companies in the gardening sub-sector.

Obviously, this is great news for Pedro, since with this aid, he will be able to balance his company’s accounts without having to cut expenses.

If we analyze this example, it is also great news for society as a whole. Pedro will be able to preserve jobs so that unemployment does not increase (and, like Pedro’s company, all the other companies in the sector).

It will also be great news for the productive fabric, since this subsidy will help to prevent companies from going out of business and will allow the country’s productivity to continue to increase.

Finally, for the public coffers it is also great news, since if this company is healthy, they will be able to continue paying the corresponding remunerations to the state to help maintain the budgets.

As we can see, subsidies can help to create a large chain that complements all the agents involved in it in a positive way.

However, this is not always the case. If we are in an environmental crisis (let’s take it as an example), and there is a major drought due to climate change, we cannot realistically be subsidizing companies whose future rates of return are far from being positive again.

Of course we need to keep the agricultural sector alive, of course we need to subsidize this important sector, but we need to select very carefully the companies and sub-sectors we want to subsidize.

Let’s look at it in practice. Gardening depends on grass growing. If it doesn’t rain, there won’t be as much grass and the demand for gardeners will be lower. If the government decides to continue subsidizing this sector to subsist, it will be useless, since it will only be able to subsist with the aid it receives from the government, but it will not be able to generate profits through its main activity because the scarcity of water will not allow there to be enough grass to cover the entire supply of gardeners.

By this I mean that we must be very cautious when granting subsidies to sectors with little future.

If the crisis in which we find ourselves is going to cause that from that moment on there will be no expanded growth in agriculture because it is not going to rain again at pre-crisis levels, we cannot grant massive subsidies, since we will be creating zombie companies, companies that do not generate returns for themselves and only suck money from the taxpayer, taking opportunities away from possible start-ups with other different and much more profitable business ideas.

This is why, and I repeat in a totally subjective way, subsidies are not always the best way to support the productive fabric. Sometimes, it is better to lower taxes, helping the entrepreneur in the same way with a lower tax burden, and observing if they can continue to generate value in a totally autonomous way, without being dependent on state subsidies.

In summary, we can say that subsidies can be beneficial if we carry out a correct study of the companies, sectors or activities that need state aid in order to survive for a certain period of time, and then continue with their main activity generating profits.

If the temporality is not fulfilled, it is preferable to lower the tax rates so that, if the business goes badly, it is the same entrepreneur who sees that he really has to change the perception of his business, turning to activities with a more profitable future.


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