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Understanding Subsidies

Updated on August 29, 2014

A subsidy is a grant of money, property, or some other form of aid for which the donor expects no direct return or repayment. In the United States the term is usually applied to a payment by the federal government to an individual or a corporation. Payments by the national government to state or local governments for specific purposes, such as education, have also been called subsidies, but these are now more commonly called grants-in-aid.

In international affairs, "subsidy" may refer to a grant of money or other aid to one country by another to help it in prosecuting a war or in developing its military preparedness or its national economy.

In its most specific application, the term refers to royal subsidies in England before the accession of Charles II (1660). These were financial grants by the House of Commons to English monarchs to augment their income from taxes and aids that were collected under the royal prerogative.

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Subsidies in National Affairs

In national affairs, subsidies are granted chiefly for purposes of expanding or supporting the national economy, strengthening national defense, or assuring the maintenance of a public service at a price that the public can afford. Such subsidies may take various forms, including an outright grant of money, land, or other property; tax reduction; tax or tariff exemption; a low-interest loan; a government guarantee; payments to support commodity prices; payment of a premium for production of a commodity; and payment of an amount in excess of what would otherwise be warranted for performing some service to the government, such as carrying the mails.

Transportation Subsidies

Among the most important recipients of subsidies have been transportation enterprises. The United States government, for example, granted vast acreages for the development of canals and railroads in the 19th century. Shipping and shipbuilding are other industries that have been subsidized by many governments. Here a major factor was the desire of the government to ensure that adequate and efficient shipping would be available to serve as transports and as naval auxiliaries during time of war.

Since the early part of the 20th century, virtually all countries have also extended subsidies to the air transportation industry... again partly as a means of contributing to military preparedness. The United States government has granted subsidies to airlines in the form of favorable mail contracts. It has also installed ground navigation facilities such as beacons, instrument landing systems, and directional beams, and it has appropriated funds for airport improvement. Government defense contracts for military planes that can also be produced, with necessary modifications, in civilian versions have provided indirect subsidies to builders of civilian transport planes and to air lines.

In 1971, the U.S. Congress agreed to accept a $200,000,000 loss on an Air Force contract with the Lockheed Aircraft Corporation for the construction of the C-5A transport. A few months later, the Senate voted to guarantee $250,000,000 in bank loans to the nearly bankrupt company. This was, in effect, a potential subsidy of nearly half a billion dollars to the nation s largest defense contractor for the sake of military defense, civilian air transportation, and the economy of a geographical region, since many thousands of jobs in California depended upon the rescue of the financially troubled corporation.

Form Subsidies

Another field in which subsidies have played an important role in several countries is agriculture. To help sustain farm income, the U.S. government instituted under the Agricultural Adjustment Act of 1938 a system of price supports whereby it agreed to purchase farm crops at specified minimum prices and to store surplus production. After 1953 this program was administered by the Commodity Stabilization Service.

Other Forms of Domestic Subsidy

Governments sometimes pay subsidies to foster new industries considered important to the national economy or defense, or grant subsidies to preserve old industries. Some countries extend subsidies to consumer groups, as in the case of subsidized housing for low-income groups, in which government, in effect, provides funds to supplement tenant rentals. Subsidies are also extended to private enterprise and other groups by a number of state, municipal, and other nonnational governmental bodies.

The atomic era ushered in a whole new pattern of governmental expenditures for the development of the peaceful uses of atomic energy. In many cases these expenditures could be construed as subsidies, direct or indirect, short- or long-range, to various industries. The U.S. and Belgian governments, for example, granted subsidies for the development of atomic-fueled electric power plants (in Britain, where power production is nationalized, such plants are wholly government financed). Other steps of potential importance to private enterprise that have been undertaken by the U.S. government included a program for developing nuclear power for air transportation and the financing of the construction of the N. S. Savannah, the first American nuclear-powered merchant ship, which was launched in 1959.

Subsidies in International Affairs

From the earliest times richer nations have granted subsidies to less affluent allies to aid them in prosecuting wars. In the mid-17th century, France subsidized Britain in wars with the United Netherlands. In the 18th century, France granted substantial subsidies to the infant United States and gave the young nation military help, as well. During the Revolutionary and Napoleonic periods in Europe, Britain, as senior partner in the coalitions against France, subsidized its continental allies.

In World War I, loans among the Allied powers replaced the old form of subsidies. Nevertheless, to the extent that most of these loans, including the debt owed to the United States by its European allies, were partially defaulted after the war, they became, in effect, retroactive subsidies. The U.S. lend-lease program of World War II was also, in part, a vast multilateral international subsidy, since large amounts of deliveries under the plan, including nearly $25 billion in aid to the Commonwealth of Nations, were subsequently written off.

Similarly, the postwar Marshall Plan and other U.S. foreign aid programs fall into the international subsidy pattern to the extent that they have included outright grants to allied and other countries for military, economic, and technical assistance purposes.

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