Investment subsidies – creation of new wealth or just redistribution of the existing?

In 2012 investment subsidies totalling EUR 121 million were approved in Slovakia. Especially, the recent cases when the investor asked for state support not to create, but only to sustain existing jobs are well-known. However, this led the Government to propose an amendment to investment  subsidies law which is going through legislative process these days.

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INESS – the Institute of Economic and Social Studies has processed the available data about investment subsidies and published a policy paper Investment subsidies – creation of new wealth or just redistribution of the existing?

The main goal was to analyze investment subsidies provided from 2002 to 2012 in Slovakia. During this period 128 investment subsidies of almost EUR 1.4 billion were given and they promised to create more than 45 000 job positions. An average cost per one promised position exceeded 30 000 EUR. Just to illustrate, instead of this, the state could pay a net wage of EUR 530 (average wage in Slovakia) for almost 5 years to the same number of people as the number of the promised vacancies.

In the paper, we point out that investment subsidies do not represent appropriate measure to support economic growth and bear high alternative costs; they represent fiscal burden that is placed on other economic subjects through higher taxes. New subsidies worth EUR 121 million were approved in 2012. To compare, the chart below shows expected revenues from the new set of consolidation. Fiscal actions have been taken by the government to increase state budget income in 2013.

It is not true that subsidies will be paid off by future tax revenues of supported projects. Resources that were collected by taxation and used for subsidies would generate tax revenues in hands of their primary owners as well. At the same time, there is a net loss due to following reasons:

• Competitive environment is negatively influenced
• Subsidies allow the subsidised companies to overbid and “steal” qualified employees from competitors as well as all relevant firms on the market
• Deformation of investment structure due to the fulfilment of formal requirements
• Deformation of the national economic structure (example: automotive industry in Slovakia)
• Investment subsidies chaining

Moreover, the social role of subsidies has not been fulfilled as more than 2/3 of them went to districts with unemployment below the national average.

The argument of international competition pressing countries to offer investment subsidies is not valid, either.  Examples from foreign countries clearly show that replacement of subsidies by lower taxes and simpler system does not threaten foreign investments inflow. There is space for universal improvements in the business environment in Slovakia, which would be profitable for all active economic subjects, not only for a tiny bunch of selected winners. INESS proposes three alternatives to the current investment subsidies policy:

• To support investments – cancel subsidies and replace them with a lower corporate tax
• To support regions with high unemployment – cancel subsidies and reform current social support payments, use the savings to introduce progressively decreasing social contributions for low income earners
• To support immediate temporary burst of employment – if there is no political will for the above mentioned approaches, replace the current system of bureaucratic allocation with a public auction of subsidies

You can find complete study in Slovak here together with an interactive map of investment subsidies.