ARE WE TRYING TO CARRY WATER IN A SIEVE? December 2017
Government support (subsidies, tax exemptions, tariff support and similar) form an important part of the state budget: the state planned to spend at least KGS 22.2 billion, or 14.9 per cent of the total central state budget expenditure, on subsidies in 2017. But experience from other countries indicates that in some cases subsidies can cause unwanted negative effects.
KGS 22.2 billion
When can support from the state be harmful?
the amount planned to be spent on different forms of state support (subsidies, tax exemptions, tarrif support and other)
What did our assessment find out?
(14.9% of the total central state budget expenditure)
This can arise when, despite good intentions, the government uses money that we pay in taxes for something that brings not only good results, but also causes harm. To understand this concept, think of a leaking tap in the kitchen. If a person doesn’t pay for water because the government subsidises all the costs, they will not bother to repair the tap, wasting a lot of water and energy in the meantime. However, if the full price of getting water to the kitchen tap has to be paid, then once the leak becomes big, they will realise they need to do something.
The expenditure review looked at several sectors that in one way or another are dependent on or have an impact on the environment. We found that in some sectors substantial amounts of money are spent on measures that have a potentially negative environmental impact. We estimate that the Ministry of Agriculture spends more than 70 per cent of its budget on potentially harmful measures such as agrochemicals use and to support (currently not always effective) irrigation, see Figure 1. The problem with this is that such measures often end up doing more harm than good: the chemicals pollute water and soil and kill all insects, including those which are needed as pollinators for crops and orchards. Ineffective irrigation systems often result in longer term damage to soil quality.
1,153
70% 216 Total environmental expenditure by the Ministry of Agriculture
352
Other expenditure
Support to potentially harmful measures
Figure 1: Comparison of expenditure on potentially harmful measures and environmental expenditure in the annual budget of the Ministry of Agriculture (KGS million, 2016)
UNDP–UN Environment Poverty-Environment Initiative
Estimated proportion of budget that the Ministry of Agriculture spends on support to potentially harmful measures (including the promotion of agrochemical use and to support ineffective irrigation)
Another example is in the energy sector, where government subsidises the cost of fuel for the heat production at boiler houses. The intention of this subsidy is again good: to help those who are very poor and who otherwise would not be able to pay for heating. But everybody is enjoying the subsidy, including people who have enough money to pay their bills and who often live in much bigger apartments and may use more heat. Because the heating is subsidised, it reduces people’s motivation to invest in energy efficiency or to insulate their houses better – all things that cost money. As a result, fuel is wasted, the air is polluted, damaging our health, and a lot of money is spent supporting people who don’t need support. At the same time many other people, who would need support don’t get it, because they live in rural areas and do not receive any of the subsidised heating (see Figure 2). Figure 2: How subsidised heating is not reaching rural people
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INCLUSIVE GREEN ECONOMY An economy that aims to reduce environmental risks and aims for sustainable development without degrading the environment, but that at the same time is inclusive in consumption and development results, is based on sharing, circularity, collaboration, solidarity, resilience, opportunity, and interdependence. It uses targeted and appropriate fiscal and social protection policies.
What can be done?
Should the money that a person pays in taxes be used to pay for the cost of the wasted water lost through the leaking tap? Or should the government use the money to help the person repair the leak? In the long term the Kyrgyz Republic will be better off if the ministries of agriculture and of energy assess how to redesign their support to these sectors and use taxes more efficiently, based on the principles of inclusive green economy. In doing this, particular attention should be paid to the needs and interests of the poorest people and the impact of the reforms on them. The money could instead be used to support energy efficiency and energy saving investments, or to support more efficient irrigation and drip irrigation, organic agriculture, and similar measures. The government has a vital role to play as it can put in place policies and legislation that stimulate such investments.
Information based on: Policy and Institutional Review for Environment Financing with a Focus on Biodiversity and Climate Change Adaptation in the Kyrgyz Republic (2017) Public and Private Expenditure Review (2017) For further information, visit the BIOFIN knowledge platform: http://biodiversityfinance.net/knowledge-platform
Photo credit: Prashant Ram. Sourced from Flickr via Creative Commons (CC BY-ND 2.0)