A subsidy is a type of payment made by the government to stimulate production and accelerate consumption by reducing the cost of producing goods and services. The Kenya Kwanza government has recently showcased its efforts to subsidize production by reducing the cost of fertiliser so farmers can achieve high production to offset the rising food shortage in the country.
Speaking before Citizen TV on matters of Finance Bill 2023, Ndindi Nyoro- a member of parliament, argued that the Kenya Kwanza government is more focused on subsidizing production than consumption. He pointed the finger at the previous regime for subsiding consumption, citing that the move led to the current surge in prices of many basic commodities.
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According to President William Ruto, the issue of high living costs can be solved by investing in agricultural production and supporting small businesses. However, the question remains whether this would be a good move or things will worsen further if the finance bill is passed into law.
Although subsidies lead to a decline in the prices of basic commodities, they also lead to sudden surges in demand, translating to shortages of goods and services in the economy. This is mainly because the production capacity associated with the increased demand is inadequate to meet the needs of the people.
The long-term implication of subsidies on consumption is that, in the future, the government will have to raise taxes to compensate for the money offered to industries as subsidies, causing a rapid hike in the prices of goods and services in the economy. In a nutshell, subsidizing consumption can be termed “present consumption of future income”.
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