Fiscal Subsidies and Their Long-Run Effects on Household Welfare and Labour Supply

Abstract

Fiscal subsidies are of great essence in defining the welfare of the household, income distribution,
and the labour market, especially in the developing economies. This paper considers both short-term
and long-term impacts of fiscal subsidies on household welfare and labour supply which combines
household level results of the Economic Survey 202425 and macro level data of other countries shown
by OECD sources. The results show that augmented Social Service Expenditure (SSE), an augmented
education and health investment, and narrow as well as focused transfers like PMGKAY and Direct
Benefit Transfers have had a profound effect on enhancing the short-term household consumption
and decreasing inequality by in the form of decreasing Gini coefficients and closing urban rural
expenditure disparities. There is high progressive distribution in food subsidies, as lower-income
groups receive a higher percentage of consumption subsidy. On the macro level, there is evidence
indicating that increased social protection expenditure correlates with reduced disposable income
inequality and that long-term growth is determined by the composition and fiscal sustainability of
expenditure. Human capital-based subsidies seem growth-neutral or growth-inducing, but
distortionary, debt-based transfers could impair efficiency in the long run. The paper has concluded
that targeted and economically viable subsidy mechanisms can be used to achieve equity and
efficiency, inclusive growth and enhance labour productivity in the long term.