Article 1: Why do you receive subsidies?

Series: subsidies and financial health

In the responses to the Flemish budget over the past few weeks, a pattern struck me. Affected institutions and organizations passionately demonstrate what their work means for people and for society. They take us into the impact they have and show what is lost when their funding is cut. That makes their outrage contagious: we become angry too about the value that risks being lost. I share that anger. I work every day with organizations that are genuinely suffering from this, and as a person, citizen, and father, I myself benefit every day from what they do.

The narrative around subsidies has been becoming sharper and more distrustful for years. Suspicions and loud pleas for abolition have been around for some time. Now policy is following suit: abruptly cutting structural lines, tightening modalities, imposing conditions outside decree-based or legal frameworks. Subsidy recipients have by now been thoroughly trained in defending them. They emphasize the value of their work, increasingly objectified in impact measurements. The fire of the past few weeks is therefore a well-practiced defense.

One question that usually remains unanswered in this is why that value must be paid for with subsidy. That is not a question about the value of the work, but about the financing instrument. Your activities may be very fine, but do they really have to be paid for with taxpayers’ money? You can genuinely have a warm regard for civil society or the cultural sector and at the same time believe that a particular organization would be better financed differently. That question becomes more urgent as the government increasingly seems to be disengaging.

The price incentive

To understand why subsidies are indeed appropriate, we must first understand what they replace. In a market, price drives an entire dynamic. A baker who cannot sell his bread for ten euros immediately receives a signal: lower the price or bake better bread. The price incentive is a free policy tool that tells the baker every day whether he is delivering value that people are willing to pay for.

Non-profits do not receive that signal, or only partially. The people who receive their value are often not the ones who could or should pay. This creates a gap between those who receive the value and those who finance it. Economists call this market failure. Without a price incentive, too little is produced of what is socially valuable. Often these are public goods, which everyone enjoys but no one wants to pay for on their own. That gap is closed with public funds, often in the form of subsidies.

Four gaps

If you want to know what form that gap takes, it helps to ask two questions. Does the value already exist now, or will it only come later? And does the recipient experience the value themselves, or does it mainly benefit society? Those two questions lead to four situations in which the market fails and subsidies have a place.

1. The recipient cannot pay. The value exists now, but the recipient does not have the money. Think of a young person being guided towards training, an internship or work. They cannot pay for that today, but we consider it too important for society to leave it aside. So we choose to pay for it as a society.
2. The recipient may not pay, usually because we consider it undesirable on principle for the recipient to receive the bill. Education and basic rights belong in this category, because we do not want access to depend on the size of your wallet.
3. The recipient cannot or does not want to pay yet, because the value only becomes visible or recognised later. Heritage and archives are the painfully current example here: we do not always see their value today, but we will in fifty or a hundred years, and by then it will be too late if we let them disappear now. This category includes merit goods, things we believe should be produced in greater quantities than people would spontaneously consume.
4. The recipient does not want to pay, because the value mainly ends up elsewhere, with another group or with society as a whole. Economists call these externalities. Think of guidance towards work or preventive healthcare. Society reaps the benefits, in the form of higher tax revenues or lower social security spending, but none of those beneficiaries is at the checkout. The value leaks away to parties that do not contribute, so the government steps in. Yet this is often precisely where a payer is hidden. An employer who finds suitable staff thanks to that guidance benefits from it and can be asked to help pay.

Subsidy is a fantastic and necessary instrument for bridging these gaps, but it is not always the only option. When the recipient cannot or may not pay, you have few options. Someone who does not want to pay yet may want or be able to do so later. And someone who receives value without being called on to pay for it can develop into a payer you do not yet know. In those cases, it is worth asking yourself whether subsidy is the only or the right instrument for financing your value.

Better language and tools

The more subsidies come under pressure, whether due to a shifting narrative or successive rounds of cuts, the more important it becomes for your organization to have the language and tools to reflect on its need for subsidies. Not only to better justify and defend those subsidies, but also to be able to switch more strategically to other, potentially more sustainable forms of financing.

In the following pieces, I want to provide you with that language and those tools, based on three dimensions of financial health: your strategic fit, your operational strength, and your sustainability. In each case, I will turn an assumption about subsidies on its head. Subsidies may seem like the form of financing that best fits your mission, but they may be the least aligned with the impact you are pursuing. Subsidies may seem like free money, but they may be your most expensive source of income per euro. And structural subsidies may seem like the safest money, but they may be your most uncertain form of financing. An organization that dares to question those assumptions gains a broader view of its financing mix and a healthier relationship with it.