There is no way of avoiding short-run pain in the process of fixing the US budget situation. But there are opportunities to leverage budget pressure to eliminate or reform policies that have outlived their usefulness or simply don’t work, especially subsidies that undercut US efforts in other areas, such as development. The core elements of the US foreign assistance budget total around $20 billion and are facing disproportionately large cuts in the current budget debate. Here for the super committee’s consideration are ideas to cut inefficient and inequitable subsidies instead – also totaling roughly $20 billion – which in whole or in part would cushion the blow to foreign assistance and support development policy.As a start, CGD colleague Connie Veillette and John Norris from the Center for American Progress identified five ways to “make aid more effective and save more than $2 billion.” Three of their five recommendations involve cuts in subsidies for farmers, shippers, and NGOs that would make US food aid policies more flexible, responsive, and development-friendly...and save a half billion dollars. In addition, Connie and John recommended cutting at least $1.5 billion from farm subsidies, which go disproportionately to larger, richer producers.Increasingly in the congressional debate, the $5 billion in “direct payments” that go to farmers every year—regardless of crop prices or yields, and on top of any other subsidies they receive— have moved squarely into the budget-cutting bulls eye. Eliminating those payments, which were created almost two decades ago as part of a failed effort to reform farm subsidies, is certainly justified, but those payments are delinked from production and cutting them would do little to reduce the global distortions imposed on developing-country producers. There is also another $10-12 billion in trade-distorting subsidies that undermine incentives to invest in agriculture in developing countries – those should not escape the budget ax.Congress could save another $6 billion or so simply by not acting at the end of year and allowing the tax credit for ethanol to expire. It is also important to ensure that the money saved is not put into other subsidies, for example for pipeline infrastructure, that would further lock in the distortions created by US ethanol policies. If combined with congressional action to phase out the mandate for mixing corn-based ethanol in gasoline, this shift would save a significant chunk of change and ease upward pressure on food prices that is squeezing millions of poor people around the world. While this subsidy to some degree offsets the price-suppressing effects of traditional farm subsidies, the two together increase the volatility of commodity prices and make it difficult for both donors and developing-country governments to develop sound policies for agriculture. Moreover, contrary to the assumption that biofuels are good for the environment, corn-based ethanol has only a small (if any) impact on carbon emissions and the net impact on climate change is quite possibly negative because the pressure that it puts on food supplies creates incentives to convert forest to cropland.So, there’s several billion dollars in potential savings right there that would result in American policies that are more efficient, equitable, and development-friendly. There are no doubt many other subsidies that should be targeted both for their wastefulness and for their development impact—fossil fuel subsidies, fishing subsidies in Europe and Japan—and we’re going to be looking for these in coming months. Let us know what you think should be on the list.
CGD blog posts reflect the views of the authors, drawing on prior research and experience in their areas of expertise.
CGD is a nonpartisan, independent organization and does not take institutional positions.
