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Most EU governments are failing to target fuel duty cuts and other energy price support at only the most vulnerable consumers, the IMF said, despite warnings the bloc could face a market backlash if countries introduce expensive blanket measures.
Two-thirds of government subsidies and tax cuts across the EU aimed at alleviating the energy crisis have been untargeted, according to IMF research, even as the fund and Brussels policymakers urge countries to keep measures narrowly focused and temporary.
Even if initial efforts to cushion consumers from high energy prices arising from the Middle East conflict are modest, EU governments will find they are politically difficult to reverse, leading to rising fiscal burdens over time, Alfred Kammer, head of the IMF’s European department, told the FT.
“Clearly” EU governments are not “taking the lessons of 2022 into account”, said Kammer, referring to the period after Russia’s full-scale invasion of Ukraine, when many countries introduced costly measures to support households and businesses from soaring gas prices.
Not all countries were “being careful about using fiscal space” in the current crisis, he said.
“We need to have this conversation with populations that actually [spending on universal measures] is a very expensive way of using tax revenue, especially when there are other spending needs.”
Governments with weaker public finances needed to find savings elsewhere if they were to avoid an adverse reaction in bond markets, he argued.
Borrowing costs for some Eurozone countries have touched multiyear highs since the start of the conflict as investors grow nervous about the effect of the energy shock on public finances.
Governments around the world are being pushed to do more to shield households and business from the effects of the Middle East conflict, which pushed oil prices as high as $126 a barrel at one stage this week as shipments via the Strait of Hormuz dry up.
Germany, for example, has announced a two-month reduction in petrol and diesel tax for all citizens, while Spain is spending €3.5bn to reduce value-added tax on energy. Italian Prime Minister Giorgia Meloni has also made temporary cuts in excise duties on fuels.
But in large parts of the EU, public finances are in a fragile state given the fiscal costs incurred during the Covid-19 pandemic and the energy crunch following Russia’s full invasion of Ukraine.
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“There are some countries which do not have fiscal space and cannot actually afford to entertain any measures if they are not compensating with offsets in the budget . . . They are super tight in terms of the fiscal space they have. And they need to be careful that markets are not reacting,” Kammer said.
Italy, France, Belgium and Greece are among the most indebted Eurozone economies, according to the Fund’s fiscal monitor report last month.
The IMF estimates EU governments spent 2.5 per cent of GDP on energy interventions after the Ukraine war broke out. By comparison, the measures announced in the EU thus far are only 0.18 per cent of GDP on average, according to the IMF data.
But this relatively modest fiscal burden will grow if the constraints on energy supplies prove to be protracted.
“The problem with these measures is, you start them off, the energy crisis may be more persistent than we expect, then the costs are being ramped up,” Kammer said. “You are going to lock yourself in.”
Kammer warned in particular against measures such as price caps or tax cuts that suppress the market signals created by high prices. This can lead to continued high demand in a supply-constrained market, while muting the incentive to switch to independent energy sources such as renewables, he argued.
More than 90 per cent of EU countries have taken at least one price-distorting measure during the current crisis, according to the IMF analysis.
“When you have these price increases this would suggest a switch to alternative energies,” Kammer said as he prepares to retire from the IMF after 34 years, the last six as head of its European department.
By removing the price signal, “you are taking that incentive and the motivation away”, he added.
Data visualisation by Amy Borrett in London
