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The number of countries cutting energy taxes in response to the Iran war has doubled over the past month despite IMF calls for fiscal restraint, new data shows.
European governments have driven the sharp rise in untargeted energy support, according to FT analysis of the IEA’s policy tracker, accounting for 19 of the 39 economies that have lowered energy taxes in response to surging oil and gas prices.
The figures underscore warnings from the EU and the IMF about the need for fiscal discipline through “targeted and temporary” measures, given what the IMF calls “stretched” public finances.
“With debt already elevated in many countries, fiscal policy must respond cautiously — providing support where needed without pushing public finances closer to the brink,” the fund warned this month.
Governments are under pressure to support consumers suffering from soaring energy prices since the US and Israel started the war on February 28. As a result of the war, shipments via the Strait of Hormuz, which carries about a fifth of global seaborne oil and gas trade, have in effect dried up.
Price caps and tax breaks amplified scarcity and often failed to help those most in need, said Ugnė Keliauskaitė, research analyst at think-tank Bruegel in Brussels.
“Untargeted measures are costly and counter-productive,” she added. “They blunt the price signals that incentivise consumers to reduce energy demand and switch to cleaner alternatives.”
Analysis by Bruegel published on Tuesday found that European governments had so far committed almost €9.5bn in fiscal measures to cushion the impact of the Iran war on energy bills. More than 80 per cent of that consisted of measures without a clear target group or conditionality, such as general energy excise or VAT tax cuts, it said.
Germany has committed €1.6bn to lower fuel duties and Spain €3.5bn to reduce energy VAT.
Italy has extended a “temporary” 20 per cent cut in excise taxes on fuel introduced in mid-March, costing a total of about €1bn for 45 days. The cuts are due to expire on Friday, but it is unclear whether Rome — currently under the EU’s excess deficit procedure — will extend them again, or whether consumers will now be hit with a sharp jump in fuel prices.
Five of the European economies that have cut taxes have also introduced price caps on fuel prices or retailers’ profit margins as of April 21, according to the IEA tracker, which monitors policies in countries globally since the start of the war.
Last week the European Commission outlined plans to tackle high prices and accelerate electrification. It proposed legislation to tax electricity less than fossil fuels and encourage the use of technologies such as heat pumps and electric vehicles, with energy commissioner Dan Jørgensen warning not to “burn taxpayers’ money on fossil fuel subsidies”.
But Alfred Arnborg, an analyst at think-tank Europa, an independent research body, said the advice had “largely been ignored”. Untargeted measures would probably stimulate demand and push prices higher, offsetting the benefits to domestic consumers, he said.
“Rising global energy prices are a big signal to push towards electric vehicles and heat pumps, but the political response is dampening this effect and has predominantly been focused on fossil fuel subsidies,” he said.
However, he noted countries such as France and Portugal had shown that tax cuts and subsidies could be done in a targeted manner.
The French government, whose attempts to reduce a large fiscal deficit limit its options, has pledged €70mn to suspend excise taxes on fuel for farmers as well as subsidies for the logistics and the fishing industry. At the same time, it is increasing state support for electrification.
By contrast, Germany had lowered fuel taxes for all consumers and had not coupled this with investments in the transition to clean energy, Arnborg noted.
Far-right politicians, such as Italy’s deputy prime minister Matteo Salvini, have mocked EU advice on conserving energy. Salvini demanded that the EU ease fiscal rules to give governments the leeway to help citizens with soaring energy costs.
“When one country lowers fuel taxes, it doesn’t really affect global prices. When all of them do it, the subsidies become less effective and rising prices benefit the oil-exporting nations, including Russia, Iran, and the US,” he added.
The EU has faced criticism for having laid out measures last week long after many member states had already taken steps to tackle high costs.
Only three European countries have introduced policies to reduce consumer energy use, compared with 19 in Asia-Pacific, according to IEA’s tracker.
Additional reporting by Amy Kazmin in Rome
