To cope with soaring energy prices caused by Russia’s aggression in Ukraine, EU governments need to better target income support, two experts told a hearing organised by the European Parliament’s Subcommittee on Tax Matters (FISC) on Thursday 27 October.
Assia Elgouacem, an economist at the OECD, presented the organisation’s ongoing work on monitoring public support measures to tackle rising prices in the EU. She noted that subsidies to fossil fuel represent 73% of total government support, or $264 billion. “Non-targeted support measures make up 55% of total government expenditure and continue to be widely used”, she explained.
“It is important to redirect support measures towards targeted income support and to support the acceleration of the development of alternative energy sources”, she said (see EUROPE 13045/20).
The OECD economist recommends accelerating the transition to alternative energy sources through investment in alternative fuels and improving the energy efficiency of buildings.
Professor Clemens Fuest, President of the Ifo Institute, said that public measures to combat inflation should focus on targeted support for vulnerable groups.
This support should not push up demand for gas or electricity, but rather provide support to enable these households to maintain their consumption of other necessary goods. Mr Fuest advises that this should be in the form of transfers, which reduce the price of energy, and not subsidies.
EU inflation is based on a supply deficit, so measures should be put in place to reduce demand, he said. “Subsidies and price caps are not the ideal tools, as they would lead to an increase in demand. This may require gas rationing later in the winter”, he stressed.
Interviewed by Luděk Niedermayer (EPP, Czech), Prof. Fuest confirmed that untargeted measures taken today, such as VAT reductions on gas or subsidies for gas-fired power plants, increase the risk of gas shortages. The scenarios envisaged also depend on the temperatures of this winter.
On the taxation of super-profits (see EUROPE 13037/33), raised by French MEPs Aurore Lalucq (S&D) and Claude Gruffat (Greens/EFA), the two experts expressed reservations. For Ms Elgouacem, these initiatives are “emergency measures” and each government must find a way to provide public support without burdening public finances.
Prof. Fuest recommended “less risky taxation, based on existing taxes”. He also advised against a net wealth tax, which would “send a negative signal to investors”, create red tape and cause capital flight. He spoke out in favour of a tax on land and property. (Original version in French by Anne Damiani)