The International Monetary Fund has warned European governments not to resort to temporary measures, such as reducing fuel taxes to cushion high energy prices due to the war in the Middle East, arguing that such measures are inefficient and poorly targeted, DPA reported, according to Agerpres.
Although policymakers might be tempted to curb price increases by capping them or reducing fuel taxes, the IMF stated in a briefing targeting Europe that “these measures are not wise.”.
In an analysis published Friday, the international financial institution specifies that broad support disproportionately benefits higher-income households, which tend to consume more energy. The IMF based its assessment on lessons learned from the energy crisis triggered by the Russian invasion of Ukraine. The Fund urged governments not to repeat what it described as “costly mistakes.”.
“Broad and open-ended support measures are difficult to reverse and should be avoided,” the Washington-based institution recommended. The IMF added that such policies also weaken incentives for households and businesses to reduce consumption or invest in alternatives and energy efficiency.
According to IMF data, European governments spent an average of 2.5% of gross domestic product (GDP) on energy aid packages during the 2022 crisis triggered by the war in Ukraine. More than two-thirds of these support expenditures were not targeted, the IMF emphasized. The Fund's analysis shows that only 0.9% of GDP would have been sufficient to fully compensate for the energy cost increases for the poorest 40% of households.
In Germany, Europe's largest economy, the governing coalition has proposed reducing taxes on diesel and gasoline, including VAT, by approximately 0.17 euros per liter, for a limited period of two months, in response to the latest energy supply crisis created by the war between the US and Israel with Iran. According to a proposal, the reduced taxes would apply from May 1st to June 30th. The Berlin parliament is currently reviewing the plan, and approval could come next week.