IMF warns Europe against fuel tax cuts to curb energy prices

The International Monetary Fund has cautioned European governments against resorting to temporary measures such as fuel tax cuts to cushion high energy prices due to war in the Middle East, arguing such steps are inefficient and poorly targeted.

While policymakers may be tempted to curb rising prices through caps or reductions in fuel duties, the IMF said in a briefing on Europe that “these are unwise measures.”

Broad-based support disproportionately benefits higher-income households, which tend to consume more energy, it said in an analysis released on Friday.

The IMF based its assessment on lessons from the energy crisis triggered by the Russian invasion of Ukraine. It urged governments not to repeat what it described as “costly mistakes.”

“Broad and open-ended support measures are hard to unwind and should be avoided,” the Washington-based crisis lender and global economic watchdog advised.

The IMF added that such policies also weaken incentives for households and businesses to reduce consumption or invest in alternatives and efficiency.

According to IMF data, European governments spent an average of 2.5% of gross domestic product (GDP) on energy relief packages during the 2022 crisis triggered by the war in Ukraine.

More than two-thirds of this support expenditure was not targeted, the organization said. Its analysis found that just 0.9% of GDP would have been sufficient to fully offset rising energy costs for the bottom 40% of households.

In Germany, Europe’s largest economy, the governing coalition has proposed lowering taxes on diesel and petrol by around €0.17 ($0.20) per litre, including VAT, for a limited period of two months in response to the latest energy supply crunch created by the US-Israeli war with Iran.

Under a draft proposal, the reduced rates would apply from May 1 to June 30. Parliament is currently considering the plan and approval could come next week.

ANEWS wp:paragraph