It is understandable that the government wants to offer immediate relief to households and businesses as the winter season begins.The 40-cent-per-litre cut in heating oil, aimed at bringing the price below €1.60 per litre, the one-off 30% increase in the heating allowance for the whole winter, a 20-cent cut in diesel and a 10-cent cut in unleaded petrol are intended to ease social pressure as the cold sets in.
The measures help keep the prices of goods on shop shelves in check and therefore help contain inflation, as transport costs affect the supply chain. They also reduce people’s travel costs, protecting their disposable income, and lower companies’ transport costs.
It is clear to everyone that these are temporary measures, as subsidies cannot be maintained indefinitely. They are therefore more like painkillers that treat the symptoms of an illness rather than its causes.
Clearly, we all hope the energy crisis will soon be behind us. If that happens, the government’s short-term relief measures will have achieved their aim, showing that the economic resources allocated were put to good use.
But hope is one thing and reality another. We cannot plan on the basis of hoping that everything will go according to plan.
This is where the danger lies. Fuel subsidies cannot be provided indefinitely, as they cost a great deal and either increase public debt or divert resources from areas such as health and education. In other words, they can put the country’s fiscal targets at risk.
If this happens amid turbulence in bond markets, as at present, borrowing costs for the state and businesses will rise sharply, consumer and business confidence may suffer, and economic growth could slow significantly.
In addition, subsidies create distortions, as they discourage consumers from reducing fuel demand in a country that imports fuel and pays for it in foreign currency. Across-the-board subsidies also benefit those with the highest consumption, who typically have higher incomes.
On the other hand, if subsidies end while international fuel prices remain high, households and businesses will find it harder to adjust, and the government will pay the political price.
There is no doubt that subsidies provide short-term relief to households and businesses. But subsidies carry medium-term pitfalls that should not be ignored. Indeed, if the energy crisis continues, the medium-term cost to the economy and households could be far greater than the short-term benefit.
In this light, the government’s allocation of available fiscal resources to measures that deliver lasting benefits over the medium term, such as energy conservation to reduce demand, rather than to across-the-board fuel subsidies, makes sense. But it will certainly not be politically or socially popular.