Assessing public measures in the face of inflation and the Ukrainian crisis

Funcas (the Spanish economic Think Tank) reviews the public measures of the main EU countries (Spain, France, Germany and Italy) to face the exponential increase in energy prices after the invasion of Ukraine. The application of tax reductions on energy, the application of subsidies to fuel consumption, or the reforms of the electricity price formation mechanism, when applied across the board, although they may be solution in the short term, they have a high budgetary cost and raise doubts about their effectiveness in the long term, while exacerbating the tension between the containment of inflation and the change of energy model.

• Public support measures aimed at controlling the rise in energy prices as the main source of inflation and limiting its effects on the most vulnerable groups. According to Funcas, the effectiveness of some of the initiatives, especially the non-targeted cuts in taxes or generalized subsidies to fuel consumption, is doubtful (although it has been applied by the four countries examined). All this raises the importance of a comprehensive plan to take over from the recent measures justified by the emergency situation.
  
  
• High budgetary impact: The resources deployed until the invasion of Ukraine amounted to between 5 and 16.4 billion of euros. Since then, the additional cost of the measures is between 15 billion of euros in Germany and 27 billion of euros in France.
  
  
• Four types of government measures analyzed: general fiscal measures that cut the final price of hydrocarbons; reforms aimed at altering the functioning of the market, especially the electricity market; subsidies or one-offs for specific groups (vulnerable and sectors most affected by energy increases); and actions aimed to save and increase energy efficiency or to promote alternative sources of supply.

- In the long term, most of the measures implemented in the four countries have no effect on the fight against inflation, with exceptions such as energy saving and efficiency measures (Germany has reduced public transport fares and Italy will make it compulsory to keep air conditioning above 25 degrees Celsius next summer). 

- Compensation policies focused on the most vulnerable sectors are undoubtedly the most effective from the point of view of protecting the productive sector and social cohesion; but they do not have a direct impact on inflation, nor do they encourage structural adjustment.