Unlock the Editor’s Digest for free
Governments that rushed to cut fuel taxes after the outbreak of war in Iran must quickly phase out costly universal energy subsidies, the OECD’s new chief economist said.
More than 25 countries – ranging from EU member states to emerging markets such as Brazil and India – have reduced excise duties on fuel to protect consumers against the energy price shock resulting from the conflict. Alternatives, such as price controls, subsidies or cash payments, have been less widely implemented.
But Stefano Scarpetta, who became chief economist at the Paris-based organization this month, told the FT that tax cuts, while quick to implement, were too expensive to sustain for long.
Experience with the 2022 European energy crisis has shown that “the costs of these policies are particularly high,” Scarpetta said, referring to the subsidies rolled out after Russia’s large-scale invasion of Ukraine. These fueled inflation, piled up budget problems and weakened incentives to reduce dependence on fossil fuels.
The European Commission has also warned the EU’s 27 member states against spending excessively to protect consumers and industries from high oil and gas prices, saying it risks plunging the bloc into a budget crisis.
The OECD still expects the Middle East conflict to drive up inflation and hit growth in coming months, despite the potential for exports to return through the Strait of Hormuz following the US-Iran two-week ceasefire agreement.
“Uncertainty is still very high,” Scarpetta said, noting that the latest developments could allow the OECD to stick to the forecast it published at the end of March that inflation in the major G20 economies will average 4 percent in 2026, rather than moving to a more adverse scenario. In December, only an average of 2.8 percent was predicted for this year.
Higher energy prices and the disruption of Gulf trade could also slow AI rollout, he acknowledged. This would be a blow to global growth prospects, as the rapid adoption of AI tools was one of the main reasons why the OECD had to upgrade its forecasts for most major economies before the US and Israel began attacks on Iran in late February.
Scarpetta said the intense uncertainty makes it more important for governments to limit energy support measures in time and target them at low-income households and energy-intensive businesses.
Setting an appropriate level of support for businesses would be “more difficult”, he said, given the risk of subsidies supporting “zombie companies” that would otherwise have to stop operating. This happened after the Covid-19 pandemic, when governments paid employers to keep workers in work.
Governments should therefore ensure that companies shoulder some of the burden of higher energy costs, even as they provide some support to those who cannot cope, he argued.
Measures to prevent companies from profiting from the crisis, such as a “fuel finder” tool promoted by the UK government, would be important “to ensure that any support for prices reaches consumers”, he added.
Scarpetta spoke to the FT ahead of the launch of an OECD report outlining ways in which governments can overcome a long-term slump in productivity that has undermined growth and living standards.
He called Britain one of the few countries where growth prospects had not improved even before the start of the Iran conflict. He urged Sir Keir Starmer’s government to do more to help young people get apprenticeships, cut childcare costs for working parents and remove “kinks” in the income tax system that were weakening work incentives for people on higher incomes.
