Brussels tells governments to end household energy supports

EU Economic Commissioner Paolo Gentiloni. Photo: Reuters

Sarah Collins

March 08 2023 01:24 PM

The EU is advising governments to end blanket energy supports like the €200 electricity credit by 2024 and start paying down high national debts.

The time for fiscal largesse has passed, according to the commission's economy chiefs, who warned Wednesday that continued subsidies could feed into higher prices.

Energy subsidies, excise reductions and other supports cost EU countries an estimated 1.2pc of GDP last year, but could have been a quarter of the cost had they been more targeted.

“This support cannot continue indefinitely,” said European Commission vice-president and trade chief Valdis Dombrovskis.

"As energy prices head lower, we should move to phasing out most of the support measures, starting with the least targeted. The time for broad-based fiscal stimulus has passed.”

Mr Dombrovskis, a former Latvian prime minister, said the better-than-expected economic picture should allow governments to stop spending while also investing in much-needed green and digital infrastructure.

While the EU believes inflation has peaked, Mr Dombrovksis warned that continued giveaway budgets could push prices higher and “we may end up in a situation where [the European Central Bank] is forced to tighten monetary policy even further”.

His colleague, Paolo Gentiloni - also a former premier - was more sympathetic to governments’ budgetary balancing act.

“It’s easy to describe these things here. It is a little bit different to take decisions, especially if you have to take them in a hurry.

“If we have new challenges coming from the energy prices, I think there is scope and time to make what we were not able to do one year ago, so to make these measures more targeted.”

Brussels is also warning that countries that breach EU budget rules - including at a deficit of 3pc or more of gross domestic product (GDP) - will be disciplined from next year as suspended fiscal rules are reapplied.

Ireland is unlikely to have any issues on that front, with the government running massive surpluses, which the Central Bank says could hit almost €8bn this year and double by 2025 if one-off budget measures are ended.

However, the country is considered by the EU as a medium to high-debt country, and could face some scrutiny under the bloc’s budget rules, which will consider debt levels and ‘net primary expenditure’ – spending minus interest payments and one-offs.

The bloc is currently updating its debt and deficit rules after suspending them in March 2020. That suspension will end in December.

Until a deal is done on the budget rules update, the old rules will apply, but “not…in a strict sense”, Mr Dombrovskis said.

For instance, the Commission has hinted it won’t slap governments with a so-called ‘excessive deficit procedure’ - which under pre-pandemic rules would have subjected them to closer surveillance and strict debt reduction targets - if they breach spending limits to make targeted energy interventions next year.

“This is not austerity,” Mr Gentiloni insisted. “This is recovery.”