What counteracts high inflation: energy protection shield, excess profit tax, or price caps?
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| [Inflation and high energy prices] |
Latvia
Latvia is in the news. Foreign policy, since the nation, along with its neighbors Estonia and Lithuania, is thought to be the Russian Federation’s next likely target. It also experienced the highest inflation rate since the 1990s in July (21.5%), which was the start of the transition from a planned to a market economy. This has implications for both domestic and economic policy.
High inflation is a result of a number of factors, including broken supply chains and the Russian invasion of Ukraine. One significant element is the increase in energy costs. Although a prohibition on imports will remove Latvia’s reliance on Russian gas on January 1, 2023, finding alternatives is more difficult than it is in Germany.
Whether there is enough gas available and stored, at least for the near future, is another question. The responsible company Latvijas Gaze, in which the Russian energy company Gazprom (34%) and Uniper Ruhrgas (18.26%) both own stakes, does not wish to confirm this. However, Prime Minister Krisjanis Karins confirmed his conviction during a press conference.
Even though Latvians have experienced the negative effects of high inflation before, including during the 1990s revolution and the 2008–2009 financial crisis, the effects are now again extremely severe. because rising expenses for transportation, housing, food, and heating affect everyone.
Because they all consume a sizable amount of the typical Latvian household budget, more so than in other societies. In a nation where the interseasons are frequently cool in addition to the frigid winters, heating expenses will increase particularly drastically. A friend’s heating bill has unexpectedly increased from 170 euros to 614 euros.
The cost of groceries has increased by at least a third, including dairy, bread, coffee, sugar, and meat (beef). It makes sense that the desired average salary in a recent survey is currently 1,646 euros, a twelve percent increase from the previous year. It had only reached slightly over half ten years prior.
The government is aware that it must step in. In the event of heating expenses, it will help offset excessive costs in part. The administration has said it will offer inflation compensation to the aged, retirees, and the disabled. Does that suffice? “Many households will not be able to tolerate this, and there will be huge pressure on the municipal social service providers to cover the costs,” says financial analyst Andris Suvajevs, who is skeptic.
However, social advantages are a challenge for government organizations. Latvia takes pride in having a low national debt that makes up only about 43% of its GDP. For comparison, this percentage is 68 percent in Germany and 152% in Italy. It is often regarded as a security component against major crises and is consistent with a very high level of skepticism about excessive state interventions, which is undoubtedly still a result of the Soviet Union’s constituent republics’ decision to break away from state administration.
On October 1st, the national parliament will be re-elected. Currently, it’s believed that at least 10 parties have a decent possibility of passing the five percent barrier. The coalition talks will be challenging once more. But since the cold weather is coming, there won’t be much time for that. Hospitals have also disclosed financial demands in order to be able to afford the escalating costs, in addition to private homes. In Latvia, it is also possible that the corona virus will evolve into a new strain.
France
Since 2021, France has experienced rising inflation dynamics after a protracted period of no more than 1% annual price increases. This started to accelerate when the war in Ukraine started. The inflation rate increased to 6.1 percent in July, the highest level since 1985. According to the French statistical agency, the rate will rise to 6.5 to 7 percent by year’s end. These are some figures who remind me of the 1970s.
Economists draw attention to the fact that the current inflation dynamic is distinct from the “traditional” scenario of a parallel rise in the cost of all products and wages. Currently, there is predominantly a “imported inflation” that only affects the costs of a select few items, most notably energy (electricity prices increased by a factor of six in the first half of the year) and food, although pay and salary growth has not yet kept pace with this increase. The French government had already introduced the “bouclier énergétique” (Energy Protection Shield), a bundle of measures meant to buffer the inflation shock for households, in response to the fast rising cost of energy.
Gas prices were “frozen,” and the annual increase in power rates was limited to 4% through the end of 2022. A one-time energy credit, or “chèque énergie,” of up to 277 euros was given to low-income households having an annual income of up to 10,000 euros for their electricity and gas bills. Additionally, those that utilize heating oil should receive relief during the winter. Aid totaling EUR 230 million was made available for this objective. A price drop of 30 cents per liter of fuel was authorized (down from only 10 cents in November) in order to stop the upward price spiral at the gas pumps. According to an estimate by the economic research center OFCE, these actions have reduced inflation by about 2%.
However, there are some who contest this “protective shield” for energy prices. Although he has so far been able to keep inflation in check in France in comparison to its neighbors, detractors contend that the policies ought to be directed more towards vulnerable people. The actions done thus far also serve as a symbol of the conflict between the short-term objective of sustaining purchasing power and the medium- and long-term objectives of energy conservation and energy transformation. Even while a social conversation about reducing consumption is slowly taking shape, there haven’t been any supporting policies to encourage energy conservation in France up until now.
Despite the fact that the topic of purchasing power previously dominated the presidential and legislative elections in the spring, it is already generating passionate and contentious debates in the National Assembly’s newly assembled members. After the elections, the government camp no longer holds a complete majority there. Elisabeth Borne, the prime minister, was forced to engage in difficult discussions with the opposition in order to reach a consensus and get support for the law she submitted just before the summer vacation to preserve consumers’ purchasing power. Along the way, two completely different ideas for maintaining purchasing power clashed. The “boucliers énergétiques” are the main focus of the Macronists’ policies. This is done, among other things, to ensure that the public accepts the sanctions against Russia.
Additionally, the government-backed aid program to maintain buying power includes modest modifications to social benefits and pensions that are below the rate of inflation. This program was pushed through by the ruling parties with the cooperation of the conservative Republicans. The index used to determine compensation in the public sector, which increased by 3.5 percent, follows the same logic. The program also includes provisions for the “Macron premium,” which was expanded following the yellow vest protests. This makes it possible for businesses to give bonuses to workers of up to 6,000 euros. Critics claim that because no social security contributions or taxes are withheld from this bonus, it serves as an incentive for employers to avoid raising wages. The potential that businesses may in some circumstances “buy back” a portion of their employees’ working hours reduction was also established at the Republicans’ request. The week is 35 hours long in France. The “buyback option,” which allows many workers the option of either boosting their salary or taking the well-deserved vacation they deserve, is viewed by the left-wing opposition as a direct attack on this Jospin-era accomplishment.
The government camp is allegedly doing everything possible to avoid making broad wage and salary adjustments to protect purchasing power because of this, according to the left-wing parliamentary opposition. On the other hand, she advocates for a minimum wage hike that goes above and beyond inflation adjustments and the calling of a “wage conference” above all else. Her demand for a tax on excessive earnings was another way in which she contrasted the government camp. Socialists and communists proposed for a special tax of 25% on businesses in the energy and transportation industries, which had recently achieved profits substantially above the scale of prior years, in light of the situation-related high earnings in several economic sectors.
A permanent reduction in the gasoline VAT should be financed with the proceeds from this special tax. In response to this discussion, TotalEnergies declared that in addition to the price cut supported by the government, it also intended to lower the cost of gasoline at its own filling stations by 20 cents. The company’s ability to quadruple its profits to 18.8 billion euros in the first half of the year was already known. Now that one energy company has done it, others have declared their intention to release their consumers.
The conservative parliamentary majority initially opposed the need for taxing excess earnings in light of such “voluntary” transfers of profits. However, the subject will undoubtedly return to the table after the summer break. Overall, there is a definite ideological convergence between the Macronists and the Republicans in the discussion of maintaining purchasing power in the recently elected National Assembly. It appears unlikely that the government camp will succeed in approaching the left-wing opposition and their demands anytime soon.
Tanzania
The comeback in oil prices following the Covid 19 drop and, more importantly, the delayed seasonal rains, were two factors that the central bank had already warned may drive inflation at the start of the year. Even before the Russian war of aggression, persistent disruptions in container shipping and global supply chains had increased transit costs and consumer prices. A significant daily newspaper cited profiteering or panic purchasing as the cause of some of the increase in food prices. Due to the fact that even sardines are now being sold for a price that has “never before” been necessary to pay. Banana prices have doubled, and the only explanation for this is that traders are making money off of people’s uncertainty.
Tanzania is fourth in the world in terms of wheat consumption, trailing only maize, cassava, and rice. However, one should not undervalue the social significance of corn in Tanzania: what would a meal be without the cherished corn porridge Ugali? Inconceivably. Newspaper sources claim that the price of grain in June was 78% more than it was a year earlier. Noodles and bread are the primary products of Tanzania’s wheat sector. 80 percent of the wheat imported, primarily from Russia, is consumed in cities, and it may be inferred that those who purchase such goods are more likely to be wealthy and middle-class. Even the price of rice, which just increased by 38 percent in comparison to the prior year, is vital for many low-income households.
Under President Samia Suluhu Hassan, the government subsidizes fuel costs, employs bulk state buying to manage fuel market prices, and is thinking about creating a price stabilization fund to lessen the social burden. The price increase of at least 33 percent has an impact on bus rates in particular, and the increase in gasoline prices is defined as “quite appropriate.” Dar es Salaam bus fares increased by 100 Tanzanian shillings, or four cents, in May. For many commuters, this rise is simply unaffordable. Marches covering a number of kilometers are evidence of this. In light of the significant increase in gasoline prices, the bus industry association has already complained to the traffic supervisory authority that the adjustment is too minimal.
One of the most critical issues in the nation, especially in the rapidly expanding cities, has always been how to address the issues with the energy supply, specifically the frequent lack of electricity without a diesel generator. Tanzania used 2.61 billion kilowatt hours of power in 2019. The world average was 125.19 billion kilowatt hours, for reference. The Greater Dar es Salaam region, which is anticipated to rank among the 20 largest cities in the world by 2050, is being supplied with energy through the construction of a hydroelectric dam. However, water rationing was already implemented here last year as a result of the drought and declining water supplies.
The southern portion of Lindi’s natural gas resources are linked to countless possibilities. People want to take advantage of the growth in liquefied natural gas even more now that it is garnering significant attention on a global scale. The government is still looking for money to invest in the energy industry. The country’s relationship with foreign partners has changed under the current president, who has been in power since 2021. On the one hand, this has transformed the investment climate, and on the other, it has led to finance commitments like IMF loans. Its economic strategy is now being put to the test to see if it can genuinely mitigate the long-term effects of the epidemic and the Russian campaign of aggression with the various loans to provide the crucial fiscal policy room for investments and social spending.
Authors: Dr. Reinhard Krumm, Dr. Thomas Manz, and, Elisabeth Bollrich