Energy Tax Cuts Swallow Relief

European governments have set aside €11 billion for energy relief in 2026. More than 72% of it is going into measures that are not targeted at all (Bruegel). Blanket VAT cuts and lower fuel taxes reduce bills for everyone, whether a household is struggling or comfortably insulated from the shock. Eurozone finance ministers meeting in Nicosia on May 23 said relief should be "targeted and temporary" (Cyprus Mail). The money already spent tells a different story.

Flat tax cuts save the rich more

The closure of the Strait of Hormuz since late February has taken about 10.5 million barrels a day out of global oil markets. Brent crude hit $138 in April and has since settled near $110 (EIA, Fortune). European gas prices rose 56% within weeks (ECCO).

Faced with that kind of price shock, governments reached for the quickest tool available. Spain cut fuel VAT from 21% to 10%. Germany reduced its energy tax on fuel by 14 cents per litre, at a cost of €1.6 billion to the federal budget over two months (Bundesregierung). Germany’s ifo Institut and the Monopolkommission, the country’s competition authority, found that the cut did reach consumers, with pump prices falling by the full amount. Italy cut fuel excise duties.

The political attraction is obvious. The distributional problem is just as obvious. A flat tax cut gives the biggest cash saving to households that use the most energy: larger homes, longer commutes, more cars. The IMF found that blanket price subsidies are regressive, meaning they deliver a larger benefit to wealthier households than poorer ones (IMF). ETUI analysis found that many households which did not need help received generous transfers, while low-income families still could not cover their extra costs (ETUI).

There are more precise options, but few governments have used them. Greece’s Fuel Pass gives €25-60 a month to households earning below €35,000 (Ethnos). France doubled its employer fuel premium to €600 a year, a tax-free payment companies can offer workers, though take-up is voluntary (Le Figaro). Across the EU, only four countries have introduced measures specifically aimed at vulnerable households (Bruegel).

Expensive subsidies, empty budgets

The broad tax cuts are now running into national budgets that were already stretched. Germany’s deficit has reached 3.7-4.25% of GDP (INSM). France is at 5.1% (IMF). The number of eurozone countries in an Excessive Deficit Procedure, the EU’s formal process for bringing deficits above 3% of GDP back under control, is expected to rise from 10 to 13 this year (Cyprus Mail).

Italy’s Prime Minister Meloni pushed to have energy spending excluded from deficit calculations, as defence spending has already been carved out. No other member state backed her publicly (Euronews). The proposal went nowhere, but it exposed the real pressure point. Governments would prefer to adjust the accounting before they adjust the policy.

Nine days in June

Spain’s electricity and gas VAT cuts expire on June 1, with price rises of 9.9% and 11.7% expected (Spain in English). Italy’s fuel tax cut expires on June 6. On June 11, the ECB, the European Central Bank which sets interest rates for the 20-country eurozone, decides on rates, and investors expect an increase (CNBC). Germany’s cut runs until June 30.

The ECB cannot bring more oil onto the market by raising interest rates. But eurozone inflation is running at 3%, against a 2% target, which makes doing nothing harder (ECB). If subsidies expire just as borrowing costs rise, lower-income households will face higher energy bills at home and higher mortgage costs from the bank. The Eurogroup agreed principles in Nicosia, but it did not create a mechanism for coordinating the exit. Each country will decide on its own when to pull support. The first deadline is nine days away.