The government is continuing with its excise duty cuts, but many of the figures do not add up. Tabarelli and Nobile speak out

The government has decided to continue with the discount on diesel: yesterday, the Council of Ministers extended until 25 August the 17-cent-per-litre reduction in excise duty and VAT, which had already been introduced on 28 July and was due to expire on 6 August, and which will now require approximately €245 million for this additional period, to be raised by cutting expenditure across the various ministries. The alternative – deferral to a decree from the Ministry of Economy and Finance – would not have changed the outcome: the funding would in any case have been sought from the additional VAT revenue collected in July as a result of the price rises.

The decision appeared to have been a difficult one, preceded by a summit between Prime Minister Giorgia Meloni, Economy Minister Giancarlo Giorgetti and Deputy Prime Ministers Antonio Tajani and Matteo Salvini – with the League leader even pushing yesterday for a one-year cut funded by the profits of the major banks. This cautious approach, however, stemmed from the disappointing results of the measure due to expire on 6 August, which was funded by fines from the Competition Authority, the Fund for Structural Economic Policy Interventions and the VAT windfall from June: 125 million for ten days, with the aim of bringing diesel prices back below 2 euros. That threshold was never reached again, and yesterday diesel stood at 2.10 euros, as prices rose in response to the reduced oil supply caused by the closure of the Strait of Hormuz.

Nicola Nobile, chief economist for Italy at Oxford Economics, explains to Il Foglio why this approach is likely to continue: “The Italian government is caught between developments on the international markets, the need to keep public finances in order, and the ever-approaching elections. For this reason, it is likely that short-term measures will continue – measures that do not place an excessive burden on public finances, but which also attract media attention.” Taken together, however, these measures do take their toll: between mid-March and early July, excise duty cuts cost around 1.8 billion, plus the 125 million from the decree at the end of July and 245 from yesterday’s decree. Meanwhile, budgetary leeway remains minimal, with this year’s deficit expected to stand at 2.9 per cent of GDP, just below the 3 per cent threshold.

On Monday, the ECB reiterated the importance of these discounts in a box included in its Economic Bulletin, authored by Alina Bobasu and Michael Dobrew. “The euro area is a net importer of the energy it consumes”, so any rise in the price per barrel acts as an “unequal transfer of income abroad”, writes the ECB: households in the lowest income quintile spend 9 per cent of their disposable income on energy, compared with an average of 5.5 per cent, and have negative savings (amounting to -5.8 per cent), meaning they spend more than they earn. The real issue, however, is where the damage lies: businesses cannot do without energy, nor can they replace it with anything else; therefore, when energy costs rise, they cut back on production and hiring. Thus, 80 per cent of the decline in consumption stems from lower wages and fewer jobs, and only 20 per cent from the higher direct cost of petrol, gas and utility bills. The ECB estimates that, immediately following a price rise, consumption by households with no savings falls by 1.4 per cent – double the 0.7 per cent drop seen among other households. In short, the price at the pump is the lesser part of the problem, and a discount applied equally to all addresses precisely this issue, distributing the benefit in proportion to the number of litres consumed.

Davide Tabarelli, chairman of Nomisma Energia, agrees with the ECB’s conclusions: “Excise duty cuts are pointless; they are harmful and send the wrong signals to consumers, who need to reduce their consumption. We have already spent nearly 2 billion, and things have gone well so far because prices haven’t skyrocketed, but there is still a significant shortage of supply on the market. The crisis could be far worse, and the government should resist all those who are ‘pulling their strings’. I would only consider further tax credits for transport operators if they ask for them.”

The government has had an alternative at its disposal for some time, and the ECB’s own box serves as a reminder once again of how targeted measures can mitigate the impact on households least able to absorb the cost of living rise: in 2023, a fuel allowance was included in the ‘Dedicata a te’ scheme, reserved for households with an ISEE of up to 15,000 euros. Almost 2 billion was used to fund a discount that encourages consumption whilst supply is scarce; the same resources could have funded a measure with a clearly defined target group, limited cost and concentrated benefits where the energy cost crisis is felt most acutely.