Wednesday, February 8, 2023

The IMF asks Spain to limit energy aid to the most vulnerable

The International Monetary Fund (IMF) asked the Government of Spain on Thursday to limit the measures to alleviate the increase in the price of energy to the most vulnerable, since the general measures have been very expensive.

The agency made this assessment in its latest report published today in which it increases its calculation of growth of the Spanish economy by six tenths in 2022, which now stands at 5.2%, while the prospects for this year drop one tenth, to 1.1 %.

In it there is a specific analysis of the policies carried out by the Spanish Government to alleviate the increase in energy prices.

Some of the policies, the IMF points out, “have adequately targeted vulnerable households and companies” and the Government has been able to correctly identify “that the group of vulnerable households extends beyond the poorest”.

But, as in other European countries, “most of the fiscal support has consisted of non-targeted (general) measures that weaken price signals,” such as electricity tax cuts and fuel discounts. .

“The latter have been fiscally costly, and the benefits accrue disproportionately to higher-income households,” the agency says.

The direct fiscal cost of the package has already been relatively high (around 1.5% of GDP in 2022) and further extensions of the measures would increase the costs.

The Iberian Mechanism, by contrast, lowers electricity prices and therefore reduces incentives to adjust demand somewhat, but unlike most other price-affecting measures, it does not impose a fiscal cost. .

Going forward, the Fund recommends allowing the market to operate more freely in terms of prices and directing relief measures to the most vulnerable.

In this sense, he insists that acting on prices delays their inevitable adjustment and reduces the incentives for households to save and companies to save energy, without forgetting that it causes demand to remain high and leads, once again, to higher prices.

Among the proposals, the Fund considers that direct transfers, for example in the form of vouchers (ideally linked to income and household size), would be preferable to price-acting measures.

Other possible measures are block tariffs (which imply a subsidized price for basic energy consumption and market prices for higher levels of consumption) and social tariffs (discounts for vulnerable households, such as the Spanish social bonus).

In the medium term, it would be necessary to continue efforts to overcome dependence on fossil fuels, insists the Fund, which calls for investments in low-carbon alternative energy, storage and interconnections.

The share of electricity generation from renewable sources in Spain has increased significantly to around 40% of the total, above the EU average, compared to 15% fifteen years ago.

A continued expansion of the renewable sector will thus be required to meet the government’s ambitious target of 74% of electricity production by 2030 and 100% by 2050.

It also advocates increasing the coverage and interconnection of electricity networks. With 6.5%, Spain is one of the few countries that has not reached the EU target of 10% electrical interconnectivity between countries by 2020 (15% by 2030).

Spain has allocated around 40% of NGEU funds to support green investment projects, with initial investments prioritizing clean energy, sustainable mobility and building efficiency renovations, the agency notes.

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