Spain | The impact of fuel subsidies

With rising energy prices, which are driving up inflation and dragging down economic activity, policymakers are facing some difficult dilemmas. This is the case with fuel subsidies in Spain and similar measures in other European countries.

Key points

• Key points:
• The evidence suggests that subsidies of EUR 0.20 a liter (equivalent to 10% of the price) will increase short-term demand for fuel in Spain by between 1.5% and 2%, reducing the incentives resulting from higher prices to reduce gas consumption and thereby to reduce emissions.
• As Spain mports almost all its oil, the subsidy will push up the energy trade deficit, at a fiscal cost of around EUR 1.4 billion each quarter (which will be funded through more short-term debt), and implies a transfer to fuel consumers — financed by future taxpayers.
• The futures markets expect oil prices to still be at their current levels in September of this year and that we will have to wait until mid-2023 before they fall by 10%; this is equivalent to the level of subsidy approved, which could be around much longer than anticipated.
• In return for these costs, which are difficult to calculate, a reduction is expected in the price of gasoline and diesel. If the subsidy is fully effective, the impact on inflation will be only temporary and marginal — between 0.5pp and 0.6pp at the most.
• As often occurs with economic policy, compared to other better alternatives, this subsidy prioritizes its supposed advantages—which are easier to see right now—rather than its less obvious costs, which are put off until sometime in the future.

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