As the effects of ongoing global financial fragility continue to affect economies across the Europe and Central Asia (ECA) region, policy makers remain vigilant in their pursuit of economic measures that can reduce spending. With subsidies for household energy accounting for as much as 2 percent of Gross Domestic Product (GDP) around the region, this is a key area for fiscal reform. However, with both poor and middle class households particularly vulnerable to increases in energy prices – spending as much as 5 percent of their income on electricity and 2 percent on gas – reform in this area must focus on minimizing the social impacts.
A new report by the World Bank is helping policy makers in the region address these reforms. This report, Balancing Act: Cutting Subsidies while Protecting Affordability, offers strategic advice and concrete recommendations to countries on how they can reduce – and eventually eliminate – energy subsidies without increasing the economic burden faced by poor and middle-class households.
“The report highlights how higher energy prices are going to significantly impact both the poor and the middle class,” says Caterina Ruggeri Laderchi, Senior Economist at the World Bank and co-author of the report, “this is not a matter of cutting down on luxuries, but rather a question of covering basic heating needs. As such, the report looks at ways governments can expand social assistance strategies targeted at the poor while simultaneously investing in energy efficiency.”
While on the surface these energy subsidies can seem like effective means of social assistance – making it possible to satisfy a basic need – the report illuminates many of the inefficiencies of this system and offers solutions to the subsidy problems, based on improved social assistance programs and the implementation of energy efficiency measures.The report also highlights ways to ensure that these reductions do not harm those households most vulnerable to energy price shocks.