Tariff shield: the right balance

Tariff shield: the right balance

Pfrom “whatever it costs” to “how much does it cost?” “. This is the perilous exercise the government engaged in on Wednesday, September 14, when presenting its energy plan. While soaring energy prices are exerting increasing pressure on the purchasing power of the French, the Prime Minister, Elisabeth Borne, has tried to send them a double message. The need to moderate the budgetary generosity that the State has shown so far, without giving up protecting the most vulnerable households.

From the beginning of 2023, the rise in energy prices will be felt more, although the bulk will continue to be borne by public spending. After a price increase limited to 4% in 2022, gas and electricity will thus increase by 15% the following year.

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Such an increase would have been considered unbearable a few months ago. But the figure must be put into perspective with the reality of market prices, which the government says have jumped 120%. Public aid is all the more important as it is quite unique in Europe. For most of our neighbours, the rate increases have been much more violent.

France was one of the first countries to deploy a tariff “shield”, before being imitated now by most European countries, which, too, are obliged to introduce shock absorbers to contain the risks of social tensions. . To this system of capping the price increase is added a more targeted device, in the form of energy checks which will be sent at the beginning of 2023 to the 12 million least advantaged households.

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While this aid should make it possible to tackle the difficult winter ahead, it can only be temporary, given its net cost to public finances, estimated at 16 billion euros. The sustainability of the system risks being quickly questioned if the tensions on the electricity market continue beyond the first half of 2023. Hence the need for European reform.

Increase in the cost of debt

Moreover, the tightening of interest rates initiated by the European Central Bank (ECB) has started to increase the cost of public debt. This must be kept under control. Finally, beyond support for purchasing power, the State must finance other equally crucial projects (education, health, police, justice, reindustrialisation). Not to mention, of course, the investments essential to the ecological transition, a major issue. Quickly, budgetary choices will have to be made.

The strategy of limiting energy prices has so far enabled France to post one of the lowest inflation rates in Europe, 2 points below the euro zone average. The budgetary cost is enormous, but it has allowed the country to experience less pressure on wages than that observed among its neighbours. If prices calm down within a reasonable time, the country could emerge with enhanced competitiveness. If, on the contrary, inflation were to continue, France would lose on both counts, with a deepening of the debt, and wages which will sooner or later have to be aligned with the rise in prices.

Read also: Euro zone: the ECB decides on a historic rate hike of 0.75 points to combat galloping inflation

The bet is therefore risky, especially in view of the looming recession. But it would be simplistic to see these public expenditures only as a cost, they can also be seen as a budgetary effort which could prove to be profitable at the end of the crisis. Only the duration of it will tell if the government’s strategy was the right one.

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