The European Central Bank’s chief economist has called on eurozone governments to tax rich people and companies to finance support for those hit hardest by the region’s energy crisis.
Philip Lane said that funding for policies to help the most vulnerable groups in society “could take the form of higher taxes on higher earners or on industries and firms that are highly profitable in spite of the energy shock”.
Lane’s remarks come after the UK government’s latest budget, which includes a tax cut for the highest earners, triggered a sell-off in bond markets and sharp depreciation of the pound.
The UK and EU member states have both unveiled fiscal support for households and businesses to deal with soaring energy prices. However, after presenting plans for a £150bn energy price cap, the UK on Friday also announced £45bn of tax cuts — mainly for those earning more than £150,000 a year — funded by extra borrowing.
Investors globally are growing increasingly concerned that monetary policy and fiscal policy are out of sync. Central banks worry that expensive government support measures will lead to greater inflation, forcing them to raise rates higher.
Lane said governments faced a clear choice in how they funded measures to support those hit hardest by the energy crisis created by Russia’s invasion of Ukraine, which has drastically cut Moscow’s supply of natural gas and oil to Europe.
“If you support those in need through higher taxes, it has less of an effect on inflation than if you increase deficits,” he told the Austrian newspaper Der Standard in an interview, giving more detailed advice than is usually provided by the central bank to politicians on tax policy.
Lane’s comments support the EU’s plan to raise €140bn from a levy on excess profits in the energy sector to spend on measures cushioning the blow of high prices, which is due to be discussed by policymakers on Friday. Bruegel, the Brussels-based think-tank, estimates that 10 EU countries have already announced or put in place such windfall tax measures. The EU has not, however, advocated higher taxes for wealthier citizens.
“From the point of view of fairness, but also from a macroeconomic perspective, governments should support the income and consumption of those households and firms that are suffering the most,” said Lane, a key architect of monetary policy for the euro area. “The big question is whether part of this support ought to be financed by tax increases for those that are better off.”
In the eurozone, where fiscal policy is handled by 19 different governments, the ECB has an extra worry. Higher government debt levels may raise the spectre of a debt crisis in individual member states and make it harder for the central bank to raise rates as high as needed to tackle inflation.
Concerns about the far-right government set to take power in Italy after elections at the weekend has pushed the gap, or spread, between the interest rate on Italy’s 10-year bonds and those of Germany to above 2.5 percentage points, its highest level since the pandemic caused a sell-off in bond markets in April 2020.
Lane said that while “it won’t be possible to avoid somewhat higher deficits” in the short term, “there has to be a clear time limit”. Stressing the importance of lower deficits next year to help tackle inflation, he said: “This does not mean moving towards austerity, just moving away from expansionary policy.”
Inflation is expected to hit a new eurozone record of 9.7 per cent when September data is released on Friday. Lane predicted energy prices would stabilise by the middle of next year and said inflationary pressures should subside as supply chain bottlenecks ease and higher rates slow demand.
He also warned that workers and companies would both have to accept lower incomes because of higher energy costs — which he estimated had increased from about 1 per cent of eurozone gross domestic product to 5 per cent.
“In order to get back to lower inflation, we need to realise that corporate profitability will decrease for a while and that wages will not fully keep up with inflation for a while either,” he said.
