Fifth Package: It Is Impossible to Target Measures When You Do Not Know the Structure of the Economy

If the Spanish government had directly targeted only half of the subsidies for electricity, fuel, and reduced VAT on basic foodstuffs to the poorest population (the bottom three deciles), the number of households negatively affected by inflation would be only four percent. In simpler terms, almost all inflation-affected households would be equally protected at half the budget cost. On the other hand, in reality, the most money from untargeted budget measures introduced to address the energy crisis has flowed to the wealthiest groups. Thus, the fuel subsidy has most benefited Spanish households with higher incomes – the top three deciles accumulated savings of 1.38 billion euros, while the poorest (the bottom three deciles) received only 472 million euros.

These data from the Spanish study once again support the argument put forward by both the International Monetary Fund and the European Central Bank that in the energy crisis and inflationary context, direct transfers to vulnerable households are a better tool for alleviating energy poverty than general measures such as reducing fuel taxes.

Horizontal Measures

Despite these arguments, as well as the recommendations of the European Commission to Croatia to target support to protect vulnerable households and businesses and to include incentives for energy savings, Prime Minister Andrej Plenković in the fifth package of measures decided to cast a wide net, so more than 60 percent of measures relate to electricity subsidies that are horizontally directed towards the entire population – both rich and poor.

– The story of horizontal measures has continued in the last package. This way, the rich and the most vulnerable groups are not differentiated. An additional problem is that the measures do not encourage rational behavior, nor do they reward those who save energy. Since Croatia does not have a list of households, but only an income census that does not include assets, it is impossible to have targeted measures. If we do not know who is poor and who is not, we cannot conduct a socially sensitive policy – says economic analyst and professor Luka Brkić.

He is joined by economic expert Ljubo Jurčić, who adds that, in addition to not knowing which household is truly poor, we do not know the structure of the economy and production chains.

– Since we do not have a list of households or an economic table with inputs and outputs, we cannot properly target subsidies. That is why it is done so broadly, and whoever the measures hit, hits. I currently do not need the measures, but my neighbor who has two children and a loan probably does. The same situation applies to companies. A large company may only be labeling stickers and importing most of the inputs, while another has a high multiplicative factor. The latter should, of course, be encouraged. The conclusion is that measures should be properly targeted, but since we do not have the right data, such administrative political measures are being implemented in Croatia – criticizes Jurčić.

From Empty to Empty

Brkić drew a parallel between insufficiently selective measures and the recent tax reform.

– All these moves do not aim to change the unfavorable structure of the Croatian economy that creates imbalances and deepens the divide between the poor and the rich. In this country, production, exports, and added value are systematically neglected. And you cannot expect improvement when you perpetuate a non-development model. It just pours from empty to empty, as does this last tax reform, which does not address the three fundamental problems that should be solved by tax: regressiveness, it does not affect cyclicality, but deepens it, it does not increase tax fairness – believes Brkić.

A partial justification for the horizontal nature of the fifth package of measures is seen by the head of bond business at InterCapital, Ivan Dražetić, in the poverty of Croatian citizens.

The Commission Praises

– Although the European Commission in its May report suggests that energy savings should be taken into account, it simultaneously praised the positive shift, the reduction of energy poverty in Croatia from 2015 to 2021. Specifically, in 2015, 9.9 percent of households could not keep their homes adequately warm, and that share fell to just 5.7 percent in 2021 (the EU average at that time was 6.9 percent). Additionally, the EC states that before 2021, 48.4 percent of the total population recorded energy costs (total energy: electricity, fuel, gas, etc.) greater than 10 percent of their total budget (the EU average at that time was 26.9 percent).

Looking at the population at risk of poverty, in 2021, 84.8 percent of that group recorded energy costs greater than 10 percent of their household budget (the EU average at that time was 48.2 percent). With such a population structure, the government had almost no choice but to direct most of the available funds to combat energy poverty – notes Dražetić, adding that the EC report mentions that in the absence of state aid between August 2021 and January 2023, the share of the population spending more than 10 percent of their household budget on energy would have increased by 7.1 percent (to 55.5 percent), and in the EU, that shift would have been around 16.4 percent.

– In other words, the EC at the beginning of the paragraph related to state aid suggests the application of alternative criteria for allocating aid, namely energy savings, but later in the text implicitly praises the Croatian model designed with the specificities of the domestic population and consumption structure in mind – explains Dražetić.

You can read the full text in the digital and printed edition of Lider.