What measures can be taken regarding the fuel tax, and what options are available to support vulnerable groups
The price of diesel, which exceeded 2 euros at several gas stations last week, signaled the need for government measures to address rising energy costs, with Finance Minister Makis Keravnos, announcing measures on September 30. Measures that, provided they follow European guidelines, should be targeted, of limited duration, and fiscally balanced. With this as a basis, we aim to provide an initial overview of the possible direction of the government’s measures.
Given these circumstances, the government has limited scope for across-the-board changes to fuel taxation unless such measures have a specific duration and are compatible with the European framework. For this reason, Cyprus has every reason to support Member States’ efforts to achieve greater flexibility in fuel taxation, especially at a time when several European governments are seeking ways to ease the burden on consumers. As for the Special Consumption Tax, the room for maneuver is even more limited, as Cyprus is already applying a temporary reduction and is below the standard minimum levels set by European legislation. A further reduction would therefore require a new European derogation.
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However, government intervention could be made more targeted, with support directed toward the categories of businesses and professionals most affected by rising fuel prices. This category could include taxi drivers, bus and trucking companies, as well as farmers, ranchers, and fishermen. Specifically for the primary sector, the intervention could also serve as a buffer against further increases in food prices, as higher fuel costs are passed on to production and the supply chain. This support could take the form of a temporary reimbursement of part of the additional fuel costs or another targeted program, rather than a blanket subsidy for all consumers.
In fact, the government could finance these measures using the additional revenue generated by the high fuel prices. As fuel prices rise, so does the VAT collected by the government, since the tax is calculated based on the final price. In other words, a portion of the price increase paid by consumers flows back into the state coffers through taxation. It makes sense, therefore, for part of this additional revenue to be returned to society in the form of temporary support measures, especially for those most affected. Of course, we must also take into account the increased costs that inflation itself imposes on the government, but unnecessary government spending must also be curtailed to create the necessary room to support households and businesses.
Another step the government could take is to focus its attention on vulnerable population groups. With the help of the Deputy Ministry of Social Welfare, it could identify which citizens and households are struggling the most to cope with the increased cost of energy and ensure that they take advantage of the benefits to which they are already entitled. A prime example is the EAC’s special tariff 08, which applies to specific categories of consumers, such as recipients of the Minimum Guaranteed Income, low-income pensioners, single-parent families, families with three or more children, people with disabilities, and specific categories of patients. The government could first verify whether all those eligible for these discounts are taking advantage of them and, where necessary, inform them or help them enroll in the program. From there, it could be examined whether the same approach could be extended to other basic needs, such as food or fuel, through temporary vouchers or other targeted assistance.
If this can be done without significant administrative costs, the government could go a step further and consider a temporary voucher system for the most vulnerable families. Depending on the design, the vouchers could cover fuel or basic food items and be provided for a specific period of time to specific categories of beneficiaries. In this way, assistance would go to those who truly need it, without the government having to provide across-the-board subsidies to all consumers. And if a new system proves difficult to set up immediately, the government could utilize existing data and registries to ensure that support reaches eligible recipients quickly.
It is therefore most likely that the government will implement a combination of measures: some temporary tax relief where feasible, targeted support for professionals most affected by rising fuel prices, and additional assistance for the most vulnerable households. The question now is whether these measures will be sufficient to alleviate the pressure on households and businesses without, at the same time, creating a permanent burden on public finances.
