As record inflation and recession talk stress out consumers, governments have struggled to figure out what, if anything, they can do.
Some countries, including the U.S. and many in Europe, have enacted broad, temporary measures like tax rebates, one-off payments, and tax cuts as their central banks raise interest rates.
Those temporary measures, however, are exactly the opposite of what governments should do, according to the International Monetary Fund. In fact, they have the potential to hurt the world’s most vulnerable consumers.
“Governments cannot prevent the loss in real national income arising from the terms-of-trade shock,” the organization wrote in a blog post on Wednesday, referring to higher prices on consumer goods. The post, titled “How Europe Can Protect the Poor from Surging Energy Prices,” warns that price increases are likely to persist indefinitely and that any temporary measures will only delay their effects and prove harmful in the long run.
“In some instances, policymakers may think of temporary price controls as a tool to restrain headline inflation and limit second-round effects on wages and nonenergy prices,” wrote the IMF in a working paper, published last week, that accompanied Wednesday’s post. “However, delaying potentially inevitable price adjustments likely trades off lower peak inflation in 2022 for a longer period of elevated inflation in the future.”
The IMF argues in its post that the only worthwhile inflation-related remedy is aid that targets the most financially vulnerable. In the U.S., where inflation was at a four-decade high of 9.1% as of June, several states have been providing such targeted relief through tax rebates.
In Oregon, hundreds of low-income residents received a one-time payment of $600 earlier this summer, while in Florida nearly 60,000 low-income families are set to receive $450 checks for every dependent.
In other states, however, the relief is not as targeted.
In Colorado, taxpayers are set to receive checks worth up to $1,500 for joint filers. Those checks are the result of the Colorado Taxpayer Bill of Rights, which mandates that excess state revenue be redistributed, and are being sent out early due to inflation. Other states, including Delaware and Indiana, have enacted their own rebate programs that involve sending checks, of equal amounts, to every adult resident who filed a tax return last year.
In California, Gov. Gavin Newsom has called his state’s relief program, which offers taxpayers up to $1,050, depending on filing status and income, a “middle class tax rebate.”
In its post, the IMF stated that similar broad-based subsidies in Europe, along with other tax cuts and price control measures, will cost European countries an estimated 1.5% of their respective GDPs this year.
Transitioning to targeted relief, it adds, could significantly lower that number. If European countries fully offset inflation-related price increases for only the bottom 20% of households by income, the resulting cost would only be about 0.4% of GDP for 2022, according to the organization.
“So far, Europe’s policymakers have responded to the energy cost surge mostly with broad-based, price-suppressing measures, including subsidies, tax cuts, and price controls,” the IMF wrote, adding that those policies have so far been inefficient. “It keeps global energy demand and prices higher than they would otherwise be.”
