Economist: Cutting VAT on fuels will only stimulate demand and help finance Russia’s war in Ukraine

In an effort to curb soaring fuel prices in the country, the Czech government on Wednesday approved a VAT cut on petrol and diesel by 1.50 CZK a liter from the beginning of June to the end of September. The move was made under growing pressure from producers and haulers who have been calling for a VAT cut on fuels for some time. I asked David Marek, chief economist at Deloitte Czech Republic, for his take on the decision.

“I think it was not a happy decision. It will only increase demand for petrol at a very high cost – approximately 12 billion crowns –and I think the money could have been better used for direct support to low-income families through social allowances. This direct approach would have been much more efficient than decreasing excise duties.”

The government is also considering capping the profits of companies selling petrol and diesel – is it time to do that?

“The Czech fuels market is very competitive, so there is no need to cap profit margins. That is something that, again, is not necessary since the market is competitive enough.”

David Marek | Photo: Jana Přinosilová,  Czech Radio

So your view is that the government should provide selective assistance, for as long as needed?

“Definitely, the government should decide how to distribute money especially to low-income families and since money is hard to find, given the need to cut the budget deficit, every decision should be carefully weighed before being announced to the public.”

But what about producers? This country is dependent on its industry.

“This is something that is a problem for us all, not just producers and it is something that companies should take into account. They have all been hit and the government cannot decide to help only some of them.”

Some neighbor states have cut VAT on fuels much more –why not us?

“I do not think that we can decide about what is good and what is bad by looking at other countries. In my view, cutting VAT on fuels is not the best approach –it is a costly measure and we are stimulating the demand for fuels at a high cost – that is only helping to finance Russia and its war in Ukraine and that is something that we should try to avoid.”

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