Diesel excise duty cuts has come at cost to state budget

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Fuel prices at a pump run by fuel retailer Alexela. Source: ERR

Last year's slashing of diesel fuel duties put in place by the previous administration has in fact cost the state purse and not paid itself off, some experts say. At the same time, the lower excise duty, set to run until May 2022, is still too new to get a full picture of its longer-term effects, a picture further complicated by the arrival of the pandemic.

"In order for the excise duty cut to have been a budget-neutral measure, the rise [in sales] should have been more than 30 percent," Merliin Laos, analyst at the finance ministry, told ERR Tuesday, meaning that the rise in fuel sales did not pay-off the loss in revenues caused by the excise duty cut.

The figure in the eight months following the diesel excise duty slash was less than half the required figure, at 11 percent, she said.

Laos added that a longer-term forecast cannot be made at this stage. The ministry's position as a whole is, however, that retaining low excise duty on diesel for nest year and the following year would have a deleterious effect on the state budget.

Laos said: "In the short time that we have had this lower excise duty rate, we have not been able to influence the passage of all fuel tankers transiting through Estonia."

"If we had a longer-term projection and knew that we will have a lower excises rate, then there would certainly be more liters being purchased there," she added.

Laos added that indirect effects of the reduction are harder to quantify, though cheaper fuel helped some firms weather the coronavirus storm (the decision to slash diesel excise rates predated the arrival of the pandemic – ed.).

Budgetary implications are even clearer, she said, reiterating that it was not neutral so far as the state budget went.

"Quantities [of diesel sold] would certainly have been lower at the end of the year than they otherwise would have been, but at present we cannot say that the change in quantity was so large that we could say it was a budget-neutral measure.

The last administration decided in late 2019 to cut the excise duty on diesel, which saw the rate slashed from 49 cents in the euro to 37 cents, a level similar to those in Latvia and Lithuania. Twinned with low world oil prices early in 2020, diesel ended up costing less than a euro per liter at pump for much of the latter half of the year, having reached a record high of €1.499 per liter just before the excise duty was enacted.

Diesel prices at pump have crept up since Christmas, however, now exceeding the €1.20-per-liter mark - again affected by world oil prices.

Fuel retailers and transport firms themselves say they hope the low rate will continue, even beyond next spring; they and other sector lobbyists have been petitioning politicians to do just that. The legislation which put the excise duty cut in place contained a regulation that it would last until May 1 2022.

Fuel retailer Alexela was one of the largest recipients of state aid during the pandemic's initial wave last year, receiving €37 million.

MPs divided on positive effects of cut

ERR canvassed three MPs, two coalition, one opposition, on the issue.

Jürgen Ligi, Reform Party MP, member of the Riigikogu's finance committee and a former finance minister, says the temporary duty cut should not have taken place.

"The state budget definitely lost out a lot from it, green policies lost out a lot. Naturally, while there were no winners, funding did not go to the areas suffering," Ligi said.

Jürgen Ligi's party was in opposition when the excise duty cut was carried out, but is in office now, with Center.

MP Aivar Kokk (Isamaa), the finance committee's deputy chair and whose party was in office with Center and the Conservative People's Party of Estonia (EKRE) when the excise cut was made, stressed that diesel sales had gone up, while cheaper diesel meant lower costs for many firms, something which came at a key time with the pandemic.

Kokk said: "Estonian entrepreneurs would not have been competitive in the crisi situation. At present, thanks to this, we have rescued many companies by lowering excise duties on diesel and other fuels."

Kokk said he also believed that diesel prices should not significantly rise higher than levels in Latvia and Lithuania – as they had been in the past – to discourage excise revenue leaving the country altogether as hauliers refuel south of Estonia's border.

"I am in favor of the excise duty not changing in April next year, but certainly remaining at the same low level until the end of the year (i.e. 2022 – ed.). At the end of next year, time will tell if excise duties can then be raised."

Jürgen Ligi said it was a matter for the cabinet anyway, noting that the policy represented a retrograde step in the so-called green turn which the administration is currently following.

Chair of the finance committee Erki Savisaar (Center) was a lone voice from the three MPs polled by ERR in saying that the excise cut was in fact budget-neutral.

At the same time, the extraordinary conditions 2020 brought with the pandemic make comprehensive conclusions impossible, he added, noting that the rise in diesel fuel sales increased Estonia's carbon footprint and reduced the volume of CO2 quotas which could be traded – in turn having an effect on the economy and state budget.

Lobbying is not having an effect on the discussion, including on state budget strategy, either way, he added, while in future consideration on excise duty cuts might be better spent on more environmentally-friendly fuels.

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Editor: Andrew Whyte

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