The most effective way to encourage Finns to save electricity can be to let the electricity market operate, says Suomen Yrittäjie’s chief economist Mika Kuismanen.
Kuismanen considers it plausible that the average price of electricity will rise significantly in the coming winter, but he reminds that according to forecasts, prices will start to decrease in the spring of 2023.
“At this point, one can ask whether it makes sense to create a significant and in many respects ineffective general tax support to solve a temporary problem,” writes Kuismanen.
Kuismanen refers to the Minister of Economic Affairs Mika Lintilän (central) to the proposal to reduce the value added tax on electricity to compensate for the increase in the price of electricity.
Kuismanen suggests that efforts could be made to increase electricity production quickly and see how it affects prices.
“You often hear it said that there is flexibility in electricity production in Finland and there is enough transmission capacity. If this is the case, in this exceptional and temporary situation, all contributions should be directed to increasing the supply, even by subsidizing it. Now you shouldn’t be too picky about what you put in the pot. All possible power generation plants should be put into use,” writes Kuismanen.
In Kuisman’s opinion, the proposal to reduce the value added tax on electricity tax is “puzzling” in many respects, but he does not think it should be rejected outright. For him, the proposal on the electricity price ceiling is even more problematic.
“It is true that lowering the VAT rate on electricity would be a general tax subsidy and would not be targeted very effectively at those who need it the most. However, there is strong political pressure that something should be done to lower the electricity bill for consumers. The optimal solution is hardly reached and there are only fewer good solutions to choose from,” says Kuismanen.
According to Kuismanen, the evidence that the VAT reductions do not fully reduce prices is solid. However, he believes that lowering the VAT rate on electricity would lower consumers’ electricity bills to some extent.
However, according to Kuismanen, reducing the VAT on electricity would not help all companies because of the right to VAT deduction.
According to Kuismanen, lowering the VAT rate could, on the other hand, increase the demand for electricity and further increase the price of electricity, in which case the benefit of the tax reduction would be wasted.
In Kuismanen’s opinion, a temporary windfall tax, which would be used to tax the profits of energy companies, should be considered as a counterpart to the reduced value added tax rate.
“It is clear that the combination proposed above is not perfect. That’s why other than fiscal means should also be considered. Changes in tax policy for all types of taxes should be based on the needs for changes in the tax structure. The fact that tax levels or structures are run after price changes or cyclical fluctuations is basically a destructive policy that increases uncertainty,” writes Kuismanen.
“It would also be desirable if the proposers of tax reductions would always include in their proposals, as a counterpart, how the state’s revenue losses will be compensated. Will other taxes be increased or will spending be adjusted? I hope the choice would focus more often on the latter”, he states.