12° Nicosia,
28 May, 2024

How high is too high before tax relief kicks in?

Government action on fuel taxes amid rising costs

Maria Eracleous

Maria Eracleous

Data from the weekly fuel price bulletin reveals that on August 28th, the average cost for 95-octane unleaded was 1.554 euros per liter, with diesel at 1.624 euros per liter. Fast forward three weeks to September 18th, and the average price for 95-octane petrol had risen to 1.586 euros per liter, while diesel reached 1.677 euros per liter. Presently, as of noon on Monday, diesel averages 1,715 euros per liter, and 95-octane petrol is at 1,614 euros per liter.

Concurrently, prices are facing upward pressure, with predictions of hitting $100 per barrel due to production cuts from Russia and Saudi Arabia.

Within the Cypriot market, George Petrou, former president of the OEB and president of Staroil, asserts that a ten-dollar increase in raw material prices results in a seven-cent rise per liter in the retail price of motor fuels. Petrou cautiously suggests that no significant price increase is expected in the near future, contingent on crude oil prices maintaining recent levels.

The Association of Petrol Distributors acknowledges the possibility of fuel prices reaching 2 euros per liter again. Christodoulos Christodoulou, press spokesman of the association, emphasizes that each cent of fuel price increase imposes a 1000-euro cost on petrol station owners to maintain adequate fuel quantities for their customers. Professional petrol station owners are grappling with reduced liters sold, impacting their profit margins.

Simultaneously, escalating service station prices are encouraging refueling in the occupied territories. Many advocate for the reintroduction of measures to reduce excise duties on fuel to maintain market equilibrium. This appeal aligns with the requests of other associations, such as the Consumers' Association, which reacted to the recent government decision to abolish VAT on sugar and coffee.

Not even 1%

But what practical impact does the zero VAT on sugar and coffee have on household finances?  Initial observations suggesting a minimal influence on household expenditures have been substantiated by specific data revealed in a report published in the Kathimerini newspaper on Sunday, September 24, 2023.

According to data extracted from the latest Consumer Protection Service's Price Observatory for basic products in August, the average retail price for sugar is €1.42. For Cypriot coffee, market prices range between €2.50 and €9.30, while instant coffee prices vary from €3.25 to €8.70, contingent on brand and packaging quantity. This prompts us to assess the collective household expenditure on these items.

Upon examining data from the statistical office, which offers insight into the weighting factor signifying the importance of products within a household's financial portfolio, the following findings emerge: Sugar expenditure accounts for a mere 0.07% of a household's total annual spending, positioning it among the products with the least financial impact on households. The cost of purchasing coffee stands at 0.46%.

Furthermore, annual expenses for a household related to other products enjoying a zero VAT rate break down as follows: Bread constitutes 0.9% of expenses, fresh milk also at 0.9%, eggs at 0.2%, and baby food at 0.26%. The broader Food category, which encompasses 68 products, makes up 17% of a household's annual expenditure. It is essential to clarify that these weightings do not reflect the quantities of specific goods and services consumed by a household but rather the proportion of a household's expenses allocated to the acquisition of these goods and services concerning the total expenditure encompassed in the Consumer Price Index.

Fuel and electricity

In a similar vein, the same dataset indicates that household expenditures for electricity, LPG (liquefied petroleum gas), and fuel – encompassing fuel for electricity and heating – collectively amount to 5.27% of an annual household budget. Furthermore, the expense associated with purchasing motor fuel, including oil and unleaded gasoline, represents 6% of a household's yearly financial outlay.

Interestingly, the European Central Bank (ECB) employs the illustration of sugar and coffee to elucidate disparities in product price fluctuations. Specifically, the ECB asserts that when computing the average price increase, greater weightage is accorded to products that constitute a more substantial share of household spending, such as electricity, in contrast to items with lower financial allocation, like sugar or postage stamps. Additionally, the ECB highlights that coffee, assigned a weighting factor of 0.4%, would exert minimal impact on the overall harmonized consumer index even in the event of price fluctuations. In stark contrast, changes in the price of gasoline would wield an influence approximately ten times more significant than that of coffee.

[This article was first published in the Sunday edition of Kathimerini and translated from its Greek original]

Cyprus  |  economy  |  inflation  |  energy

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