Tackling Europe’s cost of living crisis
- While the loose European monetary policy and Russia’s invasion of Ukraine are major drivers of inflation and the cost-of-living crisis, they are not its only causes. High consumer prices are often the result of government intervention in the economy such as burdensome regulations and over-taxation. This paper highlights how the governments of eight EU member states can alleviate the inflationary pressures faced by their citizens by liberalising domestic regulations and adopting various tax reforms.
- The housing, transportation, energy, and lifestyle sectors are particularly burdened by high taxes and government interventions. Encouraging competition and reducing taxes would provide immediate assistance to tens of millions of struggling households across the EU.
- Energy costs make up a large and increasing proportion of household expenditure across Europe. Germans, and Europeans more broadly, are facing higher energy prices as a result of the mandated shutdown of nuclear plants. A reduction in indirect taxation, and an easing of the regulations imposed on suppliers, would relieve households struggling to afford other expenses after settling energy bills.
- In housing, bold land-use reforms and an overhaul of the planning permission process are needed. Faster permit processing coupled with increasing the availability of land for development will both enable and incentivise developers to boost housing supply in areas with high demand. Increased supply will drive down costs, which will particularly benefit low-income renters.
- Lower transportation costs are another key area that present potential for liberalising reforms. For example, Italians are paying more for transport, particularly long-distance rail, as a result of a lack of competition, as four-fifths of transport companies are publicly owned or controlled.
- Governments should focus on eliminating market distortions that stifle innovation, productivity, and competition between different forms of transportation as well as between service providers.
- Indirect taxes in the lifestyle sector increase shelf prices and worsen the distribution of wealth. These sin taxes are charged in addition to VAT, thus leading to high consumer prices, where the products’ original prices are often lesser than the taxes charged on them. For example, alcohol taxes in Romania can reach 56 per cent of the shelf price. In effect, these taxes, which are regressive in nature, disproportionately affect low-income earners, unnecessarily raising daily spending.
- Red tape on businesses creates numerous barriers to economic growth and competition, thus raising consumer prices. Taken by themselves, many of these regulatory burdens appear minor; however, collectively they constitute a heavy cost for companies; especially smaller ones. Governments should reduce or remove unnecessary regulatory procedures to incentivise more competition, which will ultimately leads to lower price levels.