We are all facing the same storm, but not all are in the same boat

Capéau, B., Decoster, A., Güner, D., Sheikh Hassan, N., Vanderkelen, J., Vanheukelom, T. en Van Houtven, S. (2022), We are all facing the same storm, but not all are in the same boat, Discussion Note, KU Leuven Department of Economics.

Belgian households are hit hard by the ongoing energy crisis. This was already the case before the Russian invasion of Ukraine, when energy prices increased because of a supply shock, exacerbated by the uplift in economic growth and accompanying higher demand for energy products. Year-on-year inflation stood at 8.0% in February 2022, the highest level in Belgium since August 1983 (Statbel 2022). The increase of the Consumer Price Index is driven by a price increase in electricity (+72.8%) and gas (+133.7%). However, not all households are faced with such a large price increase.
Households are hit differently by increases in (energy) prices for at least two reasons. First, expenditure patterns differ across households: some households spend relatively more of their budget on gas and electricity than others. Secondly, not all households face the same price shock. Especially the availability of fixed and flexible price contracts on the gas and electricity markets can make a big difference in times of rapidly increasing prices. The focus and main contribution of this note is to provide a distributional analysis of the consequences of the rise of gas and electricity prices and the impact of the compensating measures. In order to give a picture for the population as a whole, we use an arithmetic tax-benefit microsimulation model (EUROMOD) with an extension that has been developed to analyse indirect taxes. In our analysis of the distributional impact of compensating measures, we distinguish the effects of recently announced measures from those measures that were already in place (the social tariff and the automatic indexation of wages).

Our main findings are:

  • Households with new or variable price contracts in the middle-income deciles are the ones least compensated by the compensating measures. That said, they too – on average – see a large part of the shock compensated.
  • The measure that compensates the most for the loss in purchasing power, with a wide margin, is the automatic indexation of incomes. It compensates the higher incomes more than the lower incomes.
  • At least in the short term, there is an important difference in how households with fixed and variable price contracts are affected. Households with fixed price contracts do not experience any negative impact on their purchasing power as long as their contract has not expired, while benefiting from automatic indexation, and from two of the three new government measures: the extension of the social tariff to a broader group and the heating cheque.
  • The VAT reduction is on net slightly beneficial for low incomes, while slightly negatively impacting higher incomes, but overall very small.
  • The social tariff and the broadening of the eligibility criteria for this tariff are key in compensating the bottom deciles.
  • The VAT reduction’s effect on purchasing power seems rather small, especially when considering the secondary effect on the indexation of incomes.