OECD urges governments to end fuel subsidies quickly

OECD Chief Economist Stefano Scarpetta said many governments have rapidly cut fuel taxes to curb energy-price increases following the Iran conflict, but warned that such relief measures must be rolled back quickly because of their high fiscal cost.

Rapid tax cuts, limited use of other tools

More than a month after the Iran conflict began, more than 25 countries—ranging from EU member states to emerging markets such as Brazil and India—have reduced fuel taxes and related charges to soften energy-price shocks for consumers. Scarpetta noted that governments have relied more on tax reductions than on other measures such as price caps, subsidies, or cash transfers.

He said tax cuts are straightforward to implement and can deliver quick relief, but are difficult to sustain for long due to their expense.

“The lesson from the energy crisis in Europe in 2022 shows the very high cost of tax-reduction measures,” Scarpetta said, citing the energy-support packages introduced by many European countries after Russia began its military operation in Ukraine.

OECD outlook: inflation higher, growth under pressure

The European Commission has also warned the 27 EU member states against overspending to shield consumers and businesses from rising oil and gas prices, warning that excessive support could trigger a wider fiscal crisis across the bloc.

Meanwhile, the OECD continues to forecast that the Middle East conflict will push inflation higher and weigh on growth in the coming months, even as oil shipments through the Hormuz Strait may gradually recover after a ceasefire between the US and Iran reached within two weeks.

Scarpetta said uncertainty remains elevated.

“The level of uncertainty remains very high,” he said.

He added that, given the latest developments, the OECD kept its forecasts published at the end of March. The inflation outlook for the G20’s major developed and emerging economies is around 4% in 2026, higher than the December projection.

Energy costs could slow AI deployment

Scarpetta also warned that higher energy prices and trade disruptions through the Gulf could slow the deployment of artificial intelligence (AI).

“This will be a drag on global growth, because AI adoption had been a major driver of OECD growth forecasts for most large economies before the United States and Israel began air strikes on Iran in late February,” he said.

Policy guidance: limited duration and targeted support

With uncertainty high, Scarpetta said governments should limit the duration of energy-price support and prioritize help for low-income households and energy-intensive businesses. However, he cautioned that setting the right level of support for firms is difficult.

He said subsidies can unintentionally prolong the life of “zombie” firms—companies that should have exited the market. He pointed to a similar dynamic after the Covid-19 pandemic, when governments supported firms to keep them operating rather than cutting jobs.

“Governments should ensure that businesses bear part of the higher energy costs rather than relying entirely on government support. Still, measures should be targeted to those firms truly unable to cope,” Scarpetta said.

Example of consumer-focused price support

Scarpetta cited a UK Government tool that helps people compare gasoline and diesel prices across stations to find the cheapest option. He said measures like this are important to ensure price-support policies actually benefit consumers.

He made the remarks in an interview with the Financial Times ahead of the OECD releasing a report on solutions to help governments address persistent productivity slowdowns, which have weighed on growth and living standards over the long run.