Global energy markets are facing a new wave of supply disruptions, yet the fiscal safety net that protected consumers during the crises of 2022-2023 has nearly been depleted.
According to a new analytical report from Morgan Stanley, governments have historically utilized fiscal policy to cushion the impact of oil price volatility. However, the current combination of high government debt relative to GDP and rising borrowing costs has critically narrowed the scope for new large-scale interventions.
Authorities are faced with a tough political choice: pass the burden of rising energy prices onto households or absorb the blow on government budgets. The investment bank estimates that in 2023, direct and indirect energy subsidies accounted for 1.5-2.0% of global GDP, primarily driven by aggressive price controls in the eurozone. Today, the available "fiscal space" has become significantly narrower.
Morgan Stanley economists note that the opportunities for new fiscal expansion are severely limited. Governments are expected to rely solely on internal adjustments within existing budgets, redistributing current expenditure items or implementing targeted tax compensations. The introduction of new support packages through increased deficits is highly unlikely. In developed markets, where free pricing predominates, the withdrawal of government interventions will lead to a quicker rise in consumer inflation compared to developing countries.
The report highlights significant regional discrepancies in response to price pressures. Asia is currently leading the way in mitigating the effects of the energy shock. While global oil prices in national currencies have surged by 53% over the past month, domestic fuel prices in the Asian region have added only 16%. Local fiscal measures have absorbed between 30% to 50% of the initial price shock.
In contrast, Europe has entered a phase of stringent "fiscal restraint." The reimposition of strict EU budgetary rules and the rising cost of sovereign borrowing mean that large-scale responses comparable to the subsidies of 2022 will only materialize in the event of a severe recession scenario.
For energy-importing developing countries, expensive oil creates a classic "double deficit" problem, deteriorating both the current account balance and the budget balance simultaneously. Analysts warn that while these markets may be able to smooth price volatility in the short term, strict fiscal constraints will inevitably force them to roll back programs that support domestic prices.