Oil price drop a chance to raise fuel taxes: IMF

Advanced economies should use the opportunity offered by lower oil prices to raise their fuel taxes to pay for infrastructure projects, IMF managing director Christine Lagarde said today.

Lagarde, appearing at the Council on Foreign Relations in Washington, DC, to discuss the global economic outlook for 2015, also called on countries that subsidize fossil fuels to reduce those government handouts.

"Certainly the drop in oil prices is a welcome shot in the arm for the global economy," Lagarde said, but lower oil prices and a stronger economic outlook for the US are not enough to cure weaknesses in other parts of the globe.

Lagarde said the drop in oil prices "provide a golden opportunity to cut energy subsidies and use the savings for more targeted transfers to protect the poor."

She said the IMF has been advocating for such policies, noting that fuel subsidies have declined in countries such as Cameroon, Egypt, India and Malaysia.

Beyond those countries that subsidize their fossil fuels, governments could use the lower oil prices to "seriously consider" increasing energy or gas taxes. Doing so would allow countries "to build fiscal buffers to finance needed infrastructure projects —maintenance of roads for instance — or reduce other taxes, such as taxes on labor where unemployment is high," Lagarde said.

Some lawmakers on Capitol Hill, including senator Bob Corker (R-Tennessee), have called for raising the 18.4¢/USG federal gasoline tax. Corker has suggested raising the tax by 12¢/USG over two years.

But the White House has said raising the gasoline tax is not "the best way to fund modernizing our infrastructure." President Barack Obama would prefer to finance infrastructure by closing tax loopholes in the US tax code.

Lagarde said countries are not evenly benefiting from the drop in oil prices. Countries that import oil will now see a windfall that could help those countries strengthen their macroeconomic framework and reduce inflation. Countries that export oil must cushion the shock on their economies.

"Some countries, such as Nigeria, Russia and Venezuela [are] facing huge currency pressures," Lagarde said. "Given their size, the recent developments in those countries could have ramification effects on a regional basis, what we call the spillover consequences."

The IMF will release its update of the World Economic Outlook in Beijing on 20 January.

kp/tdf

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