0380 COLEGIO AMERICANO DE

GUAYAQUIL
IB ECONOMICS
INTERNAL ASSESSMENT FRONT COVER

Name of Gianella Nicole Mesias Granja

Candidate

Candidates
Number 000380-0067

Teachers Name Carla Real

Commentary
Number 2

Title of the
Article WB Urges Belarus to Rethink Taxation of Energy

Lomas U., WB Urges Belarus to Rethink

Taxation of Energy Tax News Online. July
31st, 2014.
Source of the
Available on:
Article http://www.tax-
news.com/news/WB_Urges_Belarus_To_Rethink_Taxa
tion_Of_Energy____65409.html

Date of Article July 31st, 2014 Date Written August 22nd,

2014
Area of the
Word Count 748 Macroeconomics
syllabus
Cross-subsidization, Fiscal Policy
Economic Terms
(expansionary and contractionary), cost-push
Defined inflation, interventionist supply side policy.

Belarusian economy (AD/AS curves)

Title of Graphs Belaruss long-run aggregate supply

Blink, Kevin, and Ian Dorton. IB DIPLOMA

PROGRAMME: Economics Course Companion : 2007.
Other sources Oxford University Press.
and references
Tragakes E. Economics for the IB Diploma
programme: 2009. Cambridge University Press
 Gianella Mesias
IB# 000380-0067
ECONOMICS COMMENTARY #2
WB Urges Belarus To Rethink Taxation Of Energy

Article:

WB Urges Belarus To Rethink Taxation Of Energy

by Ulrika Lomas, Tax-News.com, Brussels

31 July 2014

The World Bank (WB) has put forward proposals for a reform of the "inefficient" heating tariff
system in place in Belarus, in a report issued on July 25, 2014.

The World Bank has warned that the tariff system is unsustainable in the long run, and has
recommended reform measures to mitigate the need for tariff increases on households.

"An effective social assistance package provided along with the elimination of fixed subsidies
would enable the Government to protect the poor, without jeopardizing the reform," Young Chul
Kim, World Bank Country Manager for Belarus said. "Investment in energy efficiency could also
significantly reduce consumer energy bills. The analysis shows that energy efficiency measures
could reduce household heat consumption by up to 35 percent compared to the present."

According to the report, under-priced residential heat tariffs for district heating, which are
currently at 10-21 percent of cost-recovery level, place an increasing fiscal burden on the budget
and industrial producers. Because of the cross-subsidies from industrial to residential consumers,
Belarusian manufacturers do not benefit from the low import price of natural gas. As a result, the
tariff set for the industries is higher than the European average.

Commentary:
 Gianella Mesias
IB# 000380-0067
ECONOMICS COMMENTARY #2
WB Urges Belarus To Rethink Taxation Of Energy

Belarus has been managing a heating tariff system that the WB considers inefficient and
hazardous for Belaruss future macroeconomic stability. This system is based on cross-
subsidization, which is the practice of charging higher prices to one group of consumers in order
to subsidize lower prices for another group. In this case, Belaruss government decided to charge
higher energy prices to industrial consumers (firms) than residential ones (households).

Then, it can be said that the Belarusian government intervened in the management of its taxes
to influence aggregate demand (AD); this is known as fiscal policy. In this case, it would be an
expansionary one because it seeks to increase AD by promoting consumption. Since the energy
service is a household basic necessity and they would get it at a cheaper price, then people would
have a higher disposable income to buy other goods in the economy.

However, considering the industrial side, the fiscal policy may even be considered
contractionary (reducing AD) because investment will fall because of the higher energy tax
charged to firms. The system causes an increase on firms costs of production and hence the
reduction of their profits. This would result in firms having less money available to invest in
more physical or human capital, also leading to a higher level of unemployment because firms
wouldnt want to hire more workers or would even lay off employees because they dont need
them.

Consumption and investment are both components of AD and theyre being affected in opposite
ways, making it hard to determine if the AD would finally increase or decrease. However,
consumption has greater influence on the economy. Therefore, if it increases then demand will
increase too just not in a great proportion since its increases effect is being dampened by the
investment fall. Consequently, as AD increases, the Belarusian economy would experience a rise
in the price level, demand-pull inflation.

Despite this policy affecting AD, Aggregate supply may also be negatively affected by it due to
the higher costs of production for the businesses. This leftward shift of supply will definitely sum
up to the rise of price level causing cost-push inflation, as shown below:

Belarusian Economy (AD/AS curves) Diagram 1- Shows the shift produced in

the Aggregate Demand (rightward shift)
SRAS2 because of a boosted consumption,
Price level (BYR)

leading to an increase in real output and

SRAS1 an increase in price level (from PL1 to
PL2).
PL3 Additionally, it shows a decrease
PL2 (leftward shift) in SRAS because of a
cost of production increase, which causes
PL1 a decrease in real output but also an
increase in price level. Both shifts taking
AD2 place will lead to a rise to PL3.
AD1
Real GDP
Y2 Yo Y1
 Gianella Mesias
IB# 000380-0067
ECONOMICS COMMENTARY #2
WB Urges Belarus To Rethink Taxation Of Energy

Furthermore, is tough to define whether this decrease in supply will stifle the increase of the
Belarusian Real GDP -caused by higher AD- in a partial, complete or overrated manner, which is
why the policy is contributing to economical uncertainty.

Its important to say that inflation could lead to a lower purchasing power for the population,
labor unrest and investment uncertainty. In fact, one of the reasons the SRAS decreases may be
that, as local Belarusian firms are experiencing higher costs of production and therefore
increasing their prices, foreigners are not be motivated to buy Belarusian products since they are
relatively more expensive than the rest of the European countries products. So, even though the
tax revenues could increase for the government, the real income of the country will be reduced.

One of the solutions proposed by the WB is for the government to invest in more efficient energy
projects. In the long run, this would reduce costs for the firms, and therefore increase the Long-
run Aggregate supply.
Belaruss Long-run Aggregate Supply

LRAS1 LRAS2
SRAS1
SRAS2 Diagram 2- Shift in the Long-Run
Price level (BYR)

Supply curve Belarus because of new

infrastructure provided, along with their
respective SRAS curve because at any
given moment in time, the economy is
PL always producing at its SRAS. Its shown
that larger potential will lead to an
increase in real output/income (economic
growth)

Real GDP
Y Y
This way, Belaruss economy potential would increase, letting them produce more in the future
because of the new infrastructure, research and development provided by an interventionist
supply-side policy that encourages economic growth. Therefore, even though they represent a
cost now, these projects would, in the future, fix the actual harm to production and increase the
countrys GDP.

Moreover, the suggestion of eliminating energy subsidies would have a huge impact on
households, which will have to pay more for energy and therefore have less money available to
consume and/or save, but will leave businesses with more money to invest. It would reduce
costs for the government, but they should consider implementing programs to help the poor
through that difficult situation of suddenly needing higher budgets to afford that necessity.
Finally, considering the opportunity cost, itd be pertinent to say that the Belarusian government
could also predestine the money used in these subsidies on other important aspects of the
economy such as: encouraging small businesses to appear, providing better healthcare and
education services. All of these mentioned before, would help the most vulnerable people (less
resources), while the cross-subsidies implemented were mostly helping the people with more
 Gianella Mesias
IB# 000380-0067
ECONOMICS COMMENTARY #2
WB Urges Belarus To Rethink Taxation Of Energy

income since they are the ones that consume more energy and the subsidy was fixed, not
progressive. Consequently, they would be better and more efficient alternatives.