The ongoing energy crisis, intensified by the conflict in Iran, is placing immense pressure on global public finances. The Financial Times reports that the war has led to significant energy shocks, with refined fuel shortages and crude oil production drops, pushing diesel prices in the US and Europe above $200 a barrel. In response, 94 countries have resorted to tax cuts, price caps, or fuel subsidies to shield consumers, while central banks are raising interest rates to combat inflationary pressures.
South Korea, for instance, is facing severe budget deficits due to its prolonged emergency energy intervention program. The Ministry of Economy and Finance has repeatedly extended temporary fuel tax reductions, cutting taxes on gasoline by 15% and diesel by 25%. Additionally, strict bi-weekly wholesale fuel price ceilings are forcing domestic refiners to sell below procurement costs, leading to a trillion-won fiscal buffer being rapidly depleted as global crude prices remain elevated. This situation is eroding anticipated federal tax revenues and straining public finances, with economic officials warning of unsustainable legislative targets.
Indonesia is also grappling with the fiscal burden of massive fuel subsidies, spending over $36 million daily, equivalent to 500 billion rupiah. The country's 2026 state budget had assumed an average Indonesian crude price of $70 a barrel, but post-Iran war, this surged to $90 a barrel. Every $1 rise in crude prices adds between 6.8 trillion and 10 trillion rupiah to Indonesia's annual fuel subsidy bill. Economists are urging Jakarta to slash these subsidies and raise interest rates, warning that the current policy risks a "budgetary catastrophe" and the depletion of emergency funds by July if global supply disruptions persist. Subsidized fuel in Indonesia remains among the cheapest in the region, retailing at around $0.72 a liter.
While corporate tax collections from advanced export sectors like semiconductors show recovery, overall federal tax receipts in countries like South Korea remain constrained by sluggish domestic consumption and high borrowing costs. Financing these ongoing energy subsidies through supplementary budgets requires issuing additional treasury bonds, driving up government borrowing costs during a period of sustained high interest rates. The IMF has criticized EU governments for not heeding warnings about energy subsidies, highlighting the risks of fast and widespread fiscal strain globally.
