Taxes or cuts will pay for subsidies

18 April 2008

Middle East governments are involved in a delicate but crucial balancing act as they try to avert the crisis over soaring food prices. Recent riots from the Gulf of Aden to the Atlantic coast are a sign of how bad things could get if they make the wrong decisions.

While food prices are hurting some countries, others are enjoying record oil revenues, which mean that higher bills are of little immediate concern. But all countries have an interest in keeping price rises under control. Even for oil-rich Gulf states, unchecked inflation could crush many of their recent economic gains.

The wheat price rises are partly the fault of disastrous droughts in Australia, one of the world's biggest producers of wheat, but also the fad for biofuels, which is swallowing up harvests that previously would have ended up being milled and baked. The trend has been given a boost by the high price of oil, which rose above $115 a barrel in recent days.

The poorer states of the Middle East would be helped by any move by oil-rich countries to produce more oil and so lower the price. This would cut the cost of fuel subsidies and should have a knock-on effect on wheat prices too, as demand for biofuels abates. Unfortunately for them, the indications are that Opec is more inclined to cut oil production than to increase it.

Instead, the countries without oil or wheat have little option but to keep subsidies in place to ensure stable foods remain affordable. But spending cuts and tax rises have to be made elsewhere to pay for them.

In recent days, Amman has cut import duties on some foodstuffs while raising taxes on alcohol and tobacco. Other governments will have little choice but to do the same.

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