IMF: Direct Support Is Better Than Subsidies During Inflation

The International Monetary Fund (IMF) said that giving targeted, temporary income support is the best way for governments to help vulnerable families during times of rising costs.

The IMF shared this in its latest World Economic Outlook. It pointed out that broad subsidies can cost the government a lot more money.

The report looked at the economic effects of cost-of-living issues and how governments reacted in 76 countries over the last 30 years.

The IMF explained that consumer subsidies could need three to six times more money than targeted cash transfers. This money is needed to protect lower-income families in the same way. Producer subsidies could cost 14 to 22 times more.

The report noted that problems in global commodity markets, especially after Russia invaded Ukraine in 2022 and conflicts in the Middle East, have pushed up prices for essential items like food and energy.

The IMF said these situations can have long-term effects. They make basic goods more expensive compared to others. This weakens how much families can buy and makes it harder for central banks to control inflation.

“Inflation expectations also rise and stay above pre-crisis levels for years, suggesting that these episodes may complicate efforts by central banks to control inflation,” the report said.

It added that real wages could drop and stay below previous levels for a long time.

The Fund said poorer families feel the pressure more because they spend a larger part of their money on food and energy compared to richer families.

The report highlighted that poverty and inequality worsen in low-income countries. In these places, basic needs take up even more of a poor household's spending.

High Costs of Subsidies

The IMF noted that governments usually react to rising living costs with broad measures to control prices. These include tax cuts, producer subsidies, lower customs duties, and price controls.

Advanced economies often used tax cuts on food and energy. Emerging markets and low-income countries more frequently took steps to reduce production costs and improve supply chains.

Governments also provided income support. Richer nations used targeted cash transfers while poorer countries more often raised wages and pensions for everyone.

But the IMF said these methods differ in how effective they are and how much they cost the government.

It identified targeted, temporary transfers as the best approach. This method helps households that need it most, uses limited government funds wisely, and lets market prices show real shortages.

In contrast, the IMF said price-suppressing measures can cost a lot because many people who don’t need help benefit. The report pointed to the energy crisis in Europe from 2022 to 2023. During this time, less than 20 cents of every euro spent on lowering energy prices reached the poorest fifth of households.

“Subsidising producers can cost 14 to 22 times more than targeted income support,” the IMF said.

It warned that keeping prices low could reduce incentives for people to save scarce resources.

When many countries use these measures together, they can increase global prices and add economic strain on lower-income countries.

“Producer subsidies are even less efficient. Because they lower production costs rather than directly supporting households, foreign consumers benefit through lower export prices of downstream products.

As a result, taxpayers pay more to benefit people and businesses in other countries rather than vulnerable families at home,” the lender stated.

Need for Temporary, Targeted Support

The Fund recommended that governments make assistance temporary and use targeted income-support programs.

They suggested that existing social protection systems can be expanded quickly during crises.

“Assistance, when warranted, should be temporary and delivered through targeted income-support measures, ideally using existing social protection systems that can be scaled up quickly,” it said.

The IMF noted that broader actions might be needed in special cases. These include serious food shortages, risks of social unrest, or difficulties in finding and helping those who qualify.

However, such support should focus on the temporary effects of rising prices and not on permanent increases. There should be clear deadlines for ending these measures.

Where price controls or subsidies are unavoidable, the IMF advised governments to focus closely on goods and services that vulnerable households use more while keeping market signals as clear as possible.