Governments should focus on directing financial aid to lower-income households rather than providing universal support during cost-of-living crises, according to experts at the International Monetary Fund (IMF). In a preliminary release of a chapter from its upcoming World Economic Outlook report, the IMF cautioned that broad-based subsidies risk wasting taxpayer funds by channeling money to wealthier families who may not require additional assistance.
The IMF emphasized that public resources are better targeted at poorer families, who are disproportionately affected by rising costs for essential goods such as food and energy. The Washington-based institution highlighted the inefficiencies of universal support schemes implemented in response to the European energy crisis following Russia’s 2022 invasion of Ukraine. During that period, inflation in the UK reached a 40-year high of 11.1 percent, and policies like blanket energy bill caps ended up subsidizing wealthier households.
As an example, the IMF noted that under such schemes, less than 20 percent of funds intended to reduce electricity, natural gas, and gasoline prices reached the poorest fifth of households. The former Conservative government in the UK, led by Liz Truss, introduced energy bill caps at an estimated cost of £25 billion. More recently, Prime Minister Andy Burnham removed VAT from all household energy bills, while Chancellor John Healey has indicated that the upcoming budget on October 28 will include measures aimed at providing families additional financial relief.
The IMF argues that targeted, temporary support delivered primarily through existing benefit systems is more cost-effective and fiscally sustainable. This approach also preserves important market signals that encourage consumers to reduce energy consumption when prices rise, potentially speeding the return to price equilibrium over the longer term.
“Targeted and temporary transfers are the most effective and cost-efficient way to protect poorer households when prices for basics spike,” the IMF researchers stated. They added that allowing market prices to reflect true scarcity encourages reduced demand without burdening public finances excessively.
This guidance comes amid ongoing discussions among governments in advanced economies about how best to assist households and businesses in response to surging oil and gas prices linked to the nearly eight-month-long Middle East conflict. Policymakers face the challenge of avoiding further increases in already elevated debt-to-GDP ratios and budget deficits, particularly as global bond markets have been unsettled by concerns over persistent borrowing and inflationary pressures.
The IMF projects that average budget deficits across G7 countries will remain above 5 percent of GDP well into the 2030s, citing sustained borrowing in the United States, including measures implemented to finance former President Donald Trump’s tax cuts.