The IMF World Economic Outlook has called for IMF targeted welfare spending to take priority over broad interventions such as tax cuts, price caps and subsidies when governments respond to cost-of-living pressures driven by geopolitical shocks. The recommendation, published in a newly released chapter of the fund’s world economic outlook, arrives as conflict in the Middle East raises fresh questions about the UK’s fiscal headroom ahead of next month’s Budget.
IMF targeted welfare spending: the case for precision over breadth
The fund’s position is straightforward. When prices for basics spike because of wars or other geopolitical events, the most effective response is direct income support to the most vulnerable, delivered through social protection systems capable of scaling up quickly. Broad-brush tools, the IMF argues, spread scarce public money too thinly and at too great a cost to the public finances.
‘Assistance, when warranted, should be temporary and delivered primarily through income-support measures directed at the most vulnerable households, ideally using existing social protection systems that can be scaled up rapidly,’ the IMF said.
The fund’s concern is not abstract. In its April 2024 World Economic Outlook, the IMF modelled a geopolitical risk scenario in which global headline inflation rises by close to 70 basis points in 2024 and remains 25 basis points above the pre-shock baseline in 2025. That kind of persistent price pressure, the fund warns, falls hardest on households with the least capacity to absorb it.
The scale of that human cost is underlined by separate data from the UN World Economic Situation and Prospects 2024, which puts the number of people experiencing acute food insecurity at an estimated 238 million, an increase of 21.6 million from the previous year. That figure gives concrete weight to the IMF’s argument that policymakers cannot afford to let temporary shocks become permanent setbacks for low-income families.
UK fiscal pressure mounts ahead of the Budget
For Britain, the IMF’s intervention lands at an awkward moment. Researchers at consultancy EY have warned that the Iran war has already narrowed the Chancellor John Healey’s fiscal headroom to £11bn and could wipe it out entirely if the conflict continues. UK inflation edged up from 2.9 to 3.1 per cent in August, and industry figures have warned that food inflation could surge above six per cent by next summer, tightening the squeeze on household budgets precisely when the government’s room for manoeuvre is most constrained.
Prime Minister Andy Burnham has already moved on two fronts: cutting VAT on energy bills and capping bus fares at £2. He has pledged to deliver ‘breathing space’ to households struggling with the cost of living. But those measures are exactly the kind of broad interventions the IMF urges caution about, and economists warn that soaring borrowing costs leave the government with limited scope to do more.
Andy Haldane, a former Bank of England chief economist, put the situation plainly on Tuesday. Speaking to CNBC, he said the government is fiscally ‘skating on pretty thin ice’ and argued that the ‘single most effective way’ for Labour to gain fiscal credibility would be to ‘show that it’s able and willing to take the knife to public spending.’ Haldane, who was an informal adviser to Burnham but declined a formal government role, added: ‘That is the Achilles’ heel of this government. Unless and until action is taken on that, Andy will remain, alas, in hock, to use an expression, to the bond market.’
The IMF’s framing does not resolve that tension. Targeted welfare support costs money, and the fund is equally clear that any assistance should be temporary rather than structural. For a government already being warned about its relationship with bond markets, the pressure to act precisely and cheaply will only intensify if energy prices keep climbing.
The Chancellor’s Budget next month will be the first test of whether that balance can be struck.
