Subsidy Reform: Targeted Measures Can Boost Growth, Equity And Climate Outcomes

Rising fiscal pressures, climate pledges, and growing social needs are pushing many governments, including in the Middle East, to reassess public spending. A new KPMG report with the World Governments Summit highlights subsidy rationalisation as a key option to reinforce long-term fiscal resilience while still shielding lower-income groups through targeted schemes.

Released during this year’s World Governments Summit, the study, titled Fiscal Surgery: Unlocking Global Spend Efficiency Through Bold Subsidy Rationalisation, explores how better-designed subsidies can raise spending efficiency, improve social fairness, and back climate strategies. The report aligns with the Summit’s focus on Global Governance and Effective Leadership and addresses priorities central to regional economic planning.

The report describes a "triple effect" from subsidy rationalisation, where one reform programme can reinforce fiscal strength, social equity, and environmental outcomes. By freeing resources through smarter budget allocation, governments can re-channel funds into infrastructure, healthcare, and education, while at the same time improving the precision of support given to households most at risk from price changes.

According to the analysis, aligning consumer prices more closely with true costs encourages energy efficiency, resource conservation, and lower emissions. This link supports national climate strategies across the Middle East and beyond. It also reduces wasteful consumption created by underpriced energy and other goods, helping governments balance environmental targets with long-term economic competitiveness.

In the UAE and wider GCC, this policy debate has already shifted into practice over the past decade. Governments have gradually reformed pricing structures, pegged fuel prices to global benchmarks, and introduced tiered tariffs. These measures were usually combined with targeted social assistance tools, helping maintain social cohesion while strengthening fiscal discipline and operational efficiency.

Across the GCC, the report notes that transparent pricing rules and clear communication have helped normalise changes to subsidies and reinforce trust in policy frameworks. When supported by social safety nets, such as cash support or preferential tariffs for eligible groups, these reforms have shown that governments can adjust prices without undermining social stability or economic confidence.

Middle East subsidy rationalisation frameworks and implementation

Rather than recommending abrupt subsidy cuts, the KPMG-World Governments Summit report outlines a phased and structured approach. The framework centres on gradual price adjustments, carefully targeted social protection, open and consistent public communication, and strong coordination across government institutions. Evidence from international and regional case studies shows that this method supports durable reform outcomes.

The research stresses that subsidy rationalisation works best when protection focuses directly on individuals through cash transfers or lifeline tariffs, instead of holding down prices for entire markets. Such design reduces the cost of support, avoids large benefits flowing to high-income users, and preserves fiscal space for long-term national investments and diversification plans.

Middle East subsidy rationalisation insights from global data

The report estimates that global subsidies reached about USD 7 trillion in 2022, more than seven percent of world GDP. Energy support makes up the largest component of this total. While subsidies have often cushioned households from price volatility, the analysis finds that broad, untargeted schemes strain public finances and often benefit wealthier groups more than vulnerable communities.

Findings also show that poorly targeted subsidies weaken incentives to use resources efficiently, leading to higher consumption and fiscal leakage. When governments introduce better targeting tools, such as income-based support, they can redirect budget savings toward strategic priorities, including climate adaptation, public services, and productivity-enhancing investments that underpin sustainable growth in the Middle East.

Dr. Raed Skaf, Head of Spending Efficiency, KPMG Middle East, said: "Subsidy rationalisation is emerging as one of the most powerful underutilized levers for strengthening fiscal resilience, advancing social equity, and accelerating climate impact. The focus is shifting from whether reform is needed to how it is designed and effectively implemented. The Middle East already has relevant experience with subsidy reform, and our research shows that when subsidies are better targeted, and governments act decisively to unlock spending efficiency and redirect trillions toward national priorities, they can protect the intended population and deliver measurable, sustainable impact."

Drawing on both advanced and emerging economies, including resource-rich states, the study concludes that subsidy rationalisation can support broader national agendas when reforms reflect local economic structures and governance capacity. For Middle East policymakers, the findings suggest that carefully sequenced, transparent, and well-targeted reforms can strengthen budgets, support vulnerable groups, and advance climate goals without undermining long-term economic stability.

With inputs from WAM