This background note to the Policy Brief “Responding to the Global Shock from the War in the Middle East” was first published by the World Bank
Governments worldwide are scrambling to shield consumers from rising energy and food costs inthe wake of the Middle East conflict. Tax cuts on fuel and food have been a first-line response, with over 50 countries already implementing or considering such measures. Their appeal is understandable: they are fast, politically visible, and administratively simple to deploy, especially in countries with weaker safety nets. But how much of the relief reaches those most in need? The evidence reviewed here urges caution: tax cuts vary widely in their effectiveness, and in most settings targeted cash assistance would achieve more per dollar of fiscal cost.
Fuel tax cuts and subsidies are fast but blunt. They tend to reach consumers relatively quickly, which helps explain their popularity. But they also carry high fiscal costs and—as governments’ responses to the 2022 global energy-price shock showed—can prove difficult to unwind once introduced (World Bank, 2025). They are almost always blanket measures that benefit richer households disproportionately, as they consume more energy than poorer households. Moreover, by propping up domestic consumption, subsidies can create a global externality that worsens the very shock they seek to mitigate, pricing poorer countries out of energy markets.
Food tax cuts perform considerably worse. When governments cut VAT on food, much of the savings tend to be absorbed by retailers rather than passed on as lower prices. And the relief that does reach consumers is unevenly distributed, with chain supermarkets passing on more of the cut than independent grocery stores where lower-income households typically shop (Benzarti, Garriga & Tortarolo, 2024). Worse, when the tax cut is reversed, prices can end up higher than before the cut was introduced.
This distinction matters because today’s oil shock is likely to become tomorrow’s food crisis. Higher fuel, freight, and fertilizer costs are already feeding into food supply chains and will push up staple prices in the months ahead (Hanieh, 2026; World Bank, 2026). As the food price shock builds, the pressure to extend tax relief from fuel to food will intensify. But as the evidence shows, what helps at the pump may backfire at the checkout.
The policy challenge, then, is less whether to intervene than how to do so well. Tax cuts and subsidies can provide expedient short-term relief, particularly for fuel. But where delivery infrastructure permits, the preferred strategy is to move support from the commodity to the person through targeted cash assistance. Higher prices then continue to signal scarcity, while vulnerable households are protected directly. For lower-income countries already weighed down by debt and constrained borrowing capacity, the fiscal space for any intervention is limited, making the choice between targeted and blanket instruments all the more consequential.
DOWNLOAD the full article