Realistic options for repurposing fertilizer subsidy spending

Worldwide, government spending on subsidies in agriculture, fishing, and fossil fuels amounts to a staggering $1.25 trillion annually. Subsidies play a significant role in every country’s fiscal policies, regardless of income level or spending patterns. Spending on energy and agricultural subsidies consistently accounts for 2%-3% of GDP on average across income levels and make the production and transportation of food cheaper.

Spending on these subsidies is coming under increasing scrutiny as governments struggle to mobilize additional revenue to meet important development targets amid rising debt distress, dwindling aid resources, and citizen protests against unpopular tax increases. One solution proposed by a growing consensus of voices is to repurpose expensive subsidies towards expenditures that generate higher development benefits.

While these subsidies aim to address low agricultural productivity, high food prices, and other critical challenges, their continuing predominance in food system investments raises important questions: Is this an effective way to spend public funds on such a large scale? If not, can some of the money currently going to subsidies be used to finance other needed investments (that may in turn make subsidies themselves more effective) and if yes, what type of investments can they fund?

This note explores these questions, focusing specifically on fertilizer subsidies, a major source of government support for farmers, especially in low-income countries, where they comprise a quarter of all subsidy spending (as well as one-tenth of such spending on in high income countries).