11 August 2010

How should you go about a fiscal consolidation? There are intriguing lessons for Whitehall from a consolidation exercise carried out by 24 members of the public.

The Institute set out its views on fiscal consolidation, alongside the IFS, in a briefing shortly after the election.  A vital element, based on the experience of countries like Canada and Sweden, is securing a public mandate.

This is not about trying to get people out campaigning for cuts.  Rather the two parts are that the public have to accept at a basic level that action is necessary, and that the particular actions of the government are guided by an underlying sense of fairness.

Where are we on establishing these elements of a successful consolidation?  The insights from a three and a half days Citizens’ Jury event in Coventry, convened by Price Waterhouse Coopers, where 24 members of the public were asked to do their own consolidation process provide an intriguing set of lessons for Whitehall.

Two important headlines stand out.

Firstly, people can accept the case for difficult decisions when they are engaged in a meaningful discussion about the options.

Secondly, fairness was a very important concept to the jury, who had a remarkably clear idea of what fairness meant to them and how they expected to see that play out through the consolidation process.

So the starting point for the consolidation had to be dealing with what they judged to be examples of current unfairness – whether it was benefits for migrants, benefit fraud, or luxuries for prisoners, they wanted to see these tackled first – even when they knew that, on their own, they would make little contribution to tackling the deficit.

Next stop was waste.  The government needed to convince people it was really ruthless in weeding out inefficiency and excess throughout the public sector.  Only once those had been dealt with, the citizens were prepared to contemplate some really radical options – and accepted that they would have to make sacrifices too.

Fairness came into play again. The police officer was prepared to see his overtime scaled back – but only if the fireman was also giving up some of his perks.  Those with resources already should support themselves.

This applied to some very obvious policies - richer households should not get child benefit, some of the "add-ons" (think winter fuel payment) for pensioners should be limited.  But the jury also flirted with far more radical options, such as a social insurance model for the NHS.

Finally it was important to keep in mind what people mean by fairness in some fairly standard debates.

So the jury were keen to see benefits cut back in the abstract, but simultaneously wanted to protect those who could not help themselves – the old, the disabled – when presented with personalised cases.

This opens up interesting options – simply time-limiting benefits in the abstract (think about the housing benefits changes in the budget) will not necessarily seem fair when translated into individuals' lives.

It has to be part of a wider strategy that supports people to avoid a life on benefits (an issue that the jury felt strongly about – one of their biggest surprises was discovering there are 5 million people on out-of-work benefits).

So 24 people can be taken through a process which leads them to accept the case for actions which look very radical and challenge conventional notions of the politically acceptable.  But the jury’s dominant message back to government at the moment was much simpler: the government is not getting its message across.

The jury actually came out fairly close to the government on its approach to the consolidation, but had no idea that this was the government’s approach.  The drip feed of unconnected announcements of "cuts" (or non-cuts in the case of  school milk) gave them no idea that these are the result of a process that they would recognise as fair and sensible.

If people are going to accept the scale of what is to come, government needs to listen to them and make a convincing case that starts from where the public is now.


I remember going to a seminar/roundtable on fiscal consolidation at the IGF maybe 6 months or ago.

Has to be said, IFG is on a trip of its own on this one. Closer control of government spending in the UK may well be necessary to avoid undermining incentives through higher taxes but the notion that the UK is running any meaningful risk of a 'buyers strike' in respect of required government bond sales and that it faces any real risk of sovereign debt problems a la Greece is just nonsense; primarily because the UK is outside the Euro and has no pressing need to raise non-sterling debt.

I clearly remember on at least two separate occasions at the roundtable that extremely credible guests made the point that for the UK, outside the Euro, the mechanics and underlying realities of government finance are different, and the practical fears stated by panel members would not arise. Simply put, The UK has the option of fiscal stimulus in the same way the US has implemented because it can create its own sovereign 'fiat' currency, and the risk of inflationary consequences could hardly, at the moment, be lower.

These interventions from roundtable guests were completely blanked by the panel -
not exactly an environment to stimulate enlightening discussion. To be honest I was disappointed with the IFG and came away quite depressed at what I had to, at the least, take as a valid indication of the nature of the debate within UK policy circles.

At a time when in the financial markets you can find, at least if you look in the right places, a high level of debate on the current relevance of Keynesian and monetarist/Chicago school type frameworks, I felt the IFG and other members of the panel were pretty transparently in the monetarist camp.

Come on - you're better than that!

Suspect IfG would indeed be on its own if arguing that there is an impending "buyers strike"!

Situation six months ago was rather different, and senior civil servants were definitely worried that the end of quantitative easing and uncertainty over the election could lead to serious market problems.

But even then, the IfG's stated position was simply that markets act as the ultimate guarantor of fiscal probity, which in extreme cases leads to loss of domestic fiscal control (as argued by people involved in both the <a href="http://www.instituteforgovernment.org.uk/our-events/11/public-expenditur... rel="nofollow">Swedish</a> and <a href="http://www.instituteforgovernment.org.uk/pdfs/Canada's_deficit.pdf" rel="nofollow">Canadian</a> cases).

But as you say, situation for UK is clearly now not as uncertain as it was at the start of the year. All the political parties agreed in the election campaign that some fiscal consolidation is necessary. Assuming this actually occurs, the UK is probably off the fiscal critical list.

<a href="http://www.instituteforgovernment.org.uk/presentations/news_julianmccrae... rel="nofollow">As we argued post the election [last slide]</a>, the big question going forward is whether the consolidation will be successful enough to return the UK to full fiscal health (the Swedes managed to do this in similar circumstances) or whether we enter a period of chronic fiscal problems.

This latter case has more precedent - prior to both Ireland's successful consolidation in the 1980s and Canada's in the 1990s both counties suffered successive in-year deficits, leading to accumulating problems with borrowing rates and debt servicing. Ultimately these market realities generated the political will necessary to return to full fiscal probity, but it took a decade or so.

PS the IfG website is probably not the best place to look for insights on macroeconomics (this is other people's specialist area), but think there is at least some content (<a href="http://www.instituteforgovernment.org.uk/pdfs/Fiscal%20policy%20and%20ca... rel="nofollow">see for example Martin Weale's presentation [slide 6]</a>) that it would be unfair to label as pure monetarism!

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