Undertaking a fiscal consolidation: A guide to action

This briefing note sets out some key information that the politicians and officials involved in tackling the UK’s current fiscal situation need to know.

It does not seek to offer detailed advice about which programmes or budgets to cut, or which taxes or charges to increase. Instead, it looks at how government should go about the process of fiscal consolidation.

In doing this, it draws on:

• a series of high-level seminars run by the Institute throughout 2009
• discussions with senior policy makers in the UK and abroad
• the rapidly expanding literature on how to manage fiscal consolidations.

No one in Whitehall will have had the experience of managing a fiscal challenge of the scale now facing the UK. Even after the recession has ended, the underlying gap between annual expenditure and income is equivalent to funding all our schools and our entire defence budget through borrowing on an on-going basis. Without careful thought and planning now, decisions will become hurried and services will be at risk.

In the past, other countries developed successful approaches to dealing with situations of this nature. Drawing on this experience, this note sets out a credible way to tackle the fiscal situation. Many elements of this play to the UK’s institutional strengths, such as a strong executive capable to taking action, and the powerful control over public expenditure exercised by the Treasury.

But some processes necessary to build a credible plan will be deeply countercultural to our traditional ways of running government. For example:

• a mandate for change on this scale will have to involve the public explicitly in understanding the issue and the choices that need to be made
• the Cabinet will collectively need to provide the political will to drive the consolidation
• those in departments and beyond in the wider public service will need to own both planning and implementation in their areas
• building on initiatives like Total Place, the UK needs strengthened local accountability and much greater devolution of control over spending decisions.

The detailed political decisions on tax and spending will now probably be taken after the next election. But if these decisions are to be taken in an inclusive way, then the months leading up to the election will be crucial, allowing time to work through the practicalities involved in making such an approach a reality.