Public finances in OECD countries face unprecedented challenges. Government debt ratios have risen sharply since the global financial crisis, with the OECD average increasing by nearly 40 percentage points since 2007. While debt levels stabilised briefly between 2012-2019, the COVID-19 pandemic triggered another surge, and most countries have struggled to reduce debt since. In 2024, debt levels remained higher than before the pandemic in 16 out of 35 OECD countries examined.
This deterioration reflects deeper structural problems beyond pandemic spending. Declining potential growth, rigid expenditure patterns, and persistent deficits following economic crises have ratcheted up baseline spending. Research shows that governments in many OECD countries have limited ability to reallocate resources across programmes, meaning spending levels remain high across the board with little flexibility to shift toward emerging priorities.
Governments now face what this paper terms a “dual pressure challenge” – the need to restore fiscal sustainability while simultaneously addressing substantial pressures from population ageing, rising defence expenditures, climate transition costs, and the need to maintain fiscal buffers for future crises. This dual demand transforms fiscal consolidation from a deficit-reduction exercise into something closer to state redesign.
A government needing to reduce debt while increasing spending on strategic priorities must identify sectoral cuts or revenue measures that balance both the deficit reduction targets and the new pressures emerging on the expenditure and revenue sides. This amplification of required adjustment at sectoral level significantly exceeds the aggregate fiscal objective.
Voter expectations complicate this further: citizens have been shown to broadly support consolidation in principle but oppose it once specific trade-offs become clear – while simultaneously expecting more government action on economic security and future challenges. Yet, only by building a shared recognition of the challenges ahead can governments secure the trust and willingness necessary to ensure sustainable public finances for current and future generations.
Post COVID-19, few OECD countries are following a consistent consolidation path, with fiscal improvements – where they do occur – coming mainly from the unwinding of temporary COVID-19 and cost-of-living supports, and not from broader and more long-lasting consolidation efforts. Where fiscal improvements can be identified post COVID-19, they can mostly be seen as attempting to address the dual-pressure challenge, and not performing fiscal consolidation outright.
Analysis of recent efforts in Australia, Canada, Germany, Switzerland and the United Kingdom, assessed against key success factors identified in past fiscal consolidation episodes, reveals emerging patterns. First, from a design perspective, governments now pursue multiple objectives simultaneously – efficiency gains, selective spending reductions, and spending increases in priority areas. Four of five case studies relied heavily on expenditure measures, but selectively rather than uniformly, with deliberately gradual pacing.
Accordingly, fiscal consolidation efforts post-COVID – where they do take place – have been limited by continued and new expenditures operating concurrently with savings and reallocations efforts.
Second, from a fiscal institutions' perspective, spending reviews are undergoing an evolution - moving beyond their recent focus on spending effectiveness and identifying savings, toward comprehensive portfolio reviews.
While fiscal rules are under significant strain, medium-term frameworks have proven effective at providing advanced warning on future fiscal gaps but are not always used effectively for framing and explaining trade-offs.
Independent fiscal institutions have played the role of referees in recent fiscal consolidation efforts, providing an external opinion on which consolidation measures have been implemented, and which not.
Thirdly, in terms of communication, countries studied avoided across-the-board cuts, instead framing their consolidation efforts as, for instance, “strategic reallocation”. This reflects the reality of the “dual pressure challenge”: governments need to communicate on both consolidation and reprioritisation.
Finally, the central challenge of expenditure rigidities however does not seem yet systematically addressed through explicit institutional processes – without explicitly tackling structural commitments in pensions, health, subsidies, and transfers, governments risk seeing consolidation gains eroded by baseline spending pressures.
Taken together, these findings indicate that meeting the “dual pressure challenge” requires governments to manage competing objectives more deliberately and simultaneously. To achieve these goals, while maintaining fiscal rules as the backbone of fiscal credibility, governments need to enhance other key fiscal institutions.
Spending reviews should continue to evolve into ambitious, whole-of-government exercises that examine the full portfolio of government activities, and explicitly help to address the challenge of expenditure rigidities. Their focus on efficiency gains and savings means that they need to be complemented by medium-term fiscal frameworks that should serve as active platforms for presenting alternative spending and revenue scenarios; making trade-offs and opportunity costs explicit; and fostering strategic planning and public engagement. Independent fiscal institutions should strengthen consolidation credibility through ex ante assessment of fiscal plans and ex post monitoring of progress.
Reinforcing and reorienting these institutions to maximise their potential can enable governments to confront the structural rigidities that constrain the effective reallocation of limited public resources. In turn, addressing these rigidities allows governments to make – and communicate transparently about – the deeper choices required regarding the organisation and scope of public interventions, which in some cases point to broader questions of state redesign rather than conventional fiscal consolidation.
The analysis and insights in this paper contribute to the themes being developed in the OECD’s Restoring Public Finance publication (forthcoming[1]), particularly regarding the sustainability challenges facing public finances.