Governments today face what this paper has termed the “dual pressure challenge” – the need to restore fiscal space while simultaneously addressing unprecedented spending pressures transforms the nature of fiscal consolidation from a primarily deficit-reduction exercise into something closer to state redesign.
The findings from recent consolidation experiences show that governments recognise these challenges and have started adapting their consolidation strategies, although it is too early to conclude whether these will be successful.
Recent consolidation experiences point to a few broad lessons that are relevant across countries.
First, post-COVID consolidation strategies have moved beyond across-the-board approaches typically used post-GFC toward strategic selectivity that addresses multiple objectives simultaneously. Rather than uniform spending restraint, consolidation strategies benefit from identifying areas for efficiency gains, programmes for reduction or elimination, and priorities for protection or expansion. In this sense, fiscal consolidation is evolving into a broader exercise of state redesign – although we are still at the early stages of this process.
Second, contemporary consolidation efforts rely on gradual, adaptive pacing over rapid adjustment despite high debt levels in many OECD countries. The complexity of managing multiple objectives while maintaining political support suggests that adjustment strategies benefit from the ability to respond to changing economic conditions and political circumstances. Case studies show that some governments have anchored this pacing to empirical indicators that guide adjustment timing based on economic conditions rather than predetermined schedules.
Third, the strain placed on fiscal rules during recent consolidation efforts reveals limits to the effectiveness of numerical constraints. Constitutionally enshrined debt brakes and deficit limits, while providing clear commitment mechanisms, also generate hard constraints within which governments struggle for identifying savings, managing immediate new spending needs, and operating large expenditure shifts. While fiscal rules remain the backbone of fiscal credibility, this paper calls for greater use, during current consolidation episodes, of alternative accountability and transparency processes, such as the systematic evaluation and explanation of fiscal trade-offs and transparent communication of adjustment strategies.
Fourth, medium-term fiscal frameworks represent under-utilised potential for managing contemporary fiscal challenges. When fiscal rules are under strain, medium-term framework should be the active platforms for strategic planning, formulation and communication of trade-offs, and public engagement. Enhanced medium-term frameworks could present alternative scenarios that show the implications of different strategic choices on spending, make opportunity costs explicit, and demonstrate how fiscal consolidation interacts with new spending pressures.
Fifth, spending reviews are evolving to play a central role in fiscal consolidation. Spending reviews were last systematically used for broad fiscal consolidation during the GFC. After the GFC, spending reviews had a reduced focus, on spending efficiencies. However, since COVID-19, the focus is moving towards broad-based savings again. With consolidation now requiring not just marginal savings but also the need to address the challenge of expenditure rigidities, spending reviews should evolve into ambitious exercises that examine the portfolio of government activities and support fundamental trade-offs on government functions and “design”.
Sixth, IFIs should play a role in supporting credible and effective fiscal consolidations. They strengthen the fiscal policy framework by providing independent analysis, fostering transparency, and enhancing accountability. In the context of consolidation, their contribution is twofold: ex ante, by assessing the realism and credibility of fiscal plans and macroeconomic assumptions; and ex post, by monitoring progress against stated objectives and alerting policymakers to deviations.
Seventh, AI is an uncertain element of the fiscal consolidation toolkit, albeit promising. The main challenge is institutional rather than technical: successfully integrating AI into fiscal consolidation requires aligning capabilities, data, structures, evaluation systems, and political support – something no government has yet achieved.
Eighth, the central challenge of expenditure rigidities is not yet adequately addressed. Although spending reviews can indirectly loosen rigidities, they are still primarily designed to identify savings and efficiency gains rather than to confront structural commitments in pensions, health, subsidies, or transfers. Without explicitly tackling these rigidities, governments risk seeing any consolidation gains eroded by baseline spending pressures.
Taken together, these lessons suggest that fiscal consolidation in the current context is less about short-term savings and more about and building a system capable of continuous reprioritisation, which in in some cases may evolve into redesigning the State. Such a change in focus would allow governments to address the dual-pressure challenge of post COVID-19 public finances. Accordingly, governments may gain from communicating clearly that on-going fiscal consolidation is not simply “doing more with less” but rather redesigning the allocation of public resources to meet multiple objectives simultaneously.
Framing consolidation in this broader way and strengthening PFM systems with this objective in mind can help build public and political support for difficult decisions, by linking them to the redefinition of the state’s role in society rather than to short-term fiscal consolidation alone.