The Fiscal Triangle: How The Treasury Decides What To Spend

5 min read03 January

JP Spencer, a former Treasury senior policy adviser, explains how the ‘fiscal triangle’ is at the core of every spending decision it makes

To understand how the Treasury makes its most important decisions ahead of a Budget, start by picturing a big oval-shaped wooden table.

At the head of the table, sits the chancellor. And around the table sit three civil servants.

One official argues that public services are under strain so the government needs to spend more. Another official argues that it will be difficult to increase taxes given the potential impact on people and businesses. And the other argues that any increase in government borrowing will require careful handling of the financial markets. This is the so-called ‘fiscal triangle’ in action – the heart of how the Treasury makes decisions.

Such a scene will have played out in the chancellor’s office in 1 Horse Guards Road ahead of most recent Budgets – though the table will have been a lot busier with other ministers, special advisers and officials.

The fiscal triangle gets its name from the mathematical trade-off between tax, spend and borrowing. You cannot significantly change one without affecting one of the others. The Treasury structures itself so that one very senior official represents each corner of the fiscal triangle. These officials then have the job of advising the chancellor on the trade-offs between them. The role of the chancellor is to decide what to do, and the outcome of these decisions is a Budget delivered to the House of Commons.

This central role of the fiscal triangle in the Budget process is key to understanding how HM Treasury works. It is at this apex of the decision-making hierarchy that the implicit historic goal of the Treasury – control of the public finances – becomes evident. It is also this role in making trade-offs on the use of taxpayers' money that puts the Treasury at the heart of decision-making – giving it a dominant role in many policy areas.

But, this emphasis on fiscal policy and the consequent power of the Treasury has also been criticised by some. For example, the Institute for Government wrote in early 2024 that “Treasury-managed processes fill the strategic vacuum at the centre of government by making tradeoffs between departments’ competing bids for finite resources”. A common concern of similar critics is that the Treasury focuses too much on control at the expense of objectives such as growing the economy.

The Treasury itself has been alive to these criticisms and increasingly talks of a ‘fiscal diamond’ with a fourth corner to represent the economic effects of fiscal policy. The new Government has also vowed change, with the new Chancellor having called for a "strengthened Enterprise and Growth Unit embedded in the existing fiscal event process" in opposition.

These efforts are part of a tradition of institutional change and restraint on behalf of the Treasury which has evolved its role over time. Until operational independence was delegated to the Bank of England in 1997, chancellors set interest rates. Similarly, the creation of the Office for Budget Responsibility (OBR) in 2010 took away a key Treasury role in determining the economic and fiscal forecast for the UK in the Budget process.

While appearing to diminish direct Treasury power, each of these reforms has bolstered the role of the Treasury in achieving its actual objectives – not just control of the public finances but also macroeconomic stability and a growing economy – through greater transparency and use of evidence.

By limiting its control in particular ways, the Treasury has enabled itself to focus on the core goals of macroeconomic stability

For example, following the November 2024 Budget, the Chancellor announced that the OBR will be able to more independently verify departmental spending plans rather than taking these as read from the Treasury. This aims to avoid a repeat of the March 2024 Budget forecast process which, according to documents published alongside the November 2024 Budget, saw important information not being seen by the OBR.

These changes will help the Treasury in two ways. Firstly, it will be able to set out the competing demands on the public purse to ministers with independent verification. Secondly, through greater external transparency, it will be able to reassure the markets of its spending plans.

Additionally, the change to embed growth in the fiscal events process will push the Treasury to use evidence on how different policies impact the economy as well as ensuring there is a growth-orientated voice in the room at key moments. This is being backed up by the OBR now forecasting the longer-term impact of measures that will grow the economy – a direction of travel the Chancellor also called for when in opposition. For example, the OBR set out that the November 2024 Budget will significantly increase growth over the long term if public investment is sustained at the new higher level.

Such reforms should be seen within a now well-established tradition of institutional reform. As with Bank of England independence, these reforms have used transparency and evidence to bolster the Treasury’s overall handle on macroeconomic and public finance outcomes.

Looking ahead to the Spending Review next Spring, the deliberations of the fiscal triangle will once again take centre stage. On one hand, the Treasury increasingly operates in a complex environment by limiting its own power. On the other, this frees it up to take a more strategic role focused not just on control of the public finances but a wider view of macroeconomic stability and growing the economy. This aligns well with the Government’s ambition to deliver five cross-cutting missions that it acknowledges cannot be delivered by Whitehall alone but must work through empowering different institutions and sectors.

By limiting its control in particular ways, the Treasury has enabled itself to focus on the core goals of macroeconomic stability, growing the economy and control of the public finances using greater transparency and evidence.

So next time a Budget comes around, remember those officials sitting around the big table – these deliberations hold the fate of the nation in their hands.

JP Spencer is Director of Devolution Policy at Labour Together.

PoliticsHome Newsletters

PoliticsHome provides the most comprehensive coverage of UK politics anywhere on the web, offering high quality original reporting and analysis: Subscribe