Treasury 2.0: doing economic policy differently
If HM Treasury is really an obstacle to growth and prosperity, then how do we change it to reorganise its functions within Whitehall?
A few days ago I published a rather exhaustive (and no doubt exhausting) narrative of attempts by various prime ministers since the Second World War to reform or dismantle the Treasury in order to redistribute its responsibilities. The presumption has been for decades that the influence and policy reach of the Treasury has been damaging to the UK’s economic growth, and that it houses the policy levers of what would in another country be two or three separate departments under one over-mighty roof. Better policy, the argument follows, will flow from a more rational and systematic structure of ministerial briefs.
There is some more general truth in this last point. The UK government has evolved over centuries without complete interruption (at least since 1649) and, while it has undergone periods of considerable change—for example, both world wars saw major restructuring of the central machinery of government—there is nevertheless a tendency towards the accretion of powers, like barnacles to the bottom of a ship. The Home Office, established in 1782, was for a long time a prime example of this, responsible for a ragbag of issues over time from the control of explosives (added in 1885) through the medical use of dead bodies (transferred to the Ministry of Health in 1919) to broadcasting (taken by the Department of National Heritage in 1992). What has resulted is a governmental structure that embodies the old punchline “Well I wouldn’t have started from there”, administrative and executive functions allotted not always by strict logic but by precedent and tradition.
I said at the end of the last essay that I would set out some ideas, having spent so long chronicling the efforts of various premiers to thwart or reduce Treasury power. So here they are, at least in embryo: I have read several proposals for machinery of government changes, and am myself oddly fascinated with the departmental structure of Whitehall (it’s a quirk but it’s not the oddest I could have), but I’m also a traditionalist, so I wield the butcher’s knife with a degree of regret, even of sorrow. I also think that change must always prove its case and tend to agree with Enoch Powell’s definition that “a Tory is someone who thinks institutions are wiser than those who operate them”. The Treasury has, however, in my view proved that something is wrong, and that we need to make radical changes.
The modern Treasury has five principal areas of policy responsibility:
public spending, including departmental spending, public sector pay and pensions, annually managed expenditure and welfare policy, and capital investment;
financial services policy, including banking and financial services regulation, financial stability, and the competitiveness of the City of London;
oversight of the UK tax system, including direct, indirect, business, property, personal and corporation tax;
delivery of infrastructure projects across the public sector and facilitation of private sector investment into UK infrastructure;
sustainable growth of the UK economy.
Even a cursory glance suggests that this a broad and demanding portfolio for a cabinet minister to handle successfully. Admittedly, the Treasury is usually blessed with two ministers of cabinet rank, the chief secretary (currently John Glen) taking responsibility for public expenditure, but each department can only have one strategic leader, and there is no doubt that the chancellor of the exchequer’s plate is heavily overloaded.
(In fact, the creation of the chief secretary’s post in 1961 was, in its own way, a faint acknowledgement of the need to divide the Treasury’s responsibilities. The decision to create a second, junior cabinet post for the department arose from an internal committee of inquiry from 1959 to 1961 chaired by Lord Plowden, former head of the Central Economic Planning Staff, which produced a report in July 1961 entitled Control of Public Expenditure. The growth of public expenditure was placing strain on the system of collective responsibility as the chancellor’s workload grew, and in an attempt to provide for more collective judgement the report proposed the creation of a public expenditure committee comprising senior ministers. An attempt to set up such a committee in 1960 had failed, and in October 1961 the prime minister, Harold Macmillan, appointed Henry Brooke, a steady, honest, diligent man whom he judged “sound rather than brilliant”, to be chief secretary and paymaster general, deputy to chancellor Selwyn Lloyd. Brooke assumed responsibility for the control of expenditure, Civil Service pay and management, “leaving”, in one commentator’s words, “the chancellor free to concentrate on economic policy”.)
The essential criticism of the modern Treasury is that a department which is responsible for both the management of public expenditure and the strategic oversight of economic growth will always prioritise short-term balancing of the books over long-term investment and development. In other words, paying now to save money later will always be anathema to the Treasury, so its critics maintain, which can have a catastrophic effect on public policy. Evidence suggests that, for example, preventive medicine has a significant effect on public health and therefore reduces healthcare spending in the long run; equally, rehabilitation measures within the Prison Service may require immediate expenditure but, if they result in lower rates of incarceration in the longer run, they will save money and represent value for money. But, we are told, this is not how “Treasury brain” works.
I think “Treasury brain” is a thing, and have written about it before (for example here). A good example of this short-sighted parsimony is the Vaccine Manufacturing and Innovation Centre in Oxfordshire, which was announced in December 2018 and originally slated to open this year, but fast-tracked due to the Covid-19 pandemic. It was obvious that the VMIC would give the UK a huge capacity to produce vaccines now and in the future, not only tackling Covid-19 but helping us prevent or minimise the effects of future pandemics. The government gave the project £141 million to speed up its completion, but that is a staggeringly ungenerous amount of investment in the context of the pandemic. It is, for example, the cost of running the furlough scheme for around two hours. Yet it was a nine-figure sum which will have loomed large in Treasury officials’ brains.
It did not help that then facility was then sold to Catalent, a private corporation based in New Jersey, this April. Catalent promised investment of £120 million to complete the facility. A government spokesman commented: “This investment by Catalent is necessary to keep the facility open into the long-term.” Some might wonder whether another £120 million from the government to retain the VMIC in UK ownership would have been a sensible investment, though it is worth pointing out that it was never a state-owned enterprise, but a partnership between MSD, Johnson and Johnson, Cytiva, the University of Oxford, Imperial College and the London School of Hygiene and Tropical Medicine.
I think there are three identifiable “chunks” of Treasury responsibility. The first, and perhaps simplest, is the area of taxation, borrowing and financial services regulation. These represent a discrete group which would be comfortably within the scope of a single cabinet minister; they would also disengage the setting of taxation from expenditure in immediate terms, discouraging political gimmickry. This would not be the department for a populist or a showman, though the attraction of being the minister to unveil a substantial tax cut would always exist. More likely it would suit someone more technocratic, numerically able and detail-orientated. A Stephen Timms, one might think, or a John Biffen, rather than a Gordon Brown or a Kenneth Clarke. But we ought to be more accepting in politics that some roles are technical and dry, while essential to the management of government, while some better suit visionaries and those who need a broad canvas for their artistry. Comparators for this department might be the Australian Department of Finance or the French Ministry of Public Action and Accounts.
The second chunk is public spending. It was the expansion of this area which transformed the Treasury’s role during the 1950s and made it clear to politicians and officials that the office of chancellor of the exchequer had, in effect, outgrown one minister. To separate this from other Treasury functions would largely be a matter of taking those parts of the department for which the chief secretary is responsible and making them a stand-alone organisation. It would also allow the remedy of a long-standing perceived fault of the Treasury, which is a lack of in-depth knowledge, or at least a superficial understanding, of the various areas of government activity by the so-called “spending teams” which carry out the allocation of expenditure. These spending teams are not large. A 2013 report from the House of Commons public accounts committee examined their coverage of five departments, and those teams amounted to only 52 staff. In other words, the spending team for a whole Whitehall department’s budget amounts to perhaps 10 people, on a roughly equal footing with the staff of the select committee which scrutinises is (and select committees are reckoned to do an exceptional job with slender resources).
Small spending teams effectively mean that the evidential basis for agreeing expenditure and challenging departmental plans is slender and superficial. If this function were to be corralled into an independent department, not only would it have the authority of a minister in cabinet (of higher standing than the chief secretary, who, since 2015, has been relegated to the status of “also attending cabinet” as successive prime ministers have fretted about the headline size of cabinets (thereby missing the simple point that the effectiveness of the cabinet is not changed by the description of the attendees but the overall number of interlocutors sitting around that famous table). Another priority for this new, slimline department would be cross-government budgeting, so that individual spending teams would be able to predict how their decisions affected other parts of government. For example, a report this year from the National Audit Office on the Affordable Homes Programme demonstrated that those designing the policy were failing substantially to take into account its knock-on effects—both good and bad—on other areas of government and other spending plans. It is unforgiveable that a national government in 2022 suffers this badly from its left hand’s ignorance of what its right hand is doing.
The US system—different in many ways from our parliamentary model—has an analogue of this organisation in its Office of Management and Budget. This body is headed by a Senate-approved director and consists of five resource management offices which mirror the functional divisions of the federal government. At present these are the Office of Federal Financial Management, the Office of Federal Procurement Policy, the Office of E-Government and Information Technology, the Office of Performance and Personnel Management and the Office of Information and Regulatory Affairs. Notwithstanding the different models in the UK and US, it is worth noting that the OMB is part of the Executive Office of the President within the White House; while the director of the OMB is a “cabinet-level” official, the US cabinet serves a much lesser function and has much less power than its UK equivalent.
Comparative to this, some—for example, Stian Westlake, chief executive of the Royal Statistical Society and a former HM Treasury adviser—think that a department of budget should be contained within the Cabinet Office, under the direction of the prime minister. This, Westlake suggested in a Guardian long read earlier this year, would “giv[e] future prime ministers significantly more direct oversight and control of public services”. This would be music to the ears of a prime minister like Tony Blair, who was constantly frustrated by his lack of ability to drive and pursue central government policies and created first the Delivery Unit and then the Strategy Unit within Downing Street to give him tools to do just that. Equally, Operation Teddy Bear, the 2003 plan devised by Lord Birt to split the Treasury, would have created an Office of Budget and Delivery; one option for its departmental home was the Cabinet Office, potentially creating, in form or in name, a “prime minister’s department”.
I’m less sure about this. I am open to the idea of reforming the Cabinet Office to make it in effect a department of the prime minister, such as Australia and Germany, for example, have, though (as Australia does) I would want it to retain a responsibility to and provide a resource for the cabinet as well as the prime minister; our system is currently perhaps too amenable to a quasi-presidential leadership, and to give the prime minister a beefed-up department but exclude the cabinet from it would further unbalance the relationship. (I am currently writing an essay on the ministerial complement of the Cabinet Office which may include some thoughts about how it could be reformed.) However, I think the prime minister already has enough responsibilities apart from the general execution of government, dealing with cabinet committees, the National Security Council and Secretariat, matters relating to the Union and the management of the Civil Service, and I think that adding a substantial unit which carried out the public expenditure round would be too great a burden. I realise that having this office of budget management as a stand-alone organisation is not ideal, but I would need to think about the shape of Whitehall more widely before coming to definitive conclusions.
The third chunk of activity, which would be the broadest and most ambitious in policy scope, is overall strategic responsibility for the sustainable growth of the economy. The scope and powers of this third department would (will?) vary according to the ideological tenor of the government. The Labour Party currently has a relatively activist industrial strategy (though it is mischievously selective in saying that “For 12 years, the UK has underperformed economically”, since any fair observer would note that we have lagged behind our neighbours for much longer than that), which would suggest that a department for economic growth and industrial strategy would have relatively wide powers, not unlike the current Department for Business, Energy and Industrial Strategy (I confess it makes me uneasy, as a dyed-in-the-wool monetarist, free trader and sceptic of government’s ability to execute economic policy directly that a Conservative government—a Conservative government! to go all Neil Kinnock 1985—has an “industrial strategy”. I cannot help thinking of the dismal Heath government abandoning its Selsdon manifesto and bailing out Rolls Royce or the Upper Clyde Shipbuilders.)
However interventionist a government chose to be, whether Benn or Joseph, or Heseltine somewhere in the middle, it would seem an obvious move to combine this economic stewardship with much of BEIS’s responsibilities into a major economic department. Germany, admittedly with an SPD/Green coalition, has taken the interesting and at-least-superficially attractive step of creating a Ministry of Economic Affairs and Climate Action (BMWK), which might not be so far from the model the UK might end up looking to. I like the idea of embedding climate change and sustainability in the same department as growth and prosperity, because it seems to me inevitable that these two areas of policy will have to advance in lock-step if we are going to meet our carbon emission obligations. The mission of the ministry is set out thus: “The major trends of the 21st century, notably globalisation, digitisation, demographic change, recent developments within the EU, and the energy transition all represent major challenges for German business to tackle.” This is, I think, quite a persuasive narrative around which to base the direction and structure of the department.
With the exception of the task of continuing economic and monetary union, the BMWK encompasses policy areas which a UK minister of economy would find familiar and important: encouraging and assisting start-ups and SMEs; boosting investment and deregulation; championing digitisation; and managing the energy transition away from carbon fuels. To recreate this through the merger of some Treasury functions with BEIS would also require the separation of digital policy from DCMS, where it has never sat satisfactorily. I have written in the past about how poorly the culture department handles the digital brief, which it only acquired in 2015 having previously shared it with BIS: that was reinforced when Matt Hancock (in those days famous as a young minister with an interest in digital policy!) became secretary of state for digital, culture, media and sport in January 2018.
So our third department is a portmanteau. The bulk of BEIS, with a larger economic and strategic role hived off from the Treasury and full responsibility for digital policy transferred from DCMS. Stian Westlake suggests calling this the Department for Economic Growth, and, further, that the departmental head’s seniority in government be recognised by his or her appointment as deputy prime minister or first secretary of state. I am not quite so sure about this (though I looked at the evolution of the office of DPM until 1997 here), and there is a whiff of John Prescott’s super-ministry, the Department of the Environment, Transport and the Regions (DETR), which merged the previous environment and transport departments as well as regional policy from the DTI (here is the statutory instrument creating the office). Of course Gordon Brown as chancellor kept economic policy firmly in the grip of the Treasury but the DETR attempted to bring together policy areas which would have an immediate impact on local populations.
Ken Warwick, a long-time economic and industrial adviser to the FCO and the DTI, defined “industrial policy” this way:
Any type of intervention or government policy that attempts to improve the business environment or to alter the structure of economic activity towards sectors, technologies or tasks that are expected to offer better prospects for economic growth or societal welfare than would occur in the absence of any such intervention.
As free marketeer this language makes me nervous. That is not to say that I think government should be purely and faithfully laissez-faire, but I am deeply sceptical of the ability of government to choose “winners” in the economic and industrial landscape. I do believe that government has one vastly important and powerful weapon, which is its convening power, allowing it to bring together partners from across sectors to create opportunities for investment and development in especially important or beneficial areas. This was explained neatly by the Royal Academy of Engineering recently, and last year by the Confederation of British Industry. For me, that skirts the boundaries of how activist and interventionist the government should be, but leading the exercise of this convening power would be a major task for an economic growth department.
Here, then, we have new architecture of government. I’m a traditionalist, so I would not want to lose the Treasury (which originated around 1126) or the office of chancellor of the exchequer (which dates to c. 1221), and I would assign the management of public spending to it. The chancellor would, therefore, still be a senior figure within the government, presiding over specialised spending teams who negotiated with departments to agree their budgets.
We would also have a Department of Finance, headed by a secretary of state, which would be in charge of taxation, borrowing and the regulation of financial services. Again, this would be an influential department but would work in negotiation and cooperation with other parts of government to achieve a strategic financial and fiscal policy overall. It would be a relatively technical ministry but one still attractive to many senior and ambitious politicians.
Thirdly, BEIS would be merged or transformed into a Department of Economic Growth. The secretary of state for economic growth would run broad economic and industrial policy, in charge of managing inward investment, maintaining and improving the UK’s competitiveness, overseeing energy policy (including tackling climate change and promoting green growth) and handling business. It might also (as BEIS currently is) be responsible for science, innovation and research, but I am halfway-persuaded by the case made during the leadership elections this summer that science deserves its own cabinet minister and perhaps department to boost the UK’s specialism and success in this area. This department would be very substantial in policy terms, setting broad strategy in the areas which are crucial to the UK’s prosperity and sustainable development.
There is an additional benefit that all of this restructuring could be done without increasing the size of the cabinet: we would go from having the chancellor, the chief secretary and the business secretary, to the chancellor, the finance secretary and the economic growth secretary. (Cabinet size is a major structural problem in the Whitehall machine; the current cabinet has 22 members and an additional eight ministers “also attending”, which makes a body of 30, too large effectively to discuss major issues and do more than rubber-stamp decisions made elsewhere, for example in the cabinet committee system. Edward Heath was the last prime minister to have a cabinet under 20, forming a group of 18 ministers in 1970, and he had to exercise considerable ruthlessness, for example excluding the minister of overseas development and creating the two large Departments of Trade and Industry and of the Environment to gather several areas of responsibility under one secretary of state.
Tim Durrant of the Institute for Government has summed up the problem of the cabinet as a decision-making body like this:
The size of the cabinet can also make in depth discussion and considered decision making difficult. And while the prime minister is in charge of summarising decisions made in cabinet, it is other ministers who are generally in charge of implementing those decisions—they have the legal and financial powers to do so. Ultimately a decision being made in cabinet does not guarantee that anything will change in the real world.
There was an interesting experiment by Michael Howard as leader of the opposition in 2003. When he assumed the role, he appointed a radically slimmed-down shadow cabinet of just 12 members, the departments being grouped and shadowed by broad subject spokesmen somewhat reminiscent of Churchill’s 1951 “overlords” experiment; for example, Tim Yeo represented the party on public services, education and health, overseeing individual shadow secretaries of state who did not sit in the shadow cabinet, and David Davis took on home affairs, constitutional affairs and legal matters. However, Oliver Letwin, shadow chancellor, made it clear that this was an arrangement designed for opposition rather than government, telling The Guardian: “This is not intended to be the structure of a future Conservative government”, while adding that there was no reason to be “constrained” by the structure of Whitehall in opposition.
Many commentators expressed scepticism at the new arrangement, pointing to portfolios like Yeo’s as potentially unmanageable, but The Herald was more positive (or simply reproduced a Conservative press release), observing:
No longer have policies to be debated and decided by a 25-strong shadow cabinet. Instead they will be thrashed out by a well-tried, media-savvy inner core, looking more like the boardroom of a public company than a political party. Mr Howard intends the shadow cabinet to be a genuine forum for discussion, similar to the government’s cabinet committees in which ministers thrash out policy details.
It is worth observing that Howard reverted to a tradition size and structure when he formed his final interim shadow cabinet after the 2005 general election, before he stepped down as party leader at the end of the year.
To attempt to create a similar kind of structure in Whitehall would be the biggest revolution in peacetime cabinet government since the cabinet emerged from a mere committee of the Privy Council in the reign of George I (1714-27). (Of course, Lloyd George, Chamberlain and Churchill operated dramatically smaller war cabinets during the First and Second World Wars but did not continue them in peacetime.) It is argument very much worth exploring and weighing, but that is for another time.
I am by no means wedded beyond peradventure to the tripartite division of the Treasury I have outlined above. It is a work in progress, an opening bid. But it would, I think, improve the decision-making processes within government, and by decoupling short- and long-term priorities it would help achieve a better and more balanced ministerial perspective. It was a notion toyed with during the summer’s leadership election, but the appointment of Jeremy Hunt as a heavyweight chancellor to reassure the financial markets suggests it is no longer on the immediate agenda. But it would be good to think that whoever assembles a government after the next election, whether Rishi Sunak, Sir Keir Starmer or a wild card candidate, might at least examine the idea and consider if the benefits I have set out are worth pursuing. But there’s a long way to go before we get there, and machinery of government changes are on the back burner for now.