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Should HM Treasury be abolished?

Image: HM Treasury, CC BY-NC-ND 2.0

By Craig Berry

Before she was eliminated from the race, Kemi Badenoch produced one of the few substantive policy ideas — beyond the clamour to cut taxes — to emerge from the Conservative Party leadership contest. In short, Badenoch proposed breaking up Her Majesty’s Treasury.

The Treasury has long doubled-up as a finance and economics ministry. In Badenoch’s plan, the ‘finance’ bit (i.e. managing the public finances) would stay with the Treasury, but the ‘economics’ bit would move to 10 Downing Street as a new Office for Economic Growth.

Whether she would have followed through with this in office is debatable. Yet it is a prospect that many commentators have raised before — and indeed that many Prime Ministers have tried to enact in practice, one way or another. However, while breaking up Whitehall’s most powerful and (small-c) conservative department will appeal to anyone interested in transforming the British economy, there are more limitations to this policy than might first appear.

Postwar history

Few countries imitate the UK in combining such a vast range of fiscal and economic policy powers in a single government department. The distorting impact on policy-making more generally is at the root of calls for reform, but we should also note the challenge the department (and its leader, the Chancellor of the Exchequer) represent to the exercise of prime ministerial power.

Labour Prime Minister Harold Wilson sought to create a rival department to the Treasury to oversee economic policy within Whitehall. The Department of Economic Affairs was established in 1964, but its powers were reabsorbed into the Treasury before Wilson left office in 1970. There had also been several attempts in the late 1940s and early 1950s to establish a ministry of economic affairs within the Cabinet Office, but all were short-lived.

In 1970, under a Conservative government, the various junior departments with economic policy functions were brought together as the Department of Trade and Industry (DTI). But the department was split into three main pieces when Wilson returned as Prime Minister in 1974. (Arguably, Wilson had not intended to weaken the DTI in favour of the Treasury — he had instead wanted to locate economic policy powers in the new Department of Industry — but the centrifugal power of the Treasury clearly could not be resisted.)

After 1997

The New Labour government tinkered with the junior economic policy departments constantly, but under Gordon Brown as Chancellor, the Treasury itself increased its power over large parts of domestic policy and taxation. Brown of course partially transferred monetary policy powers from the Treasury to the Bank of England, but also transferred responsibility for financial regulation from the Bank to the Treasury. (Interestingly, Tony Blair had flirted with stripping the Treasury of some of its powers — but evidently this idea was borne of his political rivalry with Brown as much as any concern about the Treasury itself.)

Under the coalition government, George Osborne was happy to continue the Treasury’s dominance of domestic policy when becoming Chancellor in 2010, but a direct challenge to the Treasury’s authority came in 2016 when Theresa May became Prime Minister. May added responsibility for energy policy and industrial strategy (the first time the latter term had appeared in Whitehall nomenclature) to what was then the Department for Business, Innovation and Skills (BIS), to create the Department for Business, Energy and Industrial Strategy (BEIS).

BEIS still exists, but its challenge to the Treasury arguably lasted for less time than May did as Prime Minister, as the Treasury (under Philip Hammond) offered limited support to the new industrial strategy agenda established in 2017.

The end

In recent years, there have been several proposals for major reform of the Treasury. The Head of IPPR’s Centre for Economic Justice, George Dibb (formerly of IIPP) has argued that:

the Treasury has to be broken up, with long-term economic strategy the responsibility of a new ministry. That way it would be matched by an equal and opposite force with long-term vision and powers to direct the economy towards socially important goals.

Dibb’s concern with how a short-term focus on the public finances warps the Treasury’s economic thinking echoes arguments made by others. In 2014, Giles Wilkes and Stian Westlake published The End of the Treasury, which argued some of the Treasury’s operating norms were responsible for ineffective governance across Whitehall:

1) Government-by-accountant: powerful short-term budgetary control manifests itself in distortionary rules and procedures, and in an inability or unwillingness to use tax measures to raise revenues. This leads to a lopsided focus on spending cuts as the only means of dealing with the deficit.

2) Wheeze-itis: the power of Treasury spending teams, combined with the short-term nature of Budgets and Autumn Statements encourages a tendency towards policy wheezes, where a long-term approach to policy-making would generally be more productive.

3) Over-centralisation: the Treasury’s influence (combined with the quality of its staff) means that a handful of often relatively junior staff in the Treasury deploy more power than experts in the departments. The culture this fosters is not conducive to wider decentralisation of power, either geographically or beyond central government.

It is interesting that Badenoch suggested centring economic policy around the Prime Minister’s office, rather than creating an alternative economic policy department. Westlake (now chief executive of the Royal Statistical Society) has written approvingly of the plan, but the Wilkes/Westlake proposal would instead have involved moving budgetary rather than economic powers to Downing Street, with BIS (or BEIS) then becoming ‘a genuine department of growth’.

With or without the Treasury

We should however be careful what we wish for. One of the dilemmas associated with reforming the Treasury is that, while the department arguably uses its centrifugal power to restrict the ambitions (or costs) of policies that might be pursued by other departments, the particular set of levers it controls could be useful for the proponents of radical change in UK economic policy.

Labour’s former Shadow Chancellor, John McDonnell, seemed to understand this. Lord Bob Kerslake (former head of the UK civil service) conducted a review of the Treasury on behalf of the Labour Party in 2017. Kerslake expressed dismay at the Treasury’s recent performance, especially in terms of financial regulation, tax policy and preparing for Brexit. However, Kerslake ultimately did not recommend breaking up the Treasury, on the basis that this would be unnecessarily disruptive.

Instead he insisted that the Treasury returned to its core functions of macroeconomic supervision and managing the public finances — perhaps reversing the expansion of its remit under Brown and Osborne, but leaving Treasury fiscal and economic policy supremacy largely in place.

Similarly, and also in 2017, the Industrial Strategy Commission (which I served on alongside several other former Treasury officials and advisers) warned against creating a rival economic policy department. We concluded that it was unlikely that a rival department could ever shift the centre of gravity in UK economic policy-making.

Accordingly, if the government wanted to develop and embed a genuinely transformative industrial strategy — which was the Commission’s main objective — it should be managed from the Treasury itself, rather than BEIS. But it would be a very different Treasury. The department would take on a coordinating role, using its power to secure buy-in across Whitehall, but policy objectives would be devised by representatives from across government.

Crucially, local, regional and devolved authorities would be central to this reform. Interestingly, another leadership candidate who was eliminated this week, Penny Mordaunt, has previously suggested ‘decentralising’ some of the Treasury’s functions. Bringing more local leaders into central government policy-making processes is one way of achieving this.

The Treasury view

Whichever way Whitehall is configured, abolishing or reforming the Treasury is probably pointless unless ‘the Treasury view’ is also challenged. The Treasury view is usually understood as a commitment to:

  • balanced budgets, because deficit spending creates fiscal risks, and displaces or ‘crowds out’ private investment; and
  • sound money, which translates to a belief in maintaining a strong currency and controlling inflation.

(It is debatable whether we should include low taxation in this list. The Treasury favours lower taxes, but is cautious where tax cuts would increase budget deficits in an unsustainable manner. In seeking to walk this tightrope, former Chancellor Rishi Sunak is the leadership candidate who most embodies the Treasury view).

Badenoch was of course a candidate of the Tory right, and had made clear her desire for a ‘slimmer’ state. We would normally expect such politics to align with the Treasury view. Badenoch has served previously as Exchequer Secretary at the Treasury, responsible for recent policy initiatives such as the ‘plan for growth’ — which killed off May’s industrial strategy, once and for all — as well as issues around local economic development.

However, these are precisely the policy responsibilities she wanted to move to Downing Street. This is rather odd: there really is no good reason to move these functions from the Treasury to the Prime Minister’s office unless you want economic policy to be liberated from the shackles of ‘Treasury brain’, and instil a more interventionist economic policy stance at the heart of Whitehall. (This was evident in Boris Johnson’s early plan, influenced by former chief adviser Dominic Cummings, to subjugate the Treasury to the Prime Minister’s office more formally.)

Yet the Treasury, and the Treasury view, are not synonymous. This is partly because it is too simplistic to assume that the Treasury is rigidly attached to any particular set of beliefs — it has evolved over time, and can do so again.

But it is also partly because the Treasury view is generally upheld across all or most Whitehall functions. The notion that the Treasury controls other departments with menace allows for a colourful characterisation of Whitehall processes, but in practice the intellectual divide between the Treasury and the rest is really not that deep (not least because most senior civil servants serve apprenticeships at the Treasury at some point in their career).

Politics matters

We should probably see Badenoch’s suggestion therefore as motivated by political concerns about prime ministerial authority, rather than any genuine disquiet about Treasury decisions. This highlights the wider danger that debates about the Treasury remain apolitical and technocratic in nature; that is, the view that if we change how policy-making processes work, we will automatically get different policy outcomes.

In practice, the Treasury is a highly political department. It is headed by the country’s second most powerful politician — generally someone with a sizeable support base within the governing party, and ambitions to become Prime Minister. It also has a unique relationship with Parliament, typified by set-piece ‘fiscal events’ such as the Budget.

We might sometimes assume the Treasury has an unchanging set of policy prescriptions, but many of its most important decisions are made quickly, under significant logistical and political pressure, with attention to the political consequences as much as the fiscal or economic. Diane Coyle and Marianne Sensier (who were both part of the Industrial Strategy Commission) rightly identified how the Treasury’s adherence to ‘Green Book’ guidance on public investment led to bias against transformative local and regional investments — yet they also argued that even if application of the Green Book led to the correct decisions on increasing investment outside London and the South East, plans may still be blocked by elected politicians for political reasons.

The point here is that, if we want to change UK economic policy, we should probably think a little less about the structure of policy-making processes, and a little more about the politicians we allow to take control of the Treasury’s significant powers.

Badenoch’s plan, if enacted, would not have been the first time that the Treasury’s powers have been altered as a result of political calculations. Independence for the Bank of England in 1997 was as much about credibility as it was policy direction. Similarly, George Osborne gave the Treasury’s forecasting function to the Office for Budget Responsibility (OBR) in 2010, but only after having set up a ‘shadow’ OBR in opposition in 2009, in order to highlight the Labour government’s apparent imprudence.

Overall, I would argue that reforming the Treasury is just as likely to succeed as removing powers from the Treasury, especially if any removal process leaves unchallenged the ideological preferences the Treasury tends to uphold.

Alas, the Treasury (and the Treasury view) is probably safe in the hands of either Rishi Sunak or Liz Truss as Prime Minister. If the next PM really wanted to shake up Whitehall, they would use the power of their office to embed cross-cutting missions across government. Addressing poverty, for instance, requires the dedication of all parts of government, and leadership from the very top. We could say the same about climate change, or preventative healthcare.

In terms of carving up the Treasury, I am certainly persuadable. But it is not a panacea. We should focus on embedding the pursuit of public value in all parts of government, however configured, enabling them to work together to transform our society and the economy.

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UCL Institute for Innovation and Public Purpose

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