Economic policy

The big idea: should the Treasury be abolished? | Economic policy

Ohen we think of the things that need fixing in the British state, it is natural to think of the institutions that are in trouble: from government helplessness in the face of soaring costs of living, to perennial NHS crises, to rule-breaking revelations at No 10. But a powerful way to solve many of the UK’s problems is the sweeping reform of one of our most effective institutions: Her Majesty’s Treasury.

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The Treasury is a remarkable organization. It sits at the heart of the British state and employs the brightest young civil servants. Former treasury staff hold senior positions in most other ministries and provide half of the current crop of permanent secretaries. Retired ministers, in moments of candor, will tell you that the Treasury is the only part of Whitehall that lives up to RA Butler’s description of a ‘Rolls-Royce’ civil service. It is also unusual, compared to other finance ministries around the world, in that it is three things at once: a budget ministry, controlling public spending; a Ministry of Finance, in charge of public credit and taxation; and a Ministry of Economy, responsible for stimulating economic growth. In France, Germany, the United States, Japan, Canada and Australia, these roles are all, to varying degrees, separate. The Treasury is also at the heart of the political news cycle. Its biannual “fiscal events” – budgets, statements and spending reviews – dominate the government’s agenda for weeks at a time and set the media agenda for days.

But this accumulation of power and talent comes at a high cost. It fundamentally shapes the mindset and incentives of the British state, changing the incentives for the worse no matter which party is in control.

The first problem it poses is what could be called “government by the accountant”. Britain’s economic history is dotted with companies such as ICI and GEC which have been taken over by bean counters and financiers, leading to a mindset focused on short-term cash, to underinvestment, decline and insolvency. The Treasury’s mission to protect Britain’s public credit and watch the purse strings breeds a similar myopia in the British state, as public investment is routinely diverted to meet short-term pressures. This helps explain why the NHS invests less in equipment and IT than any other European healthcare system. This is why defense procurement, which by nature involves large and occasional expenditures, is dragged inefficiently over the years to create smooth expenditure profiles. This is why the national tutoring program has been reduced by 90% to the point of becoming ineffective. The story is still told how, in the 1980s, Treasury officials argued that the new M25 only needed two lanes wide.

This short-term attitude combined with the political theater of major fiscal events explains the Treasury’s second problem: a reliance on political whistles, to be pulled like rabbits from the chancellor’s hat on budget day to wow the media. Sometimes these reckless surprises lead to public outbursts, like George Osborne’s infamous “mushy tax” or Philip Hammond’s war on White Van Man. But the real damage is deeper rooted. This makes policymaking more volatile and less consultative, making it harder to build the kind of long-term partnerships needed for effective industrial strategy, serious public service reform, or decentralization. to cities. And it disempowers other departments, putting officials who are often experts in their field at the mercy of bright but inexperienced young Treasury officials.

All of this is underpinned by the Treasury’s historic pessimism about the government’s ability to improve UK economic growth. The accounting mindset and focus on firefighting and in-year spending goes hand in hand with an internal view that the UK’s slow growth rate is a fact of nature , and the best the government can do is not to make matters worse. This is an understandable attitude for a budget or finance ministry – all good accountants are moderate pessimists – but not for a department responsible for managing the economy.

The first step to solving these problems is to recognize that they are not the result of a failing institution or lazy or incompetent officials. On the contrary, the Treasury is very efficient, staffed with extremely talented and committed civil servants. The root cause is the structure of the organization, and the incentives and culture it fosters. To remedy this, we must unravel the unique accumulation of powers that makes the Treasury so unusual and so powerful. One way to do this would be to divide it into three parts. Its budget function, the so-called “expenditure teams”, would be bolstered by more subject matter experts and consolidated into a department modeled on the Office of Management and Budget in the United States. This would be placed in the Cabinet Office, giving future prime ministers much more direct oversight and control of public services. (A side benefit would be to professionalize and reform the bizarre Renaissance courthouse that is 10 Downing Street – something that seems particularly urgent in light of Partygate.)

The economic role of the Treasury should be merged with the Department of Business into a large new Department for Economic Growth, headed by a Deputy Prime Minister or First Secretary of State, with the task of dealing with the dismal growth rate of UK productivity over the past 15 years. (The department could also take on responsibility for digital technology, which has awkwardly sat in the culture department since Matt Hancock’s land grab in 2018.) And the Treasury’s financial regulatory, borrowing and tax functions should be housed in a helpful and modest finance department. , such as that of Australia or France.

This plan is not entirely new. Indeed, it was nurtured by many of the most ambitious reformers in British government. Harold Wilson set up the Economics Department to be a growth-focused rival to the Treasury – but the experiment was undone by an alcoholic secretary of state and a run for the pound. Tony Blair and Jonathan Powell considered it, but in the context of the Blair-Brown Wars decided it was a bridge too far. I was told that was on Dominic Cummings’ agenda before he resigned.

We must not pretend that the politics of change is easy: as Blair discovered, it is difficult to get rid of an incumbent chancellor. And because the chancery is such a desirable office, it’s a useful piece of patronage that a prime minister can promise an ally. But at the moment the chancellor is exceptionally beleaguered, and it’s not clear that the prime minister owes a single politician much favor, or that his pledges of patronage would be trustworthy anyway. Similarly, if Keir Starmer wins the 2024 general election, he could seize the opportunity to mark a radical break with the past and commit to reform and economic growth.

Whoever is in power, the next few years appear to be an exceptionally good opportunity to effect this change and redirect the talent and energy within the Treasury to Britain’s long-term interests.

Stian Westlake is Chief Executive of the Royal Statistical Society. He is co-author with Jonathan Haskel of Rebooting the Future: How to Fix the Immaterial Economy.

Further reading

From the Third World to the First: Singapore and the Asian Economic Boom by Lee Kuan Yew (Harper Business, £12)

Markets, State and People: Economics for Public Policy by Diane Coyle (Princeton £32)

Inadequate Balances by Eliezer Yudkowsky (Artificial Intelligence, £4.99)