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The unintended consequences of the Treasury

Today we published a provocation suggesting that the UK would be better governed if HM Treasury were split up, written by Giles Wilkes and me. Here's a teaser:

You would be hard pushed to find a government department as impressive as Her Majesty’s Treasury.

Its officials are able, intelligent and public-spirited. And they’re good value for money. A thousand-odd people, usually paid less than equivalent grades elsewhere in Whitehall, carry out four major tasks – finance, budgeting, economics and tax - that in many countries require a department all to themselves.

This great cluster of responsibility is part of what makes the Treasury special. As one official told us, “the best people will work here for less pay because the job’s so interesting”. But while it makes the Treasury more effective, such concentrated power has a debilitating effect on the rest of government.

The same behaviours that bring confidence and certainty to Treasury officials breed the opposite elsewhere in Whitehall, leading to short termism, game-playing by other officials, and uncertainty amongst stakeholders.

The Treasury’s own political rituals and institutional memory do not help. The way the Treasury deploys its significant power is dictated by the twice-yearly pantomime of the budget and autumn statement. Here six months’ of tax policy and economic thinking are blended together into a politicised stew designed for the consumption of the nation’s newspapers – often concocted in a last minute rush the weekend before.

It's not just the Budget. Much of how the Treasury behaves stems from the searing effect of a long series of crises, culminating in the financial humiliation of 1976, the Treasury's trial-by-fire. For the Treasury we are always one sweaty weekend away from national bankruptcy. This neurosis means that all decisions – departmental budgeting, growth policy, banking reform – yield to the need to fund Britain’s debt. James Carville famously observed that everyone was afraid of the bond market. But by concentrating such power in the Treasury, Britain makes this phobia the defining dysfunction of its entire government.

On a more mundane level, the concentration of powers and the Treasury’s culture lead to three problems that will be familiar to anyone who has worked within government.

Accountants gone wild

British industrial history teaches us the danger of allowing great undertakings to be run by bean-counters. In most complex organisations there is a tension between finance and operations – between the finance director and the plant manager, as it were. But the Treasury’s power means that within government, this battle is largely one-sided.

And because the Treasury holds the upper hand in finance discussions, there is a strong temptation for it dictate not just how much money can be spent, but what it can be spent on, too.

Thus we end up with a budgetary system where departments can rarely move money from one purpose to another, or between years. This makes it easy to spend money on prisons or benefits, for example, but harder to invest in keeping people out of prison or off benefits.                    

Wheeze-itis

All too often, departmental policy must yield to the Treasury’s need for budget and autumn statement announcements. So once every six months, the hunt begins for eye-catching policies that can be announced in the House.

In the worst examples, this leads to shadow policymaking as Treasury teams try to dream up policies that they would like to see coming from departments. This sort of policymaking is the antithesis of the steady long-termism that businesses and economists call for, and that Britain fairly obviously needs.

Don’t trust the natives

The Treasury hates ceding control of its finances. Because it is powerful, it has a simple solution to this: it doesn’t. This has stood in the way of many of the ill-fated attempts to devolve financial power in recent years, from giving foundation hospitals borrowing rights to devolving economic growth funds to cities.

There is much to praise about the Treasury, from its superb staff to its vital role in scrutinising government. And it has taken steps to address some of its long-standing issues, from ethnic and gender diversity to professional insularity.

But it is hard to shake the feeling that its great power has in itself become a problem. If the next government wants to push a radical programme of economic reform, it will be a serious obstacle. The UK would be better off if its multiple responsibilities were divided up.

 

This article was originally published in the Fabian Review. It is republished here with the kind permission of the Fabian Society. These views are those of the authors, not of Nesta.

Author

Stian Westlake

Stian Westlake

Stian Westlake

Executive Director of Policy and Research

Stian led Nesta's Policy and Research team. His research interests included the measurement of innovation and its effects on productivity, the role of high-growth businesses in the e...

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