Why can't BEIS and the Treasury get on?

At the heart of the government’s problems with the cost-of-living crisis is a rupture between the two departments charged with managing the economy. Is it just down to the personalities, or is there something deeper going on?
Photo: Gerd Altmann/Pixabay

By Tom Sasse

24 Jun 2022

Kwasi Kwarteng and Rishi Sunak have not been getting on lately. The pair butted heads over plans for a windfall tax: even as the Treasury grew warmer, Kwarteng loudly continued to call it a “bad idea”. Back in March, they were locked in weeks of tortured wrangling over the British energy security strategy. An exasperated Department for Business, Energy and Industry Strategy official called the Treasury’s refusal to provide extra money to insulate homes “ridiculous”.

The frostiest moment was last autumn, when prices first spiked. Under pressure from industries like ceramics and steel, Kwarteng said he and Sunak were “in discussions” about how to help. The Treasury recoiled, telling journalists it was “not the first time the BEIS secretary has made things up in interviews”. (Worst of all the prime minister had to interrupt a holiday in Spain to instruct his spokesman to dampen the row.)

The backdrop to all this sparring is the worst squeeze on living standards since the Second World War. The Treasury has broadly tried to stick to its traditional view – that costs should be absorbed by consumers and businesses – while BEIS has been pushing for government to be more generous.

In many ways, it looks like a classic Whitehall spat. But beneath the surface, there is more going on. The two departments have always had a strange relationship – and their inability to see eye-to-eye in matters.

A difficult relationship

“The first thing is that the relationship is deeply unequal,” says Giles Wilkes, who spent four years as a special adviser to Vince Cable when he was business secretary. The Treasury is the most powerful department in Whitehall – it wields far more influence over policy than most finance ministries.

With this power, comes “a degree of intellectual arrogance”, says Lord Willetts, himself a Treasury official before becoming a politician and later a minister in the business department. “It is often where the brightest and best want to go, but that carries a sense of looking down on the second raters.” A Treasury official confirms many colleagues – particularly in the top ranks – “think BEIS is a bit useless”.

This is not helped by conflicting aims. The Treasury’s mantra is “must hit deficit target in two years” – it sees its role as saying no to stuff and making the public finances add up. It is deeply sceptical of public intervention and prefers to let markets decide.

There are benefits to strong financial control. Countries – including the UK in the past – get into trouble when they lose control of public spending. Or as Wilkes puts it: “You need to prove why you need your Gigafactory… empirically speaking most ideas are basically shit – you need a strong function or you’ll get all kinds of rubbish slipping through."

But you can take this too far. Officials across government complain about “Treasury brain” – a rigid short-termism that acts as a dead hand on the aspirations of anyone in government who thinks they can make things better.

In contrast, BEIS and its predecessors have usually been the ones tasked with intervening in the economy to change it in whichever way the prime minister of the day wants. Its job is to think big, strategic and long term – to ask “why not invest?” (the Treasury usually has an answer). It has never really managed to grow into the role.

“The Treasury is a finance ministry to its core,” says Duncan Weldon, author of a recent book on the UK economy over the last two centuries. “But it also likes to think of itself as an economics ministry – it sees GDP and productivity as its areas, it won’t let anyone else do them.” Elsewhere in Europe, the roles tend to be split.

A squashed department

There have long been calls to curb the Treasury’s power, but it has succeeded in squashing attempts to create something approaching an economy ministry.

The first was back in 1964, when Harold Wilson created the Department for Economic Affairs headed by the party’s deputy leader George Brown. The move was seen as a way of appeasing Brown, who made for an ineffective minister anyway because he was often drunk. The Treasury bided its time and the upstart was abolished.

The second was under Gordon Brown’s premiership in the late 2000s when Peter Mandelson was allowed to create a sprawling super-ministry pulling in business, innovation and skills. This was the department’s true moment in the sun: Mandelson was the second-most powerful minister in the government while, in the wake of the financial crisis and with a relatively weak chancellor, the Treasury was briefly cowed. It didn’t last.

There has been constant tinkering; the succession of acronyms (BERR, BIS, BEIS) reflecting an inability to find a settled role. Officials call it the “most mogged department in Whitehall” – meaning subject to disruptive “machinery-of-government” changes, where staff and responsibilities are lopped off or added.

Since the Department for Trade and Industry was created out of the ashes of Brown’s DEA in the early 1970s, the deck chairs have been moved no fewer than nine times. Most infamous was the short-lived department for productivity, energy and industry. Incoming minister Alan Johnson joked it had prompted “various descriptions… penis and dippy”, neither of which conveyed the serious, modern image he was after.

Other changes – like adding energy and hiving off trade in 2016 – proved harder to adapt to: a year on, BEIS offered an £80,000 consultancy contract to find out why so many of its disgruntled staff were leaving. And mostly the business brief has either not attracted big beasts – or has been used as a springboard. Sajid Javid, a protégé of George Osborne, used his year in charge as a prolonged audition for succeeding the latter as chancellor.

Yet BEIS’s star appears to be on the rise again. The dominance of energy in today’s politics, coupled with the fact that net zero will be the most important economic change of the next decades, mean increasingly it is where the action is happening.

The real economy department

In fact in many ways it is BEIS that should be driving the government’s programme. It is the department that best understands what Willetts calls “the real economy” – small and large businesses, sectors like manufacturing, retail, construction, firms in all parts of the country.

“BEIS has to talk to businesses and get its hands dirty when things go wrong, where the Treasury is only really interested in the City – it doesn’t really understand most businesses or workers,” says Weldon. The flip side of this is the Treasury often regards BEIS ministers and officials as “captured” – meaning too prey to special pleading.

Willetts agrees: “You won’t get to see the Treasury if you’re the head of a Midlands manufacturing firm, but if you run a bank, you will” although “the creation of a new Treasury base in Darlington is intended to change that”.

Treasury thinking sits uneasily with the Johnson makeover. “The Treasury’s view of how to grow the economy has always been that if you get the fundamentals right – low tax, skills, control inflation, stability - the economy will grow, and we shouldn’t really care about where that growth happens," says Weldon. It has always been sceptical of sectoral schemes (arguably of much of the premise of “levelling up”, too).

BEIS officials, by contrast, saw the industrial strategy as what would really power growth – and regarded its killing off and replacement with the Treasury’s glossy Plan for Growth (described by some as the “OK! Magazine of economic strategies”) as a power grab by a department ill-equipped to deliver on it.

Most governments have not bothered to resolve this contradiction. One insider describes a typical meeting where top thinkers would be invited to brainstorm how to grow the economy: “there would be the Treasury model which would be fine, the BEIS model which would be fine… all these permanent secretaries would shoot the breeze for an hour”.

Brexit has changed things, creating huge opportunities to regulate the economy differently. “It should have been the making of BEIS,” says Wilkes. “The whole economic argument was we think we could do loads of things with all sorts of regional state aid intervening. If you think you can mess around in the economy and understand industry and work with people on technologies and change a lot of things that should all be happening in BEIS.”

But it isn’t. Instead it is Jacob Rees-Mogg and a team of 31 opportunity hunters in the Cabinet Office that are searching for the benefits of Brexit, aided by readers of The Sun. His department have received a “tsunami of recommendations”, though it has not yet confirmed how many will be taken forward.

The area BEIS is leading is net zero. It is charged with working out how to transform the economy in three decades, and making judgments with huge implications. How to switch whole streets and neighbourhoods off fossil fuels? How quickly to expand nuclear? What role for hydrogen? How far can we domesticate green industries?

Even before the current price spike, these were becoming a source of tension. The UK published a market-based techno-optimist net zero strategy ahead of CopP26, but Sunak has been notably cool, courting a vocal group of net zero sceptics.

Kwasi vs Rishi

If clashes between Sunak and Kwarteng have deep roots, it is the energy crunch and a grim economic outlook that has soured relations.

Energy bills, which increased by 54% this spring, are expected to rise another 40% in the autumn. Inflation hit 9% in April, the highest rate in 40 years. The Organisation for Economic Co-operation and Development has warned the UK’s growth next year will be the worst in the G20 bar Russia.

The extent of the squeeze has put huge pressure on households and businesses – and tested the Treasury’s approach to breaking point. A small February package was swallowed up. The March budget – where Sunak appeared unwilling to spend money (as it appeared then) to prop up an ailing Johnson premiership – quickly appeared inadequate. Eventually a larger package came in May – though even that may only last to the autumn.

Yet a sudden rapprochement between the Treasury and BEIS appears unlikely. The two men have very different styles – Sunak is notorious for pouring over spreadsheets whereas the old Etonian Kwarteng is seen as “not a details guy” – while the viperish briefing and cabinet rows suggests there is little personal warmth.

While the pair may have entered parliament as ideological bedfellows, they have moved apart. The former’s fiscal conservatism has been hardened by Treasury orthodoxy, whereas the latter has been on a journey from his days as a co-author of “Britannia Unchained”, a free-market pamphlet.

Kwarteng credited being made energy minister as the best way to “see the virtues of government action”. His newfound pragmatism has also (it has to be said) helped him thrive as one of the cabinet’s most loyal Johnsonites. He now finds himself caught in the crossfire between the prime minister's boosterism and the chancellor’s restraint.

The Treasury-BEIS frontier has always been a key battleground – especially when a government is economically adrift. Assuming both men stay in their roles, the Sunak-Kwarteng episode is set to remain fascinating viewing. 

Tom Sasse is an associate director at the Institute for Government. This article first appeated on CSW's sister title The House's Guide to BEIS. 

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