Stian Westlake: Is it time to break up the Treasury?

As the Spending Review looms, Stian Westlake of Nesta argues that reducing the influence of the Treasury could replace the essay-crisis drama of Budgets and Autumn Statements with a more thoughtful budgetary process

By Stian Westlake

19 Nov 2015

Among the radical ideas that have been floated by Jeremy Corbyn’s Labour party, one is of particular interest to Whitehall: the commitment to take a hard look at government’s mightiest department, HM Treasury.

To be sure, the exercise is couched in reassuring terms: it will be an “operational review”, and it will be led by former civil service head Lord Kerslake. But it offer the chance to set out a vision of radical change that any government should take seriously. The power of Britain’s Treasury is great, and there is a good case that reducing it would make the public sector a more functional and rational place.

Treasury power is a given in the UK public sector. It is a fact of life that the most junior official learns to accept and manage. But it is worth taking a moment to reflect on how remarkable and unusual it is.

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The Treasury combines the roles of a finance ministry, a budgetary ministry, and an economics ministry. To put it another way, it is responsible for managing the government’s borrowing and the health of the wider financial system; for balancing the government’s books and approving spending; and for the growth of the wider economy.

You would hard pushed to find a single ministry in any other rich country that combined these roles. The US’s Office of Management and Budget sits separately from the Department of the Treasury. Germany and France have separate economics ministries. In Australia, the ministry of finance was forcibly hewn from the Treasury following a row between Malcolm Fraser and officials in 1976.

Concentrated power is not necessarily a bad thing. But we should not pretend it has no effects. For a start, power attracts talent, which entrenches power. Treasury civil servants are talented, hardworking, public-spirited people. Many of Whitehall’s best and brightest are attracted to the Treasury at some point in their careers. It’s better to porous than insular. But the Treasury’s role as a nursery of young talent also spreads the Treasury’s views and ways of working across Whitehall, extending its influence even further.

Concentrating power in a finance ministry of all places comes with its own pressures. In our report The End of the Treasury, we identified three endemic problems of policymaking that Treasury power exacerbates:

  • Government-by-accountant: Powerful short-term budgetary control manifests itself in distorting 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. 
  • 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 and “eye-catching initiatives”, where a long-term approach to policymaking would generally be more productive. What’s more, for this to work the Treasury needs a financial system that allows it to hoard all the flexibility to itself, so it has the resources to pick the initiatives it wants at the critical moment. This spreads uncertainty through the rest of government. 
  • Overcentralisation: 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 also holds back a German-style industrial policy in which technology roadmaps and investment plans are developed slowly and consistently in partnership with industry groups.

The radical solution to these problems is to emulate Malcolm Fraser (or for that matter Canada’s Pierre Trudeau) and break up the Treasury entirely.

There are various ways that this could be done. A stronger Cabinet Office could take on the budgetary functions of the Treasury to create something more like an American-style OMB. Handing over growth policy and financial markets policy to a more powerful version of the Department for Business, Innovation and Skills may appeal to John McDonnell, to whom the Kerslake review will report.

Organisational reform could be coupled with constitutional reform, replacing the essay-crisis drama of Budgets and Autumn Statements with a more thoughtful budgetary process. We might also learn from the effective role played by the National Economic Council, the Cabinet committee that oversaw much economic policy in the aftermath of the global financial crisis.

Kerslake’s review offers a chance to review the power at the heart of British government. Let us hope it is as radical as it has the potential to be.

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