Treasury is "overbearing" and "overstretched", warns Lord Kerslake – but review stops short of calling for break-up

Former head of the civil service's review for Labour says Treasury must "up its game" on financial expertise; do more to support regional growth; and stop "second guessing" departments

By Matt Foster

13 Feb 2017

The Treasury needs a much more sharply defined role if it is to shake the perception among the rest of Whitehall that it is "arrogant, overbearing and negative", according to a wide-ranging review of the finance ministry launched on Monday by the former head of the civil service, Lord Kerslake.

Kerslake, who stepped down as head of the civil service in 2014 after two years in the job and now sits as an independent peer in the House of Lords, was asked by Labour's shadow chancellor John McDonnell to take a detailed look at whether the Treasury remained "fit for purpose".

The former Whitehall chief drafted in experts including former KPMG deputy chairman Alan Buckle, former Birmingham city council CEO Stephen Hughes and TUC general secretary Frances O'Grady to help with the job.

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In his final report, unveiled on Monday and available in full below, Kerslake says the Treasury has played an increasing role in recent years "in arbitrating and even initiating domestic policy", arguing that its interventions now go "well beyond the core Treasury roles of overseeing the macro-economy and managing the government's finances".

"Its effect has been both to disempower departments and stretch the Treasury beyond its underlying capabilities," the report says.

Kerslake's review says that the "underlying culture" of the Treasury is often seen as "arrogant, overbearing and negative towards other departments", and it calls for a shift in its relations with the rest of Whitehall in favour of "a more enabling approach".

"Financial control should be secured through sound systems and developing departmental capacity rather than second guessing their decisions," it says. 

"Financial control has become policy control. This disempowers departments" – Lord Kerslake

Speaking at the report's launch in London, Kerslake highlighted "longstanding structural problems" facing the UK economy, including under-investment, a large trade deficit, the regional imbalance between the south east and the rest of the country, and the "stubbornly high" gap between the country's richest and poorest as examples of major public policy failures that successive governments had failed to tackle.

And while the former head of the civil service said it would be "completely wrong to lay all of the responsibility" for the UK's economic woes at the door of the Treasury, he criticised the department's "over-narrow focus on austerity", which he said had resulted in the finance ministry having "little to offer on these wider structural problems".

"The key recommendation in our report is that the Treasury mandate and the expectations on it are much more sharply defined," he said. "We also argue for a Treasury that is much more open to different and wider perspectives on how the economy needs to be managed."

Capability gaps

According to Kerslake, contributors to the review expressed a "strong and consistent" opinion "that the Treasury had extended its reach well beyond its core finance" remit.

"As one contributor put it, financial control has become policy control," he said. "This disempowers departments. As another external contributor put it, they only thought the discussions with the department were getting serious when there was a Treasury person in the room." 

But while Kerslake's report warns of Treasury over-reach, it also says the department is itself facing serious capability gaps, having reduced in size in recent decades while struggling to retain talented staff.

"The Treasury has a ‘hair shirt’ approach to pay and retention, relying on its high profile and influence to attract bright young graduates who then move on rapidly to other better paid roles," the report says.

"This needs to change. Reducing turnover should be a specific goal and progression paths and pay levels should be structured competitively to deliver this."

Expanding on that theme at the report's launch, Kerslake said that while civil servants "generally love to work in the Treasury" because of its "influence across the whole of government", it risked an exodus of bright staff unable to cope with the "sometimes-extreme levels of pressure" the role requires, even while offering "comparatively low salaries".

"In a recent staff survey for example, nearly 40% said that they were very dissatisfied with their pay, and only 24% said they were satisfied," the former head of the civil service said. "In a competitive and high cost London, people can and will go elsewhere."

The review also calls for the Treasury to "up its game" to ensure that proper financial expertise is valued as highly as wider economic policymaking skills in the department.

"We need to move away from a Treasury made up of ‘professional economists trying to be amateur accountants’," the review says.

Kerslake, who was brought in to Whitehall after heading up the Homes and Communities Agency and serving as chief executive of Sheffield City Council, meanwhile used the report launch to urge the Treasury to play a leading role in ensuring "more regionally balanced growth", saying that the department had been both "a resister and a promoter of devolution" over the years.

"Most recently under George Osborne, it has championed the so-called devolution deals, linked to the creation of metro mayors," he said.

"But passing down responsibilities without meaningful fiscal devolution amounts to essentially decentralisation, rather than true devolution. Central government still holds the ultimate control.

"So our report argues for the Treasury mandate to include specific responsibility to promote greater fiscal devolution, both to the devolved nations and the regions.

"Central government still holds the ultimate control" – Lord Kerslake on devolution

"Taken with a proper, place-based industrial strategy and new investment in transport and other infrastructure, this could at least lead to a reversing of the increasing geographic imbalance in this country."

"At loggerheads"

Kerslake's review, however, stops short of one of the more radical steps recommended by some Whitehall-watchers, namely the formal breakup of the Treasury into separate finance, budgetary and economics ministries in a bid to dilute its power.

Stian Westlake of the think tank Nesta last year warned that the Treasury's combined role "entrenches" its hold on the rest of Whitehall, and leads to a "lopsided focus on spending cuts" and encourages short term "policy wheezes".

But, speaking at the report launch, Kerslake said that while a number of the review's contributors had "strongly argued" for such an approach, the panel had ultimately come down against a major restructuring of Whitehall, in part because of the potential for creating fresh turf wars between the new organisations.

"If the permanent secretary of the Treasury is to be the chief financial officer of government, then the department needs to be resourced accordingly" – Lord Kerslake

"Although the economic and finance functions are in separate departments in many other countries, including Germany and Ireland, we felt on balance that the disruptive effects would outweigh the benefits," he said.

"There's also a risk in creating two departments that are permanently at loggerheads with each other. However, this conclusion was subject to two crucial caveats.

"Firstly, that the Treasury sticks to its two core tasks, and secondly that the two disciplines of economic and financial management are given equal weighting. If the permanent secretary of the Treasury is to be the chief financial officer of government, then the department needs to be resourced accordingly."

Kerslake's review does, however, call for the creation of a "new, high powered" strategy and delivery unit in the Cabinet Office, to try and improve the way the centre of government deals with "longer-term strategic planning", policy coordination, and tracking the performance of departments.

While the former head of the civil service acknowledged that there were risks in empowering the Cabinet Office at the expense of the Treasury, he said the "lack of a clear, well-resourced, capable strategic function in government" was "such a gap" in the current policymaking set-up.

Kerslake said: "I'd never realised just how fragmented and short-term government was until I went into it, I have to say. There is literally nothing that happens that deals with the cross-cutting issues."

Kerslake said he believed David Cameron had made "a mistake" in disbanding Labour's Downing Street Delivery Unit in one of his first acts as prime minister, and argued that the contentious passage of former health secretary Andrew Lansley's major reorganisation of the NHS had been the result of the lack of any "strong strategic and performance function" in Whitehall at the time.

"Can you conceive of the Lansley reforms going through if you'd had a strategic centre that challenged some of what was being done there?," Kerslake asked. "I just do not think it would have happened. And just look at the grief it's caused."

"Distinct perspective"

The ex-civil service head – who, since leaving Whitehall has been outspoken on a number of issues including civil service resourcing for Brexit and government policy on social housing – meanwhile used the report launch to try and pre-empt claims that carrying out a review for Labour was a step too far for a former head of a civil service which prizes its impartiality.

Kerslake pointed out that he had been "outside the civil service for most of my career, then in it, and now out again", arguing that this gave him a "very distinct perspective" on the way the Treasury operates.

"As one civil servant put it to me recently, 'you spoke truth unto power when you were inside government, and now you're doing the same on the outside'," he said.

"Having read the review, it's for others of course, including John [McDonnell] who commissioned it, to consider its results. Whether they agree with all or indeed none of its conclusions, I hope they will see it as a useful contribution to an important debate."

9076 17 Kerslake Review of the Treasury Final v2 by CivilServiceWorld on Scribd

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