Treasury rules?

The backdrop to controversies about the Prime Minister's Office and the role of the Treasury are rooted in the history of Whitehall
"If a chancellor is so minded – as Gordon Brown was – he or she can more or less cut the PM out of spending discussions." Photo: Jeff Morgan 16/Alamy Stock Photo

By Colin Talbot

08 Feb 2022

Two separate debates about the centre of government have come to the fore, again, in the past couple of weeks.

The first is the role of the prime minister’s operation in Downing Street and its relationship to the Cabinet Office. This has been dramatically highlighted by the "Partygate" scandals; the Sue Gray report into them; the resignations of six senior officials; and the decision to create an "Office of the Prime Minister" incorporating parts of the Cabinet Office.

The second is an emerging debate about the role of HM Treasury in not just public expenditure but also in domestic policymaking. Media reports yesterday suggested that the Treasury had blocked the launch of a recovery plan for NHS England. Details were unclear, but the ostensible reason behind HMT's concerns were about how the £10bn was going to be spent and what targets NHSE should be set.

The backdrop to both of these controversies is rooted in the history of Whitehall. Debates about the Prime Minister's Office go back decades and concerns about an over-powerful Treasury even further.

Conflicts between the PM and chancellor of the day are often drawn in terms of personalities and politics. Of course, it can be true that personalities matter. The long-drawn-out struggles between Tony Blair and Gordon Brown between 1997 and 2007 are an epic example – as were the clashes between Mrs Thatcher and her chancellors.

When the Treasury emerged as a major institution after the reign of Charles II, it developed a direct relationship with parliament over the authorisation of "getting and spending". This gives a powerful set of levers, especially as parliament is actually constrained in how far it can influence what the Treasury proposes.

"If a chancellor is so minded – as Gordon Brown was – he or she can more or less cut the prime minister out of these discussions"

The House of Commons Standing Orders, section 48, says that only “the Crown” – in reality the chancellor – can propose to spend public money. It is also usually taken to mean that only the chancellor can propose to raise or introduce new taxes. Unlike, say, the US Congress, parliament has very little say on what happens in budgets and is confronted with a more-or-less take or leave choice.

This has made chancellors of the exchequer into immensely powerful figures.

But there is a second set of powerful levers in the hands of Treasury. The details of public finance for each "spending ministry" are usually negotiated bilaterally with HMT. If a chancellor is so minded – as Gordon Brown was – he or she can more or less cut the prime minister out of these discussions.  The chancellor is technically second lord of the Treasury, but this arrangement makes the PM's title of first lord of the Treasury into almost a fiction.

The relationship between HMT and spending ministries is also affected by one of the peculiarities of the Whitehall system, illustrated by the phrase “the Whitehall village”. Two American academics who studied Whitehall in the early 1970s, Hugh Heclo and Aaron Wildavsky, noted the peculiar "village-like" nature of the top of the civil service.

Top mandarins often moved jobs" between departments and HMT. As a result, they often moved from "batting for the spending department to bowling for the Treasury", and vice versa. (Cricketing metaphors are very popular in Whitehall). This created a "community" in which compromise and cooperation coexist with "playing the game" during spending rounds.

Spending decisions were always, by definition, implied policy decisions. HMT has thus always had an interest not just in how much was being spent, but on what and to what purpose.

"Top mandarins often moved and between departments and HMT. This created a 'community' in which compromise and cooperation coexist with 'playing the game' during spending rounds"

This was given a big boost during the New Labour government by the introduction of medium-term spending reviews and, crucially, public service agreements, which detailed the aims and objectives of government departments for a three-year period. This system attempted to tie together funding and clear, measurable policy targets. But it meant HMT were not just involved in implied policymaking – setting targets involved direct bargaining with spending departments over policy objectives.

Whilst PSAs were abolished by the incoming coalition government in 2010, spending reviews continued and PSAs were replaced with other targets. And we can see the same system in operation today – the dispute between the Treasury and the Department of Health and Social Care over what the extra £10bn for NHS is for and how its effectiveness will be measured.

Against this system there have been various attempts by prime ministers to "rebalance" the centre of Whitehall. One was Harold Wilson’s creation of the Department of Economic Affairs in 1964 to weaken the Treasury by splitting its economic and financial roles. It lasted five years.

The next attempt was the creation of the Central Policy Review Staff in 1971 by Edward Heath. This was meant to make government more strategic, and shift power back towards the PM and cabinet. It lasted 12 years but was generally seen as ineffective and was closed down by Margaret Thatcher in 1983.

Tony Blair tried again with the creation of bodies like the Strategy Unit and the Delivery Unit (both in No.10). Both had some success, but HMT remained firmly in control of the Spending Review and Public Service Agreements processes throughout.

So in summary, all attempts to weaken the role of the Treasury over the past 50 years or more have largely failed. Indeed, HMT and the occupant of No.11 Downing St are arguably more powerful now, especially with a weakened prime minister, than ever. But this is not just about personalities – it is about the whole structure of the central British state. Fiddling around with a few name plates won’t change that.

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