Cancelling the Treasury is an appealing idea, but might cause more problems than it solves
A plan to break up the Treasury is one of the few serious policy ideas to emerge from the Conservative Party leadership election. If only it were that simple...
Kemi Badenoch has announced that, if she wins the Conservative Party leadership — a prospect we should probably start taking fairly seriously — she will break up Her Majesty’s Treasury. The Treasury has long doubled-up as a finance and economics ministry. In Badenoch’s plan, the ‘finance’ bit (i.e. managing the public finances) would stay with the Treasury, but the ‘economics’ bit would move to 10 Downing Street as a new Office for Economic Growth.
It is incredibly unlikely that, as Prime Minister, Badenoch would follow through with this plan. As I note below, it has to be seen in the context of the leadership contest, and should not be taken at face value. This does not mean we should not take the idea seriously. However, while breaking up Whitehall’s most powerful and (small-c) conservative department will appeal to anyone interested in transforming the British economy, there are more limitations to this policy than it might first appear.
History
It is perhaps inevitable that a department as powerful as the Treasury attracts calls for its reform, or even abolition, especially given that it is something of an outlier internationally — few countries combine such a vast range of fiscal and economic policy powers in a single department.
Challenging the Treasury in this regard has a long history. Labour Prime Minister Harold Wilson sought to create a rival department to the Treasury to oversee economic policy within Whitehall: the Department of Economic Affairs was established in 1964, but saw its powers reabsorbed into the Treasury before Wilson left office in 1970. There had also been several attempts in the late 1940s and early 1950s to establish a ministry of economic affairs within the Cabinet Office, but all were short-lived.
There were of course several departments in Whitehall with economic policy functions in the postwar era, but all were relatively junior departments with narrow remits. Many of these functions were brought together as the Department of Trade and Industry (DTI) in 1970 under a Conservative government, but the department was split into three main pieces when Wilson returned as Prime Minister in 1974. (Arguably, Wilson had not intended to weaken the DTI in favour of the Treasury — he had instead wanted to locate economic policy powers in the new Department of Industry — but the centrifugal power of the Treasury could not be resisted.)
New Labour tinkered with the junior economic policy departments constantly, but under Gordon Brown as Chancellor, the Treasury itself increased its power over large parts of domestic policy and taxation (Tony Blair had flirted with stripping the Treasury of some of its powers — an idea borne of his rivalry with Brown as much as any concern about the Treasury itself). George Osborne accepted Brown’s bequest zestfully when becoming Chancellor in 2010, but a direct challenge to the Treasury’s authority came in 2016 when Theresa May became Prime Minister.
May added responsibility for energy policy and industrial strategy (the first time the latter term had appeared in Whitehall nomenclature) to what was then the Department for Business, Innovation and Skills (BIS), to create the Department for Business, Energy and Industrial Strategy (BEIS). BEIS still exists, but its challenge to the Treasury arguably lasted for less time than May did as Prime Minister, as the Treasury (under Philip Hammond) offered limited support to the new industrial strategy agenda established in 2017.
The end
In recent years, there have been several proposals from people with experience of working for or with the Treasury for major reform on the department. In 2014, Giles Wilkes and Stian Westlake published The End of the Treasury, which argued some of the Treasury’s operating norms were responsible for ineffective governance across Whitehall:
1) Government-by-accountant. Powerful short-term budgetary control manifests itself in distortionary 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.
2) 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, where a long-term approach to policy-making would generally be more productive.
3) Over-centralisation. 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 decentrralisation of power, either geographically or beyond central government.
It is interesting that Badenoch suggests centring economic policy around the Prime Minister’s office, rather than empowering a junior economic policy department. Westlake (now chief executive of the Royal Statistical Society) has written approvingly of the plan in right-wing magazine The Spectator, but the Wilkes/Westlake proposal would have involved instead moving budgetary rather than economic powers to Downing Street, with BIS then becoming ‘a genuine department of growth’.
Bob Kerslake (former head of the UK civil service) conducted a review of the Treasury in 2017, on behalf of the Labour Party. Kerslake was not quite as scathing of the department as Wilkes and Westlake, but expressed dismay at the Treasury’s recent performance, especially in terms of financial regulation, tax policy and preparing for Brexit. Kerslake ultimately did not recommend breaking up the Treasury, on the basis that this would be unnecessarily disruptive, but he insisted that the Treasury returned to its core function of macroeconomic supervision and managing the public finances.
Silver lining
One of the dilemmas associated with reforming the Treasury is that, while the department arguably uses its centrifugal power to restrict the radicalism (or costs) of policies that might be pursued by other departments, the particular set of levers it controls could be useful for the proponents of radical change in UK economic policy.
As such, in 2017, the Industrial Strategy Commission (which I served on alongside several other former Treasury officials and advisers) concluded that it was unlikely that a rival department could ever shift the centre of gravity in UK economic policy-making.
Accordingly, if the government wanted to develop and embed a genuinely transformative industrial strategy, it should be managed from the Treasury itself, rather than BEIS. But it would be a very different Treasury. The department would take on a co-ordinating role, using its power to secure buy-in across Whitehall, but policy objectives would be devised by representatives from across government.
Crucially, local and regional authorities would be central to this process. Interestingly, another leadership candidate, Penny Mordaunt, has previously suggested ‘decentralising’ some of the Treasury’s functions. Bringing more local leaders into national government is one way of achieving this.
The view
There are of course limits to the extent to which redrawing the departmental map of Whitehall will lead to radical economic policy change. Challenging the Treasury is probably pointless unless ‘the Treasury view’ is also challenged.
The Treasury view is usually understood as a commitment to:
balanced budgets, because deficit spending creates fiscal risks, and displaces or ‘crowds out’ private investment; and
sound money, which translates to a belief in maintaining a strong currency and controlling inflation.
(It is debateable whether we should include low taxation in this list. The Treasury favours lower taxes, but is cautious where tax cuts would increase budget deficits in an unsustainable manner.)
Yet the Treasury and the Treasury view are not synonymous. This is partly because it is too simplistic to assume that the Treasury is rigidly attached to any particular set of beliefs — it has evolved over time, and can do so again (as I argued in a 2016 paper with Colin Hay, Tom Hunt, Andrew Gamble and Anthony Payne).
But it is also partly because the Treasury view is generally upheld across Whitehall. The notion that the Treasury controls other departments with menace allows for a colourful characterisation of Whitehall processes, but in practice the intellectual divide between the Treasury and the rest is really not that deep (not least because most senior civil servants serve apprenticeships at the Treasury at some point in their career).
Politicians
There is a danger also that debates about the Treasury remain apolitical and technocratic in nature; i.e. if we change how policy-making processes work, we might get different policy outcomes. In practice, the Treasury is a highly political department.
It is headed by the country’s second most powerful politician — generally someone with a sizeable support base within the governing party, and ambitions to become Prime Minister. It also has a unique relationship with Parliament, typified by set-piece ‘fiscal events’ such as the Budget. We might sometimes assume the Treasury has an unchanging set of policy prescriptions, but many of its most important decisions are made quickly, under significant logistical and political pressure, with attention to the political consequences as much as the fiscal or economic.
The point here is that, if we want to change UK economic policy, we should probably think a little less about the structure of policy-making processes, and a little more about the politicians we allow to take control of the Treasury’s significant powers.
This perhaps helps us to understand Badenoch’s rather sudden interest in breaking up the Treasury. In the context of the leadership contest, it can probably be seen as a subtle dig at Rishi Sunak, who vacated the role of Chancellor very recently. Of all the remaining candidates, Sunak clearly embodies most closely the Treasury view (exemplified by his caution, despite his own personal preferences, in proposing tax cuts that he knows the Treasury will resist during a period of high inflation).
It would not be the first time that the Treasury’s powers have been altered as a result of electioneering. George Osborne gave the Treasury’s forecasting function to the Office for Budget Responsibility (OBR) in 2010, but only after having set up a ‘shadow’ OBR in opposition in 2009, in order to highlight the Labour government’s apparent imprudence.
Kemi Badenoch has made the argument for a slimmer state central to her leadership campaign. Despite this, she wants government to police the toilet arrangements of private organisations, and to discourage unhappy couples from separating.
And she also, it now appears, wants to instill a more interventionist economic policy stance at the heart of Whitehall. Badenoch has served previously as Exchequer Secretary at the Treasury, responsible for recent policy initiatives such as the ‘plan for growth’ — which killed off May’s industrial strategy, once and for all — as well as issues around local economic development.
If we were to take Badenoch’s plan at face value, there really is no reason to move these functions from the Treasury to the Prime Minister’s office unless you want economic policy to be liberated from the shackles of ‘Treasury brain’. Yet there is nothing in Badenoch’s record to suggest that the plan is motivated by such ambitions.
I would argue that reforming the Treasury is just as likely to succeed as removing powers from the Treasury, especially if the removal process leaves unchallenged the ideological preferences the Treasury tends to uphold.
If the next Prime Minister really wants to shake up Whitehall, they should use the power of their office to embed cross-cutting missions across government. Addressing poverty, for instance, requires the dedication of all parts of government, and leadership from the very top. We could say the same about climate change, or preventative healthcare.
In terms of carving up the Treasury, I am certainly persuadable. But it is not a panacea. We should focus on enabling all parts of government, however configured, to work together to transform our society and the economy.