The political economics ministry: Davis and Davies on the Treasury
Few commentators have adequately captured the nature of the Treasury's influence over UK economic policy, but new books by Aeron Davis and Howard Davies get us a lot closer
By remarkable coincidence, I have been reading two excellent new books about HM Treasury, while Liz Truss and Kwasi Kwarteng’s not-a-budget plunged the UK into ever-deeper economic turmoil.
It would be easy to conclude that recent shenanigans indicate a weakening of Treasury influence, especially given the budget was preceded by the sacking of Permanent Secretary, Tom Scholar. The Treasury, so the argument goes, would never normally acquiesce with a package full of unfunded tax cuts which was always likely to increase the deficit, inflation, and the government’s borrowing costs, as well as trigger a currency crisis — and all without any expectation of a meaningful upside for growth.
Really? Should we be so quick to let the Treasury off the hook? And if it is possible to acquit the Treasury in this manner, what does it tell us about the nature of the Treasury’s influence? Bankruptcy, Bubbles and Bailouts: The Inside History of the Treasury Since 1976, by Aeron Davis, and The Chancellors: Steering the British Economy in Crisis Times, by Howard Davies, provide plenty of the answers. (Davis’s book will be available later this month but he recently published an essay in The Guardian based on its key arguments.)
It’s the politics, stupid
What emerges strongly from both books is an image of the Treasury as a highly political organisation. This should be rather obvious, although the prevailing view of the Treasury is that it is often in a position to over-rule or at least constrain elected ministers (across Whitehall departments), with officials embodying an enduring ‘Treasury view’ which persists irrespective of the party in power.
Even taking this perspective at face value, it would be necessary to see the Treasury view itself as a political construct. As Davis explains, the Treasury prides itself on being the source of economics expertise in Whitehall. But what counts as knowledge about ‘the economy’, and how this knowledge should be acquired, is obviously politically contentious. Indeed, Davis’s book details how the Treasury’s changing role in steering economic policy has often played out through internal debates about what good economics looks like, with politicians rather than economists as the protagonists.
And at a more basic level, the Treasury’s relationship with other Whitehall departments — whether we view its position as based on its economics expertise, its role in controlling public spending, or a bit of both — obviously brings the department into political conflicts. Davies’s book (as well as earlier insider accounts, such as David Lipsey’s The Secret Treasury) suggests that ministers come to greatly appreciate the political nous of their ostensibly apolitical civil servants in this regard.
The inside view
Most importantly, elected ministers have far more power to shape the Treasury than the conventional portrait suggests. That Chancellors of the Exchequer matter is of course the premise of Howard Davies’s book.
The book is a sort-of insider account. Davies worked at the Treasury as an adviser to Nigel Lawson, but has also held very senior roles at the Bank of England and the Financial Services Authority, as well as the Confederation of British Industry, various financial institutions, and the London School of Economics. Davies’s own recollection of events, supplemented by interviews with many of the key players, is a source of great insight, and there are impressively detailed chapters on tax policy and financial regulation, for instance, which add to our understanding of how these policy areas have developed.
For Davies, implicitly, economic policy emerges from a process of negotiation between what ministers want to do, and what Treasury officials think they should do. This is not as simple as politics versus economics. Often, ministers have views on economics which the Treasury advises against enacting, based on political considerations. Moreover, we find the Treasury as the guardian of the political foundations of the UK economy, just as much as it is a bulwark against the political agendas of elected ministers.
Davies’s chapter on the Scottish independence referendum in 2014 is, frankly, dynamite. We find the Treasury completely at ease with a politicisation of its position against the prospect of independence, by for example publishing advice to ministers which is usually private. As Davies comments:
Macpherson [then Permanent Secretary] and Osborne [then Chancellor] are well aware of the risks they ran. Both are unrepentant. Macpherson thought Westminster did not take the threat posed by the referendum seriously enough, and that it was right for the Treasury to take the lead as it did. The Cabinet Office had opted out.
Some commentators accused the Treasury of abandoning its commitment to evidence-based policy in order to save the union at all costs. What Nick Macpherson told Davies might explain why:
I published that advice because I regarded it as my duty. The British state’s position was being impugned. Demonstrating that the political and official state were completely aligned would further strengthen the credibility of the government’s position.
Similarly, in 2015, when still in post, Macpherson said in a speech that:
Her Majesty’s Treasury is by its nature a unionist institution. The clue lies in its name.
Clearly, Macpherson could not have been so bold without ministers’ consent — and had Scotland voted for independence, I am confident he would have implemented the decision faithfully. But the fact that leading Treasury figures could be so open about what it is essentially a political judgement is rather revealing.
Similarly, both books contain illuminating accounts of the Treasury’s commitment to internationalism, which has manifest in recent years as a strong commitment to European Union membership. (Davies implies in fact that the Treasury’s commitment to unionism is a corollary of its internationalism — because independence would essentially be a trade barrier.) This is a very good example of how the Treasury does not always get its own way.
Singularity
Aeron Davis is not an insider, but he has managed over many years to gain similar levels of access, with his book drawing upon an extensive and remarkably frank set of conversations with former Treasury ministers and officials.
With a focus on the bigger picture, what emerges in Bankruptcy, Bubbles and Bailouts is a slightly different view of life at the Treasury. Clearly, for Davis, it is again too simplistic to view UK economic policy making in terms of politics versus economics, or ministers versus mandarins.
The Treasury is presented as rather more malleable than conventional accounts suggest, with incoming governments often determined and able to reshape the department. But in doing so, ministers tend to operate in alliance with economists, business executives and Whitehall figures who are firmly embedded in a Treasury-centred elite economic policy community — and indeed in some cases are persuaded to act upon the Treasury by officials already within the Treasury. In other words, there has never been a singular Treasury view, or more precisely a singular view of what the Treasury is really for.
Truss and Kwarteng’s brazen marginalisation of the Treasury, typified by Scholar’s dismissal, is somewhat unusual in that it represents an attack on a generation of Treasury officials groomed by Truss and Kwarteng’s own political party, spurred on by Tufton Street/Vote Leave fanatics who would previously have been considered to be on the outer fringe of the policy elite. Yet it is actually quite similar to previous episodes of knife-wielding at the Treasury, detailed by Davies, which have hitherto been obscured by the myth of Treasury omnipotence.
The blame game
Whereas Davies’s book takes an episodic approach, Davis’s book takes a more developmental approach, with the UK’s recent economic history — essentially, its continuing economic decline — mapped through the lens of the Treasury.
One of Davis’s counter-intuitive, but nevertheless compelling, arguments in this regard is that the Treasury has actually surrendered its economic expertise, at least in terms of macroeconomics. It has instead beefed up its microeconomic expertise, but only superficially. Microeconomic leavers generally belong to other departments — and the relationship between these departments and the Treasury is largely framed by the latter’s responsibility for public spending. As Davis concludes:
Whether intended or not, the Treasury has become more a finance than an economics department. Its actions have ensured that is has both eradicated rival department sources of economic thinking and analysis, while also reducing its own capabilities and analytical power.
Insofar as there does exist an economic agenda at the heart of Treasury thinking, it is one of market primacy. Davis quotes Scholar as saying:
I would say there is an enduring belief in the power of markets and market conditions. That’s not to say we’re blind to the possibility of market failure but the belief that very often that’s the best way. And there is an attachment to free trade and reducing barriers to trade and economic activity.
Similarly, Macpherson told Davis that:
The Treasury historically has tended to prefer to leave the allocation of resources to the market rather than to central planning… the Treasury knows that it doesn’t know best, so better to leave decisions to markets. And there’s quite a strong antipathy towards trying to rig markets.
The valorisation of ‘the market’ and ‘competition’ was certainly a feature of my own relatively brief stint as a Treasury civil servant, especially in terms of interactions with the most senior officials.
The thing is, however, market primacy is a rather high-level and rudimentary philosophy. And it can be over-ridden rather easily, both by events, and by Chancellors. Davis extracted a stunning statement from George Osborne in this regard:
At the heart of almost all domestic political decisions are basic questions of who are you taking money from and who are you giving money to. That’s not really economics; it actually goes to the heart of how you organise a society… So, in the end I always thought of them more as sort of social judgements rather than economic judgements.
This admission will be music to the ears of political and post-Keynesian economists: distributional considerations trump aggregate economic performance… we were right all along! The question for the Treasury, however, is whether it has the authority to withstand — or even advise against — the policies of a Chancellor such as Osborne, determined to use Treasury powers and resources to, for instance, inflate the housing market in a way that may support the government’s political objectives, but undermines economic performance over the long-term.
The Treasury did evidently seek to resist Truss and Kwarteng’s reckless and regressive policy agenda — and Scholar has paid the price. But was its resistance founded upon solid macroeconomic expertise, to counter the ideas ministers were being fed by the Tufton Street mob, in addition to concerns about the immediate fiscal consequences? I suspect not. (Full disclosure: I used to work for a Tufton Street think-tank too, but it’s not what you think!)
Whether the Treasury is any good at what it does do is a theme which runs implicitly throughout the two books, with both adopting a focus on the Treasury’s response to crises. They both note the high quality and adaptability of Treasury staff, particularly in terms of responding to crisis. I would strongly concur.
On the other hand, Davis accuses the Treasury of causing some of these crises too, at least partially, adding to his previous work on financialisation and the City of London’s excessive policy influence. Davies also records the department’s mistakes alongside the triumphs, as well as offering a sense of the broader institutional landscape of UK economic policy. It is worth noting Davies’s argument that the Treasury is not necessarily prepared for potential crises in advance, even if it adapts quickly when they arise (a failing of politicians as well as officials.)
In many ways though both accounts are, more or less explicitly, about the slow-burn unravelling of the UK’s economic model — and the Treasury’s efforts to paper over the cracks. By and large, the Treasury is presented as quite effective in this regard. But I would agree with Davis that it is much less good at thinking through the longer-term trajectory of economic development in the UK, and how economic policy can help to steer a path which helps to improve living standards and well-being for all.
Perhaps this should never have been the Treasury’s job. Problematically, however, it does not appear to be anybody’s job, in Whitehall or beyond, at the moment.