When we think of things that need fixing in the British state, it’s natural to think of institutions that are struggling: from the government’s powerlessness in the face of the rocketing cost of living, to the perennial crises of the NHS, to revelations of rule-breaking at No 10. But one powerful way to fix many of the UK’s problems is the radical reform of one of our most effective institutions: Her Majesty’s Treasury.
The Treasury is a remarkable organisation. It sits at the heart of the British state and employs the brightest young officials. Former Treasury staff occupy top roles in most other government departments, and provide half the current crop of permanent secretaries. Retired ministers, in moments of candour, will tell you that the Treasury is the one part of Whitehall that lives up to RA Butler’s description of a “Rolls-Royce” civil service. It is also unusual, compared with other finance ministries around the world, in that it is three things at once: a budgetary ministry, controlling government expenditure; a financial ministry, responsible for public credit and taxation; and an economics ministry, with a brief to stimulate economic growth. In France, Germany, the US, Japan, Canada and Australia these roles are all, in differing ways, separated out. The Treasury is also central to the political news cycle. Its semi-annual “fiscal events” – budgets, statements and spending reviews – dominate the government’s agenda for weeks at a time, and set the media agenda for days.
But this accumulation of power and talent comes at a high cost. It fundamentally shapes the mindset and incentives of the British state, changing incentives for the worse, no matter which party happens to be in charge.
The first problem it causes is what we might call “government by accountant”. Britain’s economic history is littered with businesses such as ICI and GEC that were taken over by bean-counters and financiers, leading to a short-term cash-focused mindset, underinvestment, decline and insolvency. The Treasury’s remit to protect Britain’s public credit and mind the purse strings breeds a similar myopia in the British state, as public investment is routinely diverted to meet short-term pressures. It helps explain why the NHS invests less in equipment and IT than any other European health system. It is why defence procurement, which inherently involves occasional, large expenditures, gets inefficiently dragged out over years to create smooth spending profiles. It is why the national tutoring programme was whittled down by 90% to the point of ineffectiveness. The story is still told of how in the 1980s, Treasury officials argued that the new M25 only needed to be two lanes wide.
This short-termist attitude combined with the political theatre of big fiscal events explains the Treasury’s second problem: an addiction to policy wheezes, to be pulled like rabbits from the chancellor’s hat on budget day to wow the media. Occasionally, these ill-considered surprises lead to public blow-ups, such as George Osborne’s infamous “pasty tax” or Philip Hammond’s war on White Van Man. But the real damage is more deeply seated. It makes policymaking more volatile and less consultative, so it is harder to make the kind of long-term partnerships necessary for effective industrial strategy, serious public service reform or devolution to cities and towns. And it disempowers other government departments, putting civil servants who are often experts in their field at the mercy of brilliant but inexperienced young Treasury officials.
All of this is underpinned by the Treasury’s historic pessimism about the government’s ability to improve the UK’s economic growth. The accountant mindset and the focus on firefighting and in-year expenditure goes hand in hand with a house view that the UK’s sluggish growth rate is a fact of nature, and the most the government can do is not make things worse. This is an understandable attitude for a budgetary or a finance ministry – all good accountants are mild pessimists – but not for a department responsible for the stewardship of the economy.
The first step to addressing these problems is to recognise that they are not the result of a failing institution or of lazy or incompetent officials. On the contrary, the Treasury is highly effective, staffed by extremely talented and committed officials. The root cause is the structure of the organisation, and the incentives and culture that it fosters. To fix it, we must unwind the unique accumulation of powers that makes the Treasury so unusual and so mighty. One way to do this would be by dividing it into three parts. Its budgetary function, the so-called “spending teams”, would be beefed up with more subject-matter experts, and brought together into a department along the lines of the Office of Management and Budget in the US. This would be placed in the Cabinet Office, giving future prime ministers significantly more direct oversight and control of public services. (A side benefit would be to professionalise and reform the strange Renaissance court that is 10 Downing Street – something that feels especially urgent in the light of Partygate.)
The Treasury’s economic role should be merged with the business department into a big new Department for Economic Growth, led by a deputy prime minister or first secretary of state, with a mission to address the UK’s dismal rate of productivity growth over the past 15 years. (The department could also take responsibility for digital technology, which has sat awkwardly in the culture department since a 2018 land-grab by Matt Hancock.) And the Treasury’s financial regulation, borrowing and tax functions should be housed in a useful, modest finance department, like that of Australia or France.
This plan is not entirely new. Indeed, it has been entertained by several of the most ambitious reformers of the UK government. Harold Wilson set up the Department of Economic Affairs to be a growth-oriented rival to the Treasury – but the experiment was brought down by an alcoholic secretary of state and a run on the pound. Tony Blair and Jonathan Powell considered it, but in the context of the Blair-Brown wars decided it was a bridge too far. I am told it was on Dominic Cummings’s agenda before he resigned.
We should not pretend that the politics of making the change are easy: as Blair found, it is hard to get rid of an incumbent chancellor. And because the chancellorship is such a desirable office, it is a useful piece of patronage for a prime minister to be able to promise to an ally. But right now, the chancellor is unusually embattled, and it is not clear that the prime minister owes any single politician a big favour, or that his promises of patronage would be trusted in any case. Equally, if Keir Starmer wins the 2024 general election, he may welcome an opportunity to signal a radical break with the past, and to commit to reform and economic growth.
Whoever is in power, the next few years look like an unusually propitious opportunity to make this change, and to repurpose the talent and energy within the Treasury in Britain’s long-term interests.
• Stian Westlake is chief executive of the Royal Statistical Society. He is the co-author with Jonathan Haskel of Restarting the Future: How to Fix the Intangible Economy.
Further reading
From Third World to First:Singapore and the Asian Economic Boom by Lee Kuan Yew (Harper Business, £12)
Markets, State, and People: Economics for Public Policy by Diane Coyle (Princeton £32)
Inadequate Equilibria by Eliezer Yudkowsky (Machine Intelligence, £4.99)
