A new Treasury view

There has always been a strand in Labour thinking that has had it in for the Treasury.

The argument goes that all that is holding a victorious Labour government back from transforming the British economy into a fair, growth-orientated, balanced place is the dead hand of Treasury theology. Rooted in an obsession with fiscal numbers and with orthodox neoclassical economics, it simply will not allow bold, progressive plans to flourish.

This set of fears now provokes intense worries that ‘Milibandism’ will be stillborn unless the Treasury is reined in. Surely they will resist and thwart heroic attempts to alter the way capitalism works – to bring finance to heel, to end short termism, to use the power of the state to grow the economy?

Some go even further in their concerns about the Treasury. Rather than thinking that you need a strong Treasury to help navigate a period when the fiscal situation will still be tough – the view recently espoused by shadow chief secretary to the Treasury, Chris Leslie – they think that the need to adhere to continued fiscal consolidation only exists because of the power of the Treasury mind set and ideology.

Back in the day, this was the sort of thinking that led to the setting up of the Department of Economic Affairs in the 1960s by Harold Wilson. Under the leadership of George Brown, the DEA aimed to curb the power of the Treasury and focus the government on a more hands-on, growth orientated strategy. And in the run up to the election of 1997, there were those arguing for this sort of approach to be reintroduced.

There is indeed a legitimate case for worrying about the Treasury’s commitment to growth. I worked in the Treasury as a civil service economist in the mid to late 1980s and had worries that the need for spending cuts started to trump everything. My concerns on this point did lead me to think that if Labour won in 1997 we might want to split the Treasury into two, creating a system much more like that which exists in the rest of the world. In other words, you would have a finance department to look after the spending and revenue side of the government’s business, just as any company or charity would have a treasurer to check the cash flow was ok and the reserves not too low. But this would be separate from economic policy decision making, with an economic department to look  after micro-economic policy as well as to influence fiscal decision making from a ‘growth’ rather than a deficit and debt perspective.

In the event, the period of Gordon Brown as chancellor was rather interesting in the way the Treasury worked. In fact, responding to the wishes of its political masters, the Treasury did become much more focused on growth, productivity and even – in public services and tax terms – on fairness. So this shows there is no inevitability about the way the Treasury works.

However, I think an almost opposite problem emerged during those years. The Treasury became a bit too focused on its growth objectives and officials eased up a bit on their intense concentration on the value for money of public spending and their eagle eye on potential future risks to the economy. While spending was kept pretty firmly under control during this period and the surge in debt and deficits post 2008 was a product of an externally driven financial crash, it is certainly the case that the Treasury did lose sight of some of these issues and of value for money per se.

This illustrates how difficult it is to get the balance within the Treasury right. Separating the Treasury from the economic department does not seem therefore to be the key issue. A better focus is on how to have an economic policy carried out by all departments; and how to have a Treasury that is tough on spend and tax but does this in a sensible way likely to lead to more progressive outcomes, especially as we move towards a more devolved approach to the governance of Britain.

Here are some ideas about how to organise things so we can push forward a progressive set of economic policies in government.

First, we need a way to get collective buy-in across Whitehall to a progressive economic policy and then to ensure it is carried out. What tended to happen in my experience, both as a civil servant in the 1980s and as a special adviser in the Labour government, was that there were a number of departments trying to run rather different micro-economic policies. So the Department for Trade and Industry (now BIS) had a particular view of the world – and had some tools to operationalise them around regulation, company law and the like. So too did the Department for Communities and Local Government, via powers over local councils and housing, and in their own way so did health, environment, education and a host of others. No wonder it felt more like chaos than consistency at times.

To add to this, discussion around the macro and general economic policy of the government of the day was notable by its absence which meant there was no real emotional connection with the overall direction of the government nor attempts by departments to adapt their policies to the big picture agenda. What was difficult therefore was to effectively combine all the players together.

In the absence of this overriding idea and of the machinery necessary to make it happen, there was a dangerous lacuna. While these issues were all present during the New Labour years, interestingly the same problems manifested themselves to another, non Labour, though interventionist, politician. A read of Michael Heseltine’s recent fascinating tome – No Stone Unturned – shows a frustration from when he was deputy prime minister, in getting his competitiveness agenda followed through across Whitehall and a search for better ways.

The one thing that worked for Labour in my time was the National Economic Council (NEC) – and indeed Hezza copied some of this in his report by proposing a National Growth Council. The NEC was a high-level cabinet committee, chaired by the prime minister, which gave a clarity, direction and sense of urgency to economic policy making and implementation after the economic crash. Although the crisis feel of the times was crucial to its effectiveness, it would be well worth seeing if something similar might work in the future.

Second, we need to improve the way the Treasury itself works. Creating a new ‘peace time’ version of the NEC should not imply a weakening of the need for the Treasury to really ask tough questions. And a Labour government needs that more than most. Our instinct is to act, to do things, to spend and we need always to be quizzed on what evidence we have for this next bit of action.

It is easy, for instance, to say the infrastructure will not get built without some government guarantees, or agree with Mariana Mazzucato that government support often lies behind innovation and new discoveries. But it is much harder to act on all this in ways that are sensible and cost effective.

So rather than weakening the Treasury, instead we should want to increase its ability to direct resources at the areas that are most likely to produce a strong and fair economy and society. As the recent Fabian Society Commission on Future Spending Choices which I was a member of concluded, this means altering procedures and rules to encourage more long-term thinking and investment into early action and prevention areas; more use of modernised public service agreement (PSA) approaches to help keep the focus on outcomes not spend and to break down departmental silos; and more openness and accountability to the public and parliament.

Finally, given the clear and welcome statements by the Labour leadership – in particular Andrew Adonis’s recent growth review – that if elected it intends to devolve the control of expenditure much more, especially to the city regions, the Treasury needs to refresh and rethink its role.

Many in the Treasury have always realised that letting city regions control much of the public expenditure that goes on in their areas should lead to much more efficiency. Indeed the last government’s Total Place programmes were starting to suggest significant financial savings as well as better services for the public. The Treasury in a Labour administration needs to ensure that this happens, to encourage best practice and sensible accountability, and to keep an eye on it, as not everything will go right. But it must do this without demanding local areas all have to do things the same as part of some centrally dictated plan. That is quite a cultural change.

For a successful Labour government, the Treasury will always be crucial. Carving it up or weakening it are populist agendas that in the end do not really serve our needs. But changes to the way economic policy is developed, delivered and monitored are all possible and necessary. That is the agenda to focus on.