Freedom

Truss has repeatedly claimed the Treasury is too controlling and too conservative. She wants to continue Boris Johnson’s more permissive attitude towards public spending while setting the economic policy of the country through tax-cuts and supply-side strategies. These objectives fundamentally clash with the fiscally conservative attitudes of the Treasury, leading Truss to complain about its ‘economic managerialism’ and stunted ‘bean-counting’ all summer.

Her approach is borrowed from the economic thinkers she admires, Patrick Minford and Gerard Lyons, who blame central banks (and by extension their domestic treasuries) for the low productivity, low growth economy the Conservative Party has managed over the last twelve years. In effect, they want to wrestle some of the economic power away from these institutions and give it back to ‘free markets’ via government, and in the process transform the Treasury’s orthodoxy—its conservative approach to spending and anal obsession with government debt—towards something more expansionist and growth orientated.

This, alongside Liz Truss’ passion for Reaganite ‘freedoms’—whether that is helping to set up the secretive Freer campaign group while at the Treasury or boasting about ‘full-fat freeports’ this summer—explains in part why she is taking on the Treasury so vociferously. It’s a barrier to her economic desires, a political opponent to rally the troops against, but also a totem that offers cover for the Conservative Party’s decade-long failure in government. As Truss herself has said: ‘I do think the Treasury needs to change, and it has been a block on progress…this is partly about challenging not just the Treasury orthodoxy, but the Whitehall orthodoxy, in getting things done.’

These growing criticisms are a continuation of the Tory attacks on the civil service ‘blob’—the idea that bureaucratic institutions are fundamentally liberal, and therefore antagonistic to recent Conservative governments. But they are also mixed with personal resentment too. Over the years, Truss’ department budgets have been repeatedly cut via Treasury processes and her time as Chief Secretary to the Treasury between 2017-2019 was seen as a major demotion for her across Whitehall. No wonder that over the summer arch-rival and ex-Chancellor Rishi Sunak was blamed for most of the Government’s recent ills by Truss backers, with the abuse hurled at him and his previous department interchangeably.

Control

The thing is, though, Liz Truss isn’t wrong that the Treasury is too controlling. Any new administration would need to deal with this all-powerful department if it wanted to make significant changes to society. And a progressive Labour government would need to think about how it would shape the finance and economic body so that spending policies aren’t blunted on contact with it.

Today, nearly every single major government policy lands in front of a Treasury official for approval, whether this is approving costly spend on any significant projects, negotiating with departments during a seismic Spending Review or outlining the costs for a short-term Budget (an emergency one is expected imminently). This now-regular process, where the whole of government negotiates its long- and short-term budgets with the finance ministry, concentrates enormous amounts of power within its walls in Whitehall.

It is the contemporary source of the Treasury’s command over government: what was once strictly financial control, has overwhelmingly become policy control too. Want to spend tens of millions of pounds on tackling homelessness? It will need to be signed off by a Treasury official first. Want to expand higher education for future generations? You will need to put in a bid during the Spending Review. Every project lives or dies on the financial vine of the Treasury.

To weaken this grip, one of Truss’ plans is to scrap the independent forecasts currently needed for every budget. Usually this is the role of the Office for Budget Responsibility (OBR), who publish economic forecasts alongside any new government budgets. Instead, Truss wants to change the category of her fiscal intervention so that no one can see how bad things are predicted to get. Obviously, this cover-up isn’t a serious plan to bring about greater accountability and transparency to the Treasury.

However, there is a genuine organisational question about how specialist forecasters (and macroeconomists) have been shunned from the economic process at the Treasury recently.

Take the last two years of the pandemic as an example: every lockdown was blocked or lobbied against by the Treasury due to the projected macroeconomic impact it would incur. Their stance was so infuriating for senior officials in central government that people resorted to calling Rishi Sunak the ‘Minister for Covid,’ based on his apparent desire to support any and every policy decision that would give the virus a chance to resurge.

More disturbingly, given its lack of macroeconomic expertise, the Treasury was so successful at delaying these lockdown decisions because of a secret weapon: their economic modelling. Its model on how the UK economy functions provided the focal point for these major decisions, despite both the OBR and the Bank of England’s own expertise in this field. Both Minford and Lyons have bemoaned the Treasury’s capacity to model the economy and we should remain mindful of the fact that any large progressive spending programme would be up against the Treasury forecasters too. We should never forget that during the pandemic, due to its power and place at the centre of government, the Treasury’s model was seen as gospel even though the vast majority of experts didn’t contribute.

So what would real change look like in this instance? Mainly rebalancing these skills across the various institutions, having clear protocols for the next major financial crisis and opening up the process of spending and fiscal decision-making to longer timeframes—where Chancellors aren’t given a podium every autumn and spring to constantly reset the direction of spending in government.

Any progressive administration would also need to scrutinise the way Treasury officials assess hundreds of funding decisions a week and determine what is ‘value for money’—whether that’s to take a more long-term approach to investment (one that addresses generations of unequal spending in the UK) or to radically rewrite the Treasury rulebook to emphasise other costs and benefits of specific spending decisions.

Shockingly, top Treasury officials have confided in me that, given the lack of a clear framework, they are none the wiser on the costs and benefits of green policies despite it being an expanding area of public policy, which requires constant financial approvals. It is an alarming admission that the state doesn’t have the tools nor expertise to deliver a more sustainable future for the UK—something this new government will only make worse.

Her Majesty’s Teenagers

Truss’ other plan is to remove the head of the Treasury.

Sir Tom Scholar had been in charge since 2016 and was a lightning rod for right wing attacks on ‘the blob’, with the senior civil servant seen as the ‘walking embodiment’ of the Whitehall establishment this summer.

His swift removal has rattled the institution and dismayed many senior officials who have called it an ‘ideological purge’ against the ‘non partisan’ civil service. Theodore Agnew, previously a minister at the Treasury, responded: ‘[i]t is not surprising to hear cries of dismay at [Tom Scholar’s] dismissal from an echo chamber of former mandarins, because that is what they mostly are: a metropolitan elite with their own self-reinforcing prejudices.’

While it’s easy to remove an individual, institutional power arises from the institutions themselves, and the Treasury’s influence will be imbued by the class composition of those making the decisions at the end of the day.

What’s ‘value for money’ is patently subjective, and therefore who the officials are in the Treasury—and not just at the top—matter too. The ministry is a young (the median age is below 30 years old), small (there are under 2,000 officials),  and elite institution made up of the upper middle-classes: a quarter of them went to private school (three times the Whitehall average) and less than five percent grew up in social housing, while the national average is 25 percent. No doubt Truss’ new Chancellor Kwasi Kwarteng, who apparently likes to note down which Oxbridge college officials went to, will deem this a good thing.

Perhaps surprisingly given their age (some senior civil servants referred to it as ‘Her Majesty’s Teenagers’), these officials are some of the most conservative in the whole of Whitehall. Wired to reject any proposal or policy outright, the Treasury is the home for officials who have an inexplicable dislike for the majority of the public sector. Despite this, they are given broad portfolios across public policy and are responsible for annually approving hundreds of millions of pounds in these policy areas and negotiating with departments over billions of pounds during budgets.

The centralised nature of the finance body means a few hundred of these young Treasury advisors deploy more power than most lifelong policy experts in other departments ever will. The power and opportunities are intoxicating for many young, ambitious civil servants, and the more these Clapham-based wonks arrive at the Treasury, the more at home they feel.

It’s a vicious cycle that helps to create an institutional mindset, which sags with groupthink. I’ve received emails from Treasury officials saying ‘this project is worth millions of pounds… it’s too expensive… it’s the net tax return of a small village.’ The constant framing of ‘taxpayers’ money’ redefines government spending: it simultaneously instils Treasury officials with a falsely grand responsibility towards the public, while ensuring all financial decisions are debated under the parameters of individualised ‘household budgets’.

Truss has explicitly pushed back against this dogma, with claims of financing government debt on a ‘longer-term footing’ and has taken aim at the Treasury for ‘abacus economics’. However, her new economic chief was the head of the Taxpayers’ Alliance and regularly pushed for greater austerity, so the jury is out on how much departmental spending they intend to do. Without a drastic change to the composition and organisation of these officials, the department will continue to operate in this conservative way.

Truss’ other response to inheriting this elite conservative finance body is to bolster the economic expertise in No. 10, as a sort of counterweight. She has put in place a new Director General in the Cabinet Office with plenty of experience of the Treasury and wants No. 10 to become the ‘economic nerve centre’ dictating economic policy.

But one of the reasons why the ministry is so powerful is that it continues to spread its doctrine across the rest of government. The Treasury’s mindset can be seen at the higher echelons of many government institutions—all four of the deputy governors of the Bank of England are Treasury progeny—not just because of its powerful central influence, but because its senior leaders are parachuted into other departments to run them. Look up the unassuming Director Generals and Permanent Secretaries of Whitehall and they will have undoubtedly spent some time in HM Treasury.

For more junior officials, working in the ministry is also rocket fuel to an aspiring civil service career: they all learn the unwritten rules of controlling government while ensuring policies are designed and implemented in the Treasury way. In Whitehall at least, breaking the Treasury’s grip will require more than just leadership change.

A Breakup

The idea of dismantling the Treasury arises every few decades as various politicians bemoan the power of the institution. For instance, in 1964, the Labour Prime Minister Harold Wilson established the Department for Economic Affairs with the responsibility of long-term planning of the economy and industry, in contrast to the Treasury’s tax policies and financial management. His plan was to spark ‘creative tension’ between the Treasury and this new department, but after less than five years, multiple crises and the departure of its powerful minister, the latter was wound-up, and the Treasury went back to controlling everything.

In Robert Kerslake’s review of the Treasury (commissioned by John McDonnell in 2015), he explored the breaking up of the Treasury as a solution to the ‘almost uniquely British political phenomenon [of having] so many of the central functions of government concentrated in one department.’

In August of this year, when asked whether she was planning on breaking up the Treasury, Liz Truss answered ‘well I wouldn’t want to give them any advance warning.’ Splitting the department up would seemingly also benefit our new Prime Minister, in that it would allow her administration to focus on tax cuts and economic growth separately. Although the idea has a long history, Kerslake’s review didn’t ultimately recommend breaking the ministry up, and Truss’ own team has rowed back from some of her earlier rhetoric.

The time and resources it would take to carry out such a change in Whitehall before the next election would be immense, and Truss’ team may choose to focus on other priorities in the short term or even boost the fiscal power at the centre of government, given the cataclysmic events heading our way this winter. But dividing some of the Treasury’s responsibilities into other departments and creating new bodies that can strategise and plan for the future of the country is tempting.

Countries like Germany and Japan all split their financial and economic ministries into two and only a few states subsume departmental spending controls into their fiscal bodies. Splitting the Treasury in two could weaken its drive for fiscal conservatism too.

It’s also an option that may gain greater traction if the UK continues to slide into the economic abyss that we are all staring at presently, despite the new Government’s best efforts. Institutional problems require institutional solutions, and without the political appetite to actually implement economic policies that will improve society, visibly breaking up parts of the Whitehall ‘blob’ may be the right’s next best thing.

On the other hand, both the structure of Whitehall and the social composition of those policymakers makes meaningful economic change look remote. These fiscally conservative officials will continue to control government and continue to shape its priorities and approach: we will see far more public bailouts of private market failures (without addressing ownership), like the new cost of living package, in the future. The real orthodoxy—the monetarist economics of the last forty years—is under pressure from external forces rather than internal bureaucratic tweaks.

Will this lead to a new era at the Treasury? Its recent history suggests it is possible—Thatcher’s first Chancellor abandoned many of the Keynesian tools he had inherited. But what shape or influence this new Treasury will have is unpredictable. It will depend on Truss’ desire to curb the powers of our public financial institutions balanced with her appetite for the political risks such economic interventions would bring. It will also depend on the changing nature of the state, and the aligning or fracturing of interests for those who perceive themselves to be in power.

Prime Minister Liz Truss won’t change the centre of Whitehall to help society and working people over the next two years and that means there are still serious questions about those institutions and how they exercise power today. We can and should critically engage with the prevailing economic conventions now, in order to give any progressive administrations a better opportunity to deal with these challenges in the future. Otherwise, the Treasury will just continue to rule us all.