Abominable no-men

The Secret Treasury: how Britain's economy is really run

David Lipsey <em>Viking, 278pp, £20</em>

The Treasury used sometimes to be called the central department, which is as good a description as any. Sitting in the middle of the Whitehall web, controlling every public function that involves the spending of money, little of importance escapes its scrutiny. In the hands of a determined chancellor such as Gordon Brown, the Treasury is the motor of the government machine. From outside its aggressively frugal premises - all linoleum and peeling paintwork - it inspires respect and sometimes fear, but rarely affection. It performs for the public sector the role that the financial sector does for business: it allocates finance. It says no. As Joel Barnett, both the wittiest and most successful of recent chief secretaries once said, we are the abominable no-men.

I have already given away my instinctive Treasury sympathies by calling Barnett successful. He was - maybe still is - legendary in the Treasury because he cut more out of public spending more quickly than any chief secretary before or since, and thereby helped save the institution from one of its worst traumas. The IMF crisis of 1976 was a defining moment. It destroyed the reputation of the chancellor and his government, and ended a generation of both Tory and Labour economic thinking and policy-making. In many ways, the present government is still living in the shadow of those experiences, if only in its determination never to repeat them. If the Tories had been re-elected in 1997, they would certainly have revised upwards their public spending plans, as they had in 1992. Instead, Brown actually implemented them.

Apart from counting the candle ends, the other key role of the Treasury is the management of the economy, now broadly defined to include supply-side issues. The Chancellor deserves unstinting praise for his early decision to move Britain into line with the other leading seven industrial countries by giving the Bank of England independent control of interest rates. But the Chancellor's orthodoxy - penance perhaps for his own firebrand past as part of Labour's 1980s problem - has had less happy effects elsewhere. Like Philip Snowden and other over-compensating radicals before him, he has become a slave to an excessively narrow view of his role and responsibilities. Despite the extraordinary over-valuation of the pound, now higher in real terms even than it was during the similar bubble of 1981, Brown says he can do nothing to influence the market's view. This will, I believe, prove to be the great mistake that ultimately undermines the reputation of his chancellorship.

In this doctrine, however, Brown stands four-square with the traditional Treasury view, which is to distance oneself as much as possible from any economic objectives that might prove difficult to attain. The Treasury has been seared by high expectations that it failed to deliver. If you do not try, you cannot fail. So don't try. The Treasury has therefore cleverly defined "stability" as the stability of fiscal policy, rather than of the economy. But in a dynamic and unstable system, policy must be more active. When the pound is driven to levels which, although clearly temporary, have thrown 240,000 people out of work in manufacturing since the beginning of 1998, it is only Tory-controlled Treasuries that should stand aside and say, "that's just the market".

David Lipsey is an expert chronicler of the institution, who is motivated by an instinctual sympathy; but he is perhaps a little too charitable to the Treasury about all of this. As he says, the Treasury is staffed by exceptionally clever meritocrats who are good at producing the devastating two-page critique in two hours, but they are much less good at the big picture, particularly when the thinking has to depart from the conventional wisdom. Treasury Man - and they are still overwhelmingly men, even more so than a few years ago - is a splendid critic, but an unimaginative architect. The Treasury's attributes are essential in one role, controlling public spending, and usually unhappy in the other, managing the economy. The real case for splitting the Treasury into an economics ministry and a budget ministry is the incompatibility of the thought processes and the culture required in each. Fiscal skinheads have their place, but it is not running the economy.

If the Treasury were better at the big picture, it would have fostered institutions with checks and balances to deliver acceptable results without the centralisation that is the hallmark of the British system. How is it, for example, that the United States can allow states, cities and towns to borrow freely without central approval? The Treasury would also have made fewer mistakes: on the poll tax, the 1988 tax cuts, the exchange rate, and particularly on Europe. The decision not to participate in the Messina talks that founded the European Community was probably the single most disastrous economic error of the postwar period - and it was the archetypically Eurosceptic Treasury Man whose fingers were all over it.

Nor has the Treasury stopped making mistakes on Europe, as the botched membership of the exchange rate mechanism in 1990 shows. Senior officials did not think to consult our partners, who were therefore uncommitted to defending the rate we chose. Nor did they educate ministers in the eventual need to devalue, even though, at the most senior level, this was understood from the start. And then the Treasury's most senior officials consistently and unerringly misjudged the political momentum behind monetary union: when John Major assured the Commons that it would never happen, he was acting on the best official advice.

Again, the monastic cast of mind that avoids external contact for fear of going native may be appropriate for the Treasury's allocative role, but merely undermines its ability to judge the political and market environment well. The Treasury generously donates its talent to the top jobs all around Whitehall, parachuting its own as permanent secretaries such as Nic Monck, Rachel Lomax, Tim Lankester, Mike Scholar and Valerie Strachan. But who ever goes into the Treasury at a senior level? Those who go in at a junior level rarely have any experience except academe. It is the fastest one-way street in Whitehall. At the very least, it would be sensible to open senior roles in the Treasury to outsiders with City and business experience, or encourage Treasury people to leave and come back after a period in the real world. On all these subjects, Lord Lipsey has written an admirable case for the defence. But we still need a case for the prosecution.

The author is a Lib Dem MEP and former economics journalist

This article first appeared in the 24 April 2000 issue of the New Statesman, Are the loonies coming back?