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  1. The Politics Interview
23 November 2021

“The idea that Brexit has liberalised trade is just nonsense” – Treasury grandee Nick Macpherson

The longest-serving Treasury chief in 80 years on Rishi Sunak, austerity and the decade to come.

By Harry Lambert

Any political project in the UK must, in the end, encounter and overcome the civil servants of the Treasury: the staff who run the most powerful government department in Whitehall. In the 11 years from 2005 to 2016, Nick Macpherson served as permanent secretary to the Treasury – the tax and spending plans of three administrations (Blair, Brown and Cameron) had to clear his desk. As the Treasury’s lead civil servant, Macpherson helped construct the budgets of three chancellors, becoming the longest serving Treasury “perm sec” since the Second World War. He stepped down shortly before the 2016 Brexit referendum. 

The civil servants atop the Treasury play a pivotal role in British politics, even though they are unelected and essentially unknown. Their judgements of what is and is not “possible” or advisable can embolden or deter the politicians they serve. The Treasury is not scrupulously neutral, it has a view: one crafted by centuries of trial and error, and inflected by the biases of its key civil servants at any one time. A chancellor may disregard the “Treasury view”, but few chancellors wish to war outright with the staff carrying out their plans. 

In short, the Treasury view matters, and Macpherson – who joined the department in 1985, when bunk beds still housed overnight staff and new employees had only recently stopped being given a towel and bar of soap on arrival – is well-qualified to offer it. He does not speak on behalf of his successors at the Treasury, and is distant from their discussions today, but he worked closely with (and helped to hire) many of them. They share a mindset. 

Macpherson is complimentary of Rishi Sunak’s recent Budget, and the way he has staggered significant tax hikes over the past year. “It was quite clever,” he told me over lunch in Westminster, as last month’s budget was in effect “the third of the year. The one in March had a big increase in corporation tax, and a classic stealth tax with the freezing of the income tax threshold” – the rate at which people start paying income tax. Such a freeze, Macpherson said, is “a brilliant stealth tax at a time when inflation is rising”.

Secondly, by floating the proposal of a 1.25 per cent rise in National Insurance to help fund social care over the summer, Sunak managed to make his October budget “all about how you spend it”. He “even managed to throw in a tax reform on alcohol”, Macpherson noted, admiringly. 

But he is also concerned. The tax rises are ambitious – if realised, they would bring the UK’s tax take to its sustained highest level since the late 1940s. Macpherson doubts that will happen: either tax revenues will be weaker than forecast, as he expects, or taxes will be cut ahead of the next election if the projections on the tax take prove to be robust.  

Macpherson is, in part, sceptical of projections because Britain is set to grow slowly in the 2020s, as it did in the 2010s after the financial crisis of 2008. “If the Office of Budget Responsibility [OBR] are right,” Macpherson said, “living standards and productivity will continue to stagnate, and Sunak will have a massive problem funding public services – the national income simply won’t be there to give him the revenues [both] to fund them and cut debt.” 

The OBR has made it clear that Brexit is a key driver of our subdued future growth: a fact that Labour has proven reluctant to highlight, allowing Boris Johnson and Sunak to ignore it. In the OBR’s forecasts, Brexit is set to reduce UK GDP by 4 per cent over the long run, while the economic scarring from Covid is forecast to be only half as great, at 2 per cent. 

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Many economists predicted this – and many proponents of Brexit accepted it as a price worth paying in exchange for tighter borders and greater sovereignty. But some ardent backers of Brexit maintained that leaving the EU, a protectionist bloc, would in fact increase Britain’s trade and wealth. Macpherson is quietly caustic about such boosterism. “Maybe Brexit will unleash animal spirits that none of us have yet detected,” he suggested with wry scepticism, but “the idea that Brexit has liberalised trade is just nonsense.

“The plain fact is that almost all the trade deals we are doing are not much better than any deal the EU has done with that country,” he said. In many cases, they are worse: “You only have to look at the restrictions of the border,” he pointed out, referring to the chaos seen at Dover and other ports as lorries queue up to get their paperwork stamped.  

One of the Treasury’s unifying principles since the 19th century has been the importance of free trade. Brexit is a spanner in that long narrative. “The single market gave us extraordinary access to a market where trade on goods was totally free and it was becoming freer still with services.” 

Macpherson likes to refer to Brexit as a “Jacobin revolution”, and he thinks its revolutionary fervour has ways to run. But “at some point”, he told me, “a leader – Labour or Tory – will have a grown-up conversation with the British people, and say, ‘Look, come on, we need to make it easier to trade.’” Within 15 years, he predicted, the UK “will settle down to a relationship which has aspects of the customs union and single market whilst being very clearly outside the EU”. In his estimation, “we were never properly in the EU” in any case – noting Britain’s reluctance to sign up to key EU policies such as the Schengen Agreement and the euro.  

I asked finally about the politics of austerity – the prolonged programme of spending cuts that the New Statesman long opposed, and which arguably fuelled support for Brexit. Macpherson ran the Treasury at the time. His civil servant team enacted George Osborne’s programme of cuts. Macpherson today sees those measures as having disproportionately fallen on the poorer with “things like benefit cuts… while the better off, perhaps, didn’t make the same contribution.

“We could have been more in it together,” he conceded. “You could certainly argue that.”

[See also: Chris Bryant interview: “Labour should put the ministerial code into law”]