An extraordinary briefing over the weekend (16 October) from the Treasury about the Prime Minister’s “economic illiteracy” concludes a torrid seven days for the once all-powerful department. Outmanoeuvred at the start of the week by the Business Secretary Kwasi Kwarteng over emergency support for businesses during the gas crisis, the Treasury was revealed on Friday to be resorting to statistical chicanery to convince other secretaries of state to accept tighter spending plans.
Traditionally, the Spending Review period is a time when the Treasury gets to demonstrate its power, threatening cuts across government and throwing the odd crumb to pet departments. Yet the current rows suggest a shift of authority inside Whitehall. Briefing against the Prime Minister – particularly one as politically commanding as Boris Johnson – doesn’t make a government department strong; it makes it desperate. Fiddling with figures to persuade departments to accept tight spending cuts is not an indication of a Treasury in control.
There should be no tears over this loss in status. No single department bears as grave a responsibility for the misery of the last decade. It was senior officials at the Treasury that insisted on and fought for austerity from 2009 onwards, crowbarring Labour into supporting spending cuts ahead of the May 2010 election, and then working overtime to frighten (an admittedly credulous) Nick Clegg into believing a Greek-style crisis would erupt without them.
The Treasury has stuck doggedly, and absurdly, to the austerity mantra for the decade since. Even as empirical justification for austerity has been shredded, even as the economics profession has turned, almost as one, against fiscal tightening, even as – perhaps most significantly – public support for spending cuts has evaporated, we can still find the Treasury insisting on the necessity of belt-tightening.
Of course, the rot runs deeper than just the past ten years. As an excellent analysis by economists Diane Coyle and Marianne Sensier details, the department has been systematically biased in its investment decisions against the rest of the country outside London. Figures from the Institute for Public Policy Research in 2019, for example, show that this has meant Yorkshire receives £511 per head in transport funding, while London receives £3,636.
Coyle and Sensier demonstrate that the department’s own operating system – its “Green Book” guide to investment decisions – is methodologically flawed, chasing short-term gains to GDP in London at the expense of longer-term, stable investment across the whole country. Rewriting those rules, as the Conservatives have claimed they want to do, is a crucial part of getting a grip on the department.
Short-term thinking is hardwired into the Treasury. Stretching over decades and multiple changes in government, the department’s failures are the consequence of more than just bad decisions by politicians. Lacking a comprehensive economic mandate, the “Treasury view” fixates on the government’s deficit and debt, and neglects to reflect on the economy that produces them.
But, as any undergraduate macroeconomics course will teach you, since what the government does affects the whole economy, economic policymaking should attend to the whole economy before it turns to considering the government debt and the deficit that emerge from it.
Failure to think this way has meant, for example, that the immense windfall from North Sea oil and gas, coming onstream from the late 1960s, was squandered on day-to-day spending instead of being placed into a sovereign wealth fund, as Norway did later with such success. More recently, accountants Ernst & Young say renewables investors face a “confused” and “inconsistent” environment in the UK as a result of Treasury short-term cost-cutting. By prioritising “control over public spending” above wider economic goals, the Treasury is hobbling the country.
At the centre of the current dispute between No 10 and the Treasury are the Prime Minister’s plans to increase public investment in our energy system, focused on decarbonisation. In the middle of an energy crisis, with wholesale gas prices at all-time highs, gas suppliers going bankrupt, and businesses and consumers facing a winter of dramatically higher energy bills, the real “economic illiteracy” would be a failure to invest in energy infrastructure that helps to ensure this doesn’t happen again.
The Treasury thinks it knows better. It always does. And using the power it wields inside Whitehall thanks to its control of the purse strings, what the Treasury as an institution thinks tends to become what the whole government has to think. Working for shadow chancellor John McDonnell in the run-up to the June 2017 election, it was this prospect that gave me sleepless nights.
As the polls tightened, I became increasingly concerned that a possible minority Labour government would find itself on the wrong side of the “Treasury view”. I had every confidence in McDonnell and the shadow Treasury team around him. We also had a plan to box it in, lining up external advisers and looking to rapidly set an emergency budget. But would it be enough? The vision that haunted me was of ending up with a sorrowful Jeremy Corbyn on the steps of Downing Street announcing – with a heavy heart – that the economic situation was worse than expected and austerity would therefore be continuing. I had been in Syntagma Square, central Athens, when Syriza was elected in 2015, PM Alexis Tsipras heralding a new dawn for his country. I had seen Syriza collapse six months later. I feared a very British repeat. Getting on top of Her Majesty’s Treasury had to be a priority.
So of course I am happy to see No 10, and any spending department, lined up against the UK’s overmighty bean-counters. Whatever his own intentions, Johnson will be performing a great service to any future progressive administration if his government can cut it down to size. Better for this Tory administration to choose to take on the task of reform than a future Labour government be forced to.