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13 September 2022

What’s really behind Kwasi Kwarteng’s sacking of Tom Scholar?

The Chancellor wants a more “pro-growth” Treasury. The unspoken tension is how Brexit obstructs that aim.

By Harry Lambert

Why did Kwasi Kwarteng sack Tom Scholar, permanent secretary at the Treasury since 2016, on his first day as Chancellor last week? Pressed on this question, those close to Kwarteng tell me that, having entered office as part of a new administration, the Chancellor wants a new economic approach and fresh leadership at the department. 

That sounds reasonable in the abstract. But the civil service is designed to serve any and every political administration. No economic approach should, in theory, be a problem for Treasury officials, who are there to enact the government’s decisions, not to hinder them.

Tom Scholar’s two predecessors at the Treasury, Gus O’Donnell (2002-05) and Nicholas Macpherson (2005-16), are both bewildered by Kwarteng’s decision.

O’Donnell, who went on to serve as cabinet secretary for six years after he was succeeded at the Treasury by Macpherson in 2005, believes Kwarteng has acted with undue haste. “When I was cabinet secretary,” he tells me, “there were plenty of ministers who came in and weren’t sure about their permanent secretaries. What I would say is, ‘If you think the chemistry doesn’t work, we’ll sort out a smooth transition. That is possible.’” But Kwarteng has fired Scholar without working with him.

When I put the line from Kwarteng’s camp to O’Donnell – that a new leader who offered a new approach was necessary – he replies: “Well they’ve got that in the chancellor. Who do they think determines the direction of economic policy? It’s the chancellor.”

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Both O’Donnell and Macpherson believe that the Treasury is far more flexible as an institution than it is given credit for, as they say their own experiences as civil servants attest. O’Donnell joined the Treasury in 1979, as Macpherson did in 1985. Since then, O’Donnell suggests, the Treasury has been subject to a variety of orthodoxies, mainly imported from academic economists – but there is no single Treasury orthodoxy, they argue, that Scholar represented and that Kwarteng needed to fight against.

Scholar, Macpherson suggests, has been critical to the Treasury’s efforts during major crises in recent decades, and the range of those responses demonstrate both his and the department’s flexibility. “The scale of the interventions in 2008 [during the financial crisis, when Scholar was second permanent secretary to the Treasury] and 2020 [during the Covid-19 pandemic] suggest to me this is someone [who] actually can think extremely creatively and isn’t consistent with whatever Treasury orthodoxy is supposed to be,” he says.

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Firing Scholar is, say former mandarins, only likely to make Kwarteng less effective as he faces the challenge of the biggest fall in living standards since records began. An experienced civil servant chief offers a chancellor the knowledge of how to get the Treasury to act effectively. In any case, the acting permanent secretaries at the Treasury who will now assist Kwarteng are Scholar’s deputies and it is – on the surface – unlikely any new appointment will act very differently to Scholar when in post.

What is it, in any case, that Kwarteng wants to change? That is less clear. Having studied his comments in the House of the Commons since he was elected as an MP in 2010, there is no great evidence of a revolutionary mind, or an intemperate soul. Kwarteng has done little other than voice support for deep-blue Conservative orthodoxy over the past decade. 

He has spoken in favour of corporation tax cuts (“Reductions in corporation tax from 28 per cent towards 18 per cent have been of huge benefit in trying to create a culture of entrepreneurship and in trying to create growth,” he said in 2018), against rises in National Insurance (2015: “Of course it makes sense to limit National Insurance contributions, because they are, after all, as has been pointed out, a tax on jobs”), and “for lower tax rates across the board”, as he put it in 2013.

In 2012 he echoed George Osborne’s opposition to high government borrowing – and showed support for the institutional Treasury in doing so: “It was always the function of the British Treasury… to have a very conservative approach to public finances. It was always the tradition that we in the British Treasury tried to match expenditure to income.”

Kwarteng has also complemented the civil service, which he described as a “highly effective, well-trained force and a disciplined, professional cadre of people” in 2017, adding in 2019: “I have to say that I think all my colleagues, all my right hon and hon Friends, have very full confidence in our civil service.”

Against that backdrop, it is unclear what Kwarteng objected to in Scholar, a man with whom he never worked. Why, then, did he sack the permanent secretary?

[See also: The real cost of Liz Truss’s energy plan is dizzying]

One line of thought is that Liz Truss’s government wanted a symbol of the economic change it will seek in office. Firing Andrew Bailey, the governor of the Bank of England, was not tenable – governors are meant to serve in post independently of the government of the day – and so Scholar became the sacrificial alternative.

The Conservative peer Theodore Agnew, a minister across the Cabinet Office and Treasury from February 2020 to January 2022, has pushed back against the “cries of dismay” from “an echo chamber of former mandarins” over Scholar’s firing. “There are many excellent civil servants in Whitehall,” he wrote in the Times yesterday (12 September). “Tom Scholar was not one of them.”

The Treasury, Agnew believes, has “no idea” how to deliver economic growth. Kwarteng cannot be so categorical in his views, but Agnew’s may reflect the Chancellor’s. The FT’s front page today splashes on Kwarteng’s request to Treasury staff to focus “entirely on growth”. In praising the Treasury as an “excellent finance ministry”, Kwarteng was criticising it for its ineffectiveness as an economics ministry able to drive growth.

Treasury officials bristle when you put that criticism to them. Without growth, they say, there are no tax revenues – nothing, therefore, is more important to them. Many civil servants have, for example, constructed plans to reform the planning system or business regulations in a bid to drive growth, but it was politicians who tended to shelve them for fear of alienating part of their electoral coalition.

Yet the view holds across the Tory party that the Treasury is, as one MP put it to me recently, “sitting on growth”. This view is shared by Remainers and Leavers, although it is most pronounced among Leavers such as Kwarteng, who wants to return annual GDP growth to its pre-2008 crash level of 2.5 per cent.

The unspoken tension over that aim, however, is that the UK only achieved such growth when it was in the European Union. The Treasury, as an institution, is wary of Brexit. As Macpherson put it to me last November: “The idea that Brexit has liberalised trade is just nonsense.” This is the tension for any civil servant serving a Leaver: Brexit was a national choice to cut GDP by 4 per cent over the long term, according to the Office for Budget Responsibility. 

That is a significant headwind. It makes Kwarteng’s unfunded tax cuts harder to justify, and undermines the idea that the Tory right care “entirely” about growth – because their flagship project cut it.

[See also: Civil service sackings set a dangerous precedent]

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