What do Boris Johnson and Harold Wilson have in common? At first glance our Etonian Prime Minister shares little with his Huddersfield-born Labour predecessor, but they, in fact, share a common problem: both discovered very quickly they had an issue with Her Majesty’s Treasury.
Like many prime ministers before him, Johnson took office setting out an ambitious vision. He was going to solve the social care problem once and for all, he’d make the UK a “science superpower” and he’d “level up” regions outside London and the south-east. Yet next-door neighbour Rishi Sunak, and his Treasury, have appeared to block every major policy the PM has – from refusing to invest enough towards net zero to holding back spending on levelling up. Now, Sunak appears to be refusing to release funds to cut NHS waiting times.
How can we make sense of this and why do so many prime ministers end up at war with their chancellors?
The Chancellor has a superpower to essentially veto any other secretary of state’s plans by holding back funding, while compared with what happens in other developed economies. While the Treasury’s myriad responsibilities are often split between several different departments in other developed economies, Sunak’s department is enormously powerful in Whitehall and beyond: it’s a budgetary ministry responsible for reigning in departmental spending and a fiscal ministry responsible for tax policy; it’s a financial ministry responsible for managing the UK’s public sector debt; and it’s an economics ministry responsible for the long-term growth of the UK economy.
Balancing these different roles with different objectives doesn’t come easily. Decisions on whether the country should invest now to grow the economy in the long term or cut expenditure to reduce national debt will lead to radically different economic trajectories.
So common is the critique of this tension that the phrase “Treasury brain” is thrown around in Twitter discourse to describe the Treasury’s observed tendency to always prefer short-term financial savings to long-term non-financial returns. Why worry about the massive economic cost of another wave of Covid-19 in the future when we can save the money we’re spending on lateral flow tests today? Or what about that vaccine research centre we invested millions in? Who needs one of those? Sell it off!
Not only is the challenge of the Treasury’s multiple roles well-known, it has been for at least 60 years.
When Harold Wilson won a narrow victory for Labour in the 1964 election it was on a manifesto that promised to seize the opportunities of new technologies to increase UK economic activity and GDP growth. If Wilson were around today, he might even be accused of “boosterism”.
The Wilson government’s strategy involved domestic economic planning around a National Plan for the economy to promote growth and investment – so far, so “levelling up”. The National Plan initially targeted a 25 per cent growth in GDP over the course of the parliament. But Wilson and his advisors, even before the election, were sceptical that the Treasury was sufficiently aligned with this policy programme and doubted that a fiscal ministry with such a focus on short-term spending restraint could set long-term economic strategy. Wilson embarked on the most ambitious reform of the Treasury ever attempted, splitting it up and giving powers to a new ministry, the Department of Economic Affairs (DEA), which would draw up and deliver the National Plan.
The intention of the new ministry was explicitly to divide the functions of the Treasury to reduce its power. Wilson believed there should be “creative tension” between the DEA and the Treasury – one setting the direction of long-term planning of the economy and the other scrutinising the expenditure and short-term fiscal constraints. As historian Christopher Clifford wrote: “If the creativity was occasionally hard to spot, the tension was never in short supply.”
This kind of set-up has inspired other prime ministers since. Prior to the 1997 general election, Gordon Brown was considering similar reform of the Treasury. Somewhat ironically, Brown dismissed the creation of a new separate ministry on the basis that “the lesson of the DEA is that splitting responsibility between departments is a recipe for turf wars”. In 2016, Theresa May expanded the business department to create the Department for Business Energy and Industrial Strategy (BEIS), and empowered it to develop and deliver a plan to “boost productivity and earning power throughout the UK” – setting up a battle with the Treasury it would ultimately lose when May left office.
Even today there are echoes of the DEA experiment in the joint No 10 and No 11 Downing Street policy team. Formed by Dominic Cummings with an eye towards confronting concentrations of power within Whitehall, the team was successful during the pandemic but has perhaps lost some coherence as the Prime Minister and Chancellor have diverged post-pandemic. Equally, the Levelling Up department is being shaped as a Whitehall power centre, with Michael Gove and permanent secretary to the cabinet office Andy Haldane’s 12 levelling-up missions forming an ambitious, cross-government, economic strategy. It’s hardly surprising that the Treasury has sought to take the wind out of their sails at the first opportunity.
Johnson and Wilson also share another similarity: both became prime minister at a moment of absolute national crisis. They’re radically different, but Johnson’s administration was quickly overwhelmed by Covid-19 and Wilson’s by the balance-of-payments crisis.
Wilson’s ambitious experiment with the DEA failed along with his government, which was torn apart by the internal contradictions of its policy programme. Ultimately, it proved impossible to simultaneously pursue deflationary policies on one hand, and an inflationary growth programme on the other. Today, the playing field is completely different, of course – fixed exchange rates are out and operational independence for the Bank of England is in – but there is a risk that history will repeat itself.
Will the Department for Levelling Up fail in its “12 missions” as Boris Johnson and Rishi Sunak seek to get the cost-of-living crisis under control? Last week, Downing Street rejected the governor of the Bank of England’s suggestion that workers shouldn’t ask for pay rises. In a tug-of-war between an economic strategy aiming to increase investment, increase demand, and put more money in people’s pockets, and a Bank of England aiming to suck demand out of the economy, who will win?
This leaves us with a question: how do you solve a problem like the Treasury?
Ultimately, Harold Wilson, Gordon Brown and Theresa May are not all wrong. A short-termist Treasury with absolute control in Whitehall will always skew policy in a damaging way. Tony Danker, director general of the Confederation of British Industry (CBI), made a similar point this month on the role of the Treasury in economic growth: “No CEO would put the finance department in charge of sales.” The Treasury has to be broken up, with long-term economic strategy the responsibility of a new ministry. That way it would be matched by an equal and opposite force with long-term vision and powers to direct the economy towards socially important goals. Whether that goal is decarbonisation or addressing regional inequality, the Treasury’s instinct to pull tight the purse strings will always be a barrier.
George Brown, Wilson’s first secretary of state for economic affairs – often unfairly blamed for the DEA’s failure – said upon its collapse “some government, someday, will recreate a department on the lines of the [DEA] and limit the outdated authority of the Treasury”. In 1995, journalist Will Hutton wrote that “reform of the Treasury is one pivot on which national renewal hangs”.
Looking at the challenges that face our economy in the 21st century they are right. The answer is simple: we need to break up the Treasury.