It is difficult to talk about success and failure in British economy policy without focusing explicitly on the role of the Treasury. The role and functions of the Treasury have evolved significantly since the 1990s to increase the likelihood of public policy success. The power to set interest rates was transferred to the Bank of England, made operationally independent of the Treasury to reduce the British economy’s vulnerability to instability. The Treasury was freed up to oversee macro-economic policy, while playing a greater role in the modernisation of public services, particularly the NHS. After the 2010 general election, the Treasury’s fiscal forecasting capability was shifted to the Office for Budgetary Responsibility, giving Treasury officials greater scope to see through the Chancellor’s austerity programme by making major changes to the level and composition of public spending.
So how does the Treasury itself judge policy success? The policy priorities will vary according to the government of the day – reducing unemployment, controlling inflation, managing the balance of payments deficit, allowing an expansion of consumption. Yet the major lesson of the post-war era was that policy-makers needed to be humble; they should avoid overestimating what government policies could do. The economic crisis events that occurred in Britain from the 1940s to the 1970s taught the Treasury some harsh lessons.
As a consequence, a key criteria for success within the Treasury is to avoid policy ‘blunders’ and fiascos, minimising uncertainty. In his book on Britain’s forced exit from the Exchange Rate Mechanism (ERM) in 1992, Politics and the Pound, the FT commentator Philip Stephens records the sense of ‘humiliation’ that enveloped the Treasury in the immediate aftermath of the ERM debacle. Ironically, Britain’s departure from the ‘straightjacket’ of the ERM which had kept interest rates artificially high was followed by fifteen years of continuous economic growth and low inflation. Policy-makers had learned important lessons. Another criteria of policy success in the Treasury is maintaining control over policy. In the last thirty years, the Treasury has sought to determine not only how much Whitehall departments spend, but how they spend it. Targets and performance indicators are much more widely used throughout government as a result of the Treasury’s influence.
But the Treasury doesn’t only measure success in terms of policy outcomes. Naturally, it is concerned to ensure it has influence at the highest levels of political and economic decision-making. Treasury officials are well versed in the practice of high politics. They want to be in the room with the Chancellor and key advisers when important decisions are taken. More than any other department in Whitehall, it is the Treasury that intuitively understands the practice of statecraft, enabling politicians and governments to survive in office despite the buffeting caused by economic events outside the direct control of national governments.
Given its influence and power, it is easy to cast the Treasury as the villain of the piece in British economy policy-making. During the last century, the great depression, the disappearance of Britain’s industrial base, the dominance of the City of London, relative economic decline, stagflation, and now austerity have all been blamed on the Treasury. Many of these criticisms are inaccurate and misguided. But if the objective is to increase the likelihood of success and minimise failure in British economic policy, the Treasury ought to adapt its approach and working methods further. Firstly, it should be less inclined to try to please politicians, telling them merely what they want to hear. Officials have to provide robust policy challenge. Second, the Treasury has to be less prone to group think. It ought to employ more social scientists who are non-economists to offer alternative disciplinary perspectives on economic questions. Anthropologists and geographers, for example, have a huge amount to contribute to questions such how to manage risk in the financial system. Thirdly, the Treasury needs to have greater institutional memory. Currently, the average age of a Treasury official is 27. Too many experienced officials leave the Department at a relatively young age. In 2008 when the financial crisis broke, there was almost no one in the Treasury who had been present during the last great crisis in 1992.
Finally, and most importantly, the Treasury ought to become less secretive and inward-looking. The effort to open up the process of economic policy-making in the UK has been half-hearted. The Treasury has little voice or presence outside London. Unlike senior staff at the Bank of England, notably Mark Carney and Andrew Haldane, Treasury officials seem curiously reluctant to engage in public debate about economic issues. The Treasury appears distant from the deeper questions being posed about UK national economic performance since the great recession – the decline in the real wages of median earners, the threat of secular stagnation and permanently lower growth, deindustrialisation in poorer regions, the persistence of the underlying UK trade deficit.
The Treasury needs to operate very differently in an age of popular disaffection. The 2014 referendum on Scottish independence and the 2016 plebiscite on Great Britain’s membership of the European Community exposed the limitations of economic expertise as an instrument of public persuasion. The rhetoric of ‘project fear’ clearly has diminishing returns. In the future, the Treasury will have to engage very differently with citizens, not only politicians and Ministers.
This article forms part of our policy success and failure series of blogs and the Bennett Institute report Policy Success and Failure: Embedding Effective Learning in Government.