It’s time to tackle the orthodoxy of the Treasury?


The Treasury and its “orthodoxy” have recently been drawn into the projector. The first act of the new Prime Minister and her Chancellor was to confront it head-on in order to justify new budgetary and political initiatives. Orthodoxy is something that needs to be challenged and revised, but it also has various elements; and, in the eyes of many critics, Liz Truss and Kwarsi Kwarteng picked the wrong one to oppose.

Treasury orthodoxy and economic policy were a major point of difference between the two Tory leadership candidates. Rishi Sunak, the last chancellor, took the standard post-crisis Treasury line of regaining fiscal discipline now before considering anything else. Liz Truss rather cursed versus the “abacus economics” of “treasury orthodoxy,” calling for borrowing to fund tax cuts now, in hopes of quickly spurring economic growth.

With Truss’ victory, it then seemed inevitable that the HMT would be likely to be challenged. She did not disappoint. She endorsed the sacking of Permanent Treasury Secretary Tom Scholar from day one. Scholar was one of the most experienced, able, and popular figures in the civil service. I know this because many of them I interviewed for my recent book on the institution repeated these things to me.

Scholar had been a mainstay of the Treasury for about 30 years. He played a major role in the rescue missions that followed the great financial crisis (2007-08), the Brexit vote (2016) and then the pandemic. So why fire him now, when the UK economy seems to be in crisis again?

The most obvious reason is that Scholar is too associated with this “treasury orthodoxy”. When asked, everyone I spoke to is convinced there is an orthodoxy, although the elements they emphasize vary. The one they all agree on is the need to balance budgets (which is very much against borrowing for tax cuts). “Everything has to be paid for,” Scholar told me, regardless of how it’s achieved.

Other key elements of orthodoxy have been in place most of the time since William Gladstone. These are support for free trade, promotion of market mechanisms and the need to achieve price stability (in terms of a stable currency and constant, low inflation). The administrations before the depression of the 1930s and the arrival of Keynes supported them.

All governments since 1979, whether Labor or Conservative, have done so too, but not always through the same mechanisms. Since then, there has also been great continuity in the officials who run the department. There was no major overhaul of Treasury mandarins when New Labor came to power in 1997. The younger generation that developed under Brown and Darling then moved to Osborne in 2010.

The last time there was a major elimination of senior Treasury staff was in the early years of the Thatcher government. The upper tiers have all been forcibly removed. They were seen as Keynesians, held responsible for Britain’s economic decline in the 1970s and the country’s near bankruptcy in 1976. The new officials, Peter Middleton and Terry Burns, were in full agreement with alternative thinking, including a return to those traditional elements of Exchequer orthodoxy.

So it seems fitting that if Liz Truss and Kwasi Kwarteng really wanted to challenge Treasury orthodoxy, they would start by suppressing its most important personalities. They are just doing what Theresa May, Boris Johnson and Dominic Cummings have all threatened to do. Like them, they saw the institution as an obstacle to any radical change in economic policy.

For me and various critics, Treasury orthodoxy has indeed been part of the problem of the UK’s slow economic decline; but not for the reasons Truss and Kwarteng believe. The institution’s strong adherence to free markets and free trade, regardless of the circumstances, has inhibited all sorts of initiatives.

UK infrastructure and funding for business support and regional development has been cut. The Treasury, instinctively conservative, fought against new national initiatives of all kinds. In contrast, he has actively courted foreign multinationals and international investors with tax breaks, sweeteners and light regulations. Many have been the ex-treasury minister or civil servant who wrung their hands over the decline of UK manufacturing and regional economies, wondering if they should have done more?

More than that, it is the associated elements of Treasury orthodoxy that have become particularly entrenched since 1979. One of these is the use of monetarist rather than fiscal policy levers, and the claim that UK governments do not ever intervene in the economy if they can help it. . This resulted in all kinds of accounting trickery and trillions in state debt that quietly piled up through quantitative easing, private finance initiatives and other measures.

Another has been to repeatedly support the UK’s financial and service sectors while neglecting its manufacturing. Thus, the UK’s manufacturing base shrank faster over the period than any of its rivals. Arguably, Britain’s low levels of productivity and R&D spending are directly linked to this decades-long sectoral imbalance.

These criticisms of British economic policy have been made by various authors over the years. Although, more often than not, it is politicians rather than Treasury officials who are held accountable. For me, it was both. Exchequer orthodoxy aligned perfectly with the post-Thatcher political and economic consensus.

However, it is clear that under the new Truss government, it is a rather different view of orthodoxy and Treasury economics that is behind the recent attacks on the institution. Despite years of corporate and personal tax rate cuts, they argue that it is more tax cuts and deregulation that is needed for growth, whatever the cost. And it’s principle number one – fiscal discipline of balanced budgets – that stands in the way.

And therein lies the dilemma that confronts me and other critics of the Treasury. For many, it makes sense that macroeconomic management should be separated from the finance department’s function of making things add up. Economic decision-making and investment must be extended beyond the bounds of Treasury and London orthodoxy to get things done.

On the other hand, a weakened national treasury also means a lack of checks and balances on an all-powerful prime minister and spendthrift ministers, operating in a state lacking a strong constitution. In these precarious times of populist politics, where rules and precedents are easily ignored and opponents ruthlessly dispatched, this could lead to all sorts of undesirable consequences. In this case, Treasury critics have to be careful what they wish for.

By Aeron DavisProfessor of Political Communication, Victoria University of Wellington.

His new book, published by Manchester University Press in mid-October, is Bankruptcy, bubbles and bailouts: an inside story of the Treasury since 1976.


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