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Sunday 17 March 2019

Britain’s most important twentysomethings

  • The UK is shaped by its overmighty finance ministry, the Treasury, which has a distinct culture
  • Brexit marks a low point in its influence – it is against cutting immigration and weakening ties with our trading partners
  • Britain’s centralised system of government, however, means that it is likely to make a comeback

By Jack Kessler

Audio Article: The Treasury by Jack Kessler (12:36)

To understand Britain, you have to understand a strange, secretive organisation that employs only 1,500 people, nearly half of whom are under 30 years old. But it can lay claim to be the most influential institution in the country.

The UK’s finance ministry is too grand to call itself a finance ministry, and too self-important to call its leader a finance minister. “Her Majesty’s Treasury”, led by the “Chancellor of the Exchequer”, is responsible for control of public spending and macroeconomic policy. It also has strategic oversight of the tax system and financial services.

Like any longstanding institution, the Treasury has a view and a culture that permeates its work. But, unlike most, its likes and dislikes shape Britain. That is why proposals to reform it – or abolish it – are ever-present. Change the Treasury and you can change the country. Labour recently commissioned a review of the department, for that reason.

The issue is not just that the Treasury says yes or no to projects – though that really matters. It is also that there are civil servants operating across Whitehall known commonly, and not always admiringly, as “Treasury people”. The boards of many departments have at least one former Treasury official. And they carry the Treasury creed in their hearts.

This is not about party politics. But the ministry does hold dear certain truths – on what makes a good tax, or why bailing out failing businesses is normally a bad idea. And these orthodoxies are passed down, drilled into young and ambitious civil servants who often find themselves in senior posts across government, making countless decisions that affect everything from the cost of a pint to macroeconomic stability.

In some respects, its outlook is what you might expect of an institution where economics has an important role. Indeed, that is one of the reasons why the department is, at the moment, rather out of favour.

This week, the Treasury gave its spring statement – one of its two major outings per year. But no one paid attention because of Brexit – a policy decision which is fundamentally opposed by the Treasury. It is not attempting to overturn Brexit. But the decision to leave the EU has caused a real problem for the department, by threatening two essential Treasury orthodoxies: support for free trade and a liberal immigration system.

In 2014, Lord Macpherson, then the Treasury’s lead official, said: “The Treasury has always taken the view that the United Kingdom is a small country with few natural resources. Its prosperity rests on trade.”

But the Treasury view is that the UK has been negotiating significantly worse trading terms with its largest, nearest trading bloc and – as economists agree – free trade deals with faraway countries will not make up for it. Brexit is heresy.

Migrant workers: the Treasury argues for the benefits of immigration

The government position on immigration also represents a defeat. The Treasury is locked in a permanent fight with the Home Office on this topic. For the Home Office, migration into the UK is a problem. For the Treasury, it is a shortcut to higher productivity and healthier public finances.

It is a huge Home Office win that, in her negotiations with the EU, the Prime Minister has compromised on every red line except one: Britain will leave the EU’s single market to ensure the UK is no longer subject to the free movement of people.

Jonathan Portes, professor of economics and public policy at King’s College London, attributes this to Theresa May herself: “She doesn’t care about the economy. Her focus is on immigration, and that has an impact on the power of the Treasury.”

Part of the current dysfunction in government may owe something to this temporary loss of influence.

Gemma Tetlow, chief economist at the Institute for Government (IfG), said: “Under previous governments, the Treasury has been a hugely powerful ministry, with the Chancellor as a powerful player across most areas of government policy.”

But, she says, Theresa May has never had that relationship with Philip Hammond, her Chancellor. “That loss of political heft has been compounded by the PM’s preference to select her key officials from those who have worked with her at the Home Office. Securocrats have replaced Treasury officials in key positions.”

Whitehall is designed for the Treasury to be a centre of power. A common Treasury ploy is to frame a policy issue, such as climate change, as an economic issue, thereby allowing the Treasury to swallow it. Brexit has inverted this. It has taken what could fundamentally be an economic issue and allowed identity politics and concerns over immigration to dominate.

Make no mistake, though, the Treasury still matters – and the Treasury view runs across government.

For starters, the department is sceptical of spending money because it suspects that no one else in government is. The Department for Transport, for example, only exists to lobby for and spend money on things that move. And it does not concern itself with issues like opportunity cost – whether money should be spent on doctors instead of trains.

Tess Kidney-Bishop, a researcher at the IfG, said: “The Treasury feels it is on its own pushing for spending control, against spending ministers asking for more, often with support from Number 10.”

The aversion to spending can sometimes appear pathological. It is sceptical of big projects – especially if the benefits are less than clear. It is nervous even about familiar sorts of projects, like new train lines.

Stewart Wood, now Lord Wood, was a special adviser to Gordon Brown in 2005, when Britain was nervously waiting for the announcement of whether London had beaten Paris to host the 2012 Olympic Games.

Brown used to tell the story of watching a television that was three seconds behind the live feed. They heard a huge cheer from downstairs and then three seconds later saw on the television that London had won the right to put on the (expensive) games. Brown said that an official with him said he thought Paris had won – and that’s why the Treasury was cheering.

Planned spending on the 2012 Olympics was anathema to the Treasury

This attitude can give meetings between the Treasury and other departments an air of pantomime. My first trip as a junior civil servant was to Northern Ireland, to attend a seminar attended by the permanent secretaries of Northern Ireland departments. When it came time to introduce myself, I was greeted with mock hisses by Northern Ireland’s most senior civil servants.

However, some of the department’s preoccupations are perhaps less understandable. The Treasury has a particular view on what makes a good tax. Often that means it rather likes strange, indirect duties that the public hate.

Consider fuel duty: it is loathed by motorists, who pay 57.95p per litre (and VAT on top of that) every time they fill up their car. But, from the Treasury’s perspective, it is fabulous. It raises a huge amount of money – approximately £28 billion a year – making it the fifth largest tax behind only income tax, National Insurance, VAT and corporation tax.

It is simple: a tax on petrol and diesel used on public roads. It is broad-based: a tax paid by every motorist. It is predictable: people still have to fill up their cars to get where they need to go, even when the price rises. It is also easy and cheap to collect: the Treasury collects the money when fuel leaves the refinery, so there are, in effect, only a handful of people to collect the cash from.

In fact, it would be perfect but for two not inconsequential problems. Due to political pressures, it has been frozen – a real terms cut – for the past nine years. And as people switch to electric vehicles, it will disappear entirely.

Dan Kitwood/Getty Images

Tax on alcohol is a big earner and easy to collect

Still, there is a heavily taxed substance that will not go out of fashion: alcohol. Taxes on booze raise about £11 billion a year and, like fuel duty, it is cheap to administer – it costs just 0.4p for every pound collected in revenue. And, again, the tax is collected by scooping up cash from relatively few companies, not millions of consumers.

The problem is that desire for an easy-to-collect tax is sometimes prioritised above all else. Stamp duty land tax, a levy on the purchase of housing, is perhaps the best example of a tax that persists not because it makes much economic sense, but because the Treasury rather likes it. The tax is easy to administer and hard to avoid, being a tax on the transfer of a large, visible and fixed object.

But stamp duty is in many ways a terrible tax. Helen Miller, head of tax at the Institute for Fiscal Studies, a think tank, calls it “a tax on mutually beneficial transactions. It is one of the worst we have.”

It is a tax on selling and buying houses, so it discourages people from moving – unless they can make a massive profit to cover the tax bill. People will not move just because their house is not quite right. Elderly people, whose children may have moved out, are less likely to downsize, while growing families are discouraged from moving into larger properties. But the Treasury is relaxed about it because, as Tetlow says, “it raises billions of pounds a year and is easy to collect”.

The Treasury’s view on what makes a good tax will only become more significant in the next few decades. The Office for Budget Responsibility projects that, as a result of demographic changes, in the absence of policy change, projected debt will reach 150 per cent of GDP in 2050, 200 per cent in 2060 and on its way to 300 per cent in 2070.

Beyond its views on tax, though – where the taxpayer must work for the state’s convenience – it is rather sceptical of government making its presence felt. The Treasury thinks that markets broadly work, and the government’s job is to help them to work better. Dan Corry, a special adviser at a number of departments including the Treasury, said: “They worry that when government steps in, it is often a result of political pressure from Number 10 or powerful incumbents and you end up propping up lame ducks.”

In a 2016 speech delivered at the Treasury, Sir John Kingman, a former senior official, argued that prime ministers are always under political pressure to undermine productivity by propping up failing businesses. He cites the steel plant in Port Talbot, which was threatened with closure in 2016.

Government was pressured to support the failing Port Talbot steel plant

“I have occasionally wondered what Margaret Thatcher, whose portrait Sajid Javid made a point of keeping on his wall as Business Secretary, would have made of the endless meetings he had to hold under instructions from David Cameron to do ‘whatever it takes’ to save one of the world’s least productive steel plants in a massively oversupplied global market.”

Andy Westwood, a professor at the University of Manchester and a former Treasury civil servant, said: “Its theory of government is that it is bad at industrial strategy. I don’t think they would lose any sleep if BEIS [the Department for Business, Energy and Industrial Strategy] disappeared.”

The so-called Big Bang – the deregulation of UK financial markets in 1986 – was delivered by the Treasury and is, in Kingman’s view, “probably the single most successful piece of British industrial strategy ever”. But it was a strategy of cutting regulation. A very Treasury-ish notion of industrial policy and government action.

Indeed, the only industrial policy it seems to like where government plays a positive role is investment in science. Kingman says: “After the US, by any measure Britain has the best science on earth… This is why the Treasury has invested in this agenda, consistently now over a long period.”

Activist Chancellors have tried to move the Treasury into a more proactive industrial space. Gordon Brown set up the so-called “Produnit, “a rogue element”, according to Wood, with a focus on growth and productivity. But Wood could not help but notice that, as with the Big Bang, “remedies that the Treasury traditionally likes are never the state getting more involved but rather the state getting out of the way”.

Torsten Bell, director of the Resolution Foundation think tank, does not think this historical anomaly can last. “This is not sustainable. The Treasury is set up to carry out a great function, not to be a commentator.” The Treasury will bounce back. An institution that has been around since the Norman Conquest will not panic over a quiet few years.

Britain is an unusual place in lots of ways; a nation of shopkeepers, comfortable with the market. Tax-wary and sceptical of taking big risks on, for example, building new rail lines. Some of this is rooted deep in the nation’s bones. But make no mistake, it is a culture with an enforcer. The Treasury makes Britain much of what it is.

Jack Kessler is a reporter at Tortoise, who previously worked at HM Treasury

Further Reading

  • In 2014, then Treasury permanent secretary Nick Macpherson (now Lord Macpherson) ran through his views of 20th century UK economic history – and Treasury thinking.
  • If you like your graphs, this Institute for Government article on the age of the civil service is for you. Millennials are running in the country.
  • “Today I will announce more money and more capital investment in schools, hospitals, transport and fighting crime.” Go back in time to Gordon Brown’s March 1999 Budget. His tenure was the apogee of recent Treasury power.
  • You can tell how young the workforce is: Gladstone, the Treasury cat, is on Instagram.