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21 Sep 2022


The Treasury and its ‘orthodoxy’ have recently been dragged into the spotlight. The first act of the new PM and her chancellor was to confront it head on with a view to justifying new budget and policy initiatives. The orthodoxy is something that does need to be challenged and reviewed but it also has various elements; and, in many critic’s eyes, Liz Truss and Kwarsi Kwarteng have chosen the wrong one to oppose.

Treasury orthodoxy and economic policy was a major point of difference between the two Conservative leadership contenders. Rishi Sunak, the last chancellor, took the standard Treasury post-crisis line of regain fiscal discipline now before contemplating anything else. Liz Truss instead railed against the ‘abacus economics’ of ‘Treasury orthodoxy’, calling for borrowing to fund tax cuts now, in the hope of quickly stimulating economic growth.

With Truss’s victory it then seemed inevitable that the HMT was likely to be challenged. She didn’t disappoint. She approved the sacking of the Treasury Permanent Secretary, Tom Scholar, on day one. Scholar was one of the Civil Service’s most experienced, able and popular senior figures. I know because many I interviewed for my recent book on the institution repeated these things to me.

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

The most obvious reason is that Scholar is too associated with that ‘Treasury orthodoxy’. When asked, everyone I spoke to is convinced that there is an orthodoxy, although which elements they emphasise varies. The one they all agree on is the need for balanced budgets (which goes strongly against borrowing to achieve tax cuts). ‘Everything has to be paid for’, said Scholar to me, however that is achieved.

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

Every government since 1979, whether Labour or Conservative, has done so too, though not always through the same mechanisms. Since then, there has also been a great degree of continuity when it comes to the officials running the department. There was no great overhaul of Treasury mandarins when New Labour came to power in 1997. The younger generation that developed under Brown and Darling then passed onto Osborne in 2010.

The last time there was a major clear out of senior Treasury personnel was in the first years of the Thatcher government. The top tiers were all forcefully removed. They were seen as Keynesians, held to blame for Britain’s economic decline in the 1970s and the nation’s near bankruptcy in 1976. The new personnel put in charge, Peter Middleton and Terry Burns, were completely in line with the alternative thinking, including a return to those traditional elements of Exchequer orthodoxy.

So, it seems fitting that if Liz Truss and Kwasi Kwarteng wanted to really challenge the Treasury orthodoxy they would start by removing its most senior figures. They are only doing what Theresa May, Boris Johnson and Dominic Cummings all threatened to do. Like them, they saw the institution as standing in the way of any radical economic policy shift.

For me and various critics, the 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 circumstances, has inhibited all manner of initiatives.

British business support and regional development infrastructures and funding have been wound down. The instinctively conservative Treasury has fought against national new initiatives of all kinds. In contrast, it has actively wooed foreign multinationals and international investors with tax breaks, sweeteners and light touch regulations. Many has been the former Treasury minister or official who wrung their hands over the decline of UK manufacturing and regional economies, asking should they have done more?

More than that are the associated elements of the Treasury orthodoxy that have become particularly entrenched since 1979. One of those is the use of monetarist policy levers rather than fiscal ones, and the pretence that UK governments never intervene in the economy if they can help it. This has resulted in all sorts of accounting ruses and trillions in state debt being quietly built up through Quantitative Easing, Private Finance Initiatives and other measures.

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

These criticisms of UK economic policy have been put by various authors over the years. Although, more often than not, it is the politicians rather than Treasury officials that are held to blame. For me, it has been both. Exchequer orthodoxy has dove-tailed neatly with the post-Thatcher political economic consensus.

However, it is clear under the new Truss government, that it is a quite different view of Treasury orthodoxy and economics that is driving recent attacks on the institution. In spite of years of corporate and individual tax rate cuts, they argue that it is more tax cuts and deregulation that are needed for growth, regardless of cost. And it is principle number one – the fiscal discipline of balanced budgets – that is getting in the way.

And there lies the dilemma confronting myself and other Treasury critics. For many, it makes sense for macroeconomic management to be separated from the finance department function of making things add up. Economic decision-making and investment need to be spread beyond the confines of the Treasury orthodoxy and London in order for things to move forward.

On the other hand, a weakened Exchequer also means a lack of checks and balances on an all-powerful Prime Minister and spendthrift ministers, operating in a state lacking a robust constitution. In these precarious times of populist politics, where rules and precedents are easily ignored and opponents ruthlessly dispatched, that could cause all manner of unwanted consequences. In which case, Treasury critics need be careful what they wish for.

By Aeron Davis, Professor 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 History of the Treasury Since 1976.


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