Lansons Conversations

Her Majesty’s Treasury: Still the great office of state?

Lansons Public Affairs and Regulatory Consulting hosted a seminar this morning examining the current role of HM Treasury in UK politics. The assembled panel included Lord Oakeshott – Liberal Democrat peer, former Treasury Spokesperson and high profile media commentator; Lord Turnbull KCB – former Head of the Civil Service and Cabinet Secretary between 2002 and 2005 and Permanent Secretary to the Treasury between 1998 and 2002 and Kitty Ussher – Director of the think tank DEMOS and former Treasury Minister. The seminar was chaired by Lansons Director, Mark Adams, who spent six years in Downing Street working closely with the Treasury. Opening remarks Lord Turnbull Addressing the seminar’s question of whether the Treasury still remains the great office of state, Turnbull began by listing some of the department’s current properties. He said that the Treasury has a pan-governmental view, can play a role of consumer protector, acts as the lender of last resort, has an international perspective, is an institution dominated by rationalists and is generally sceptical. Turnbull said the department became flooded with a range of ‘pathologies’ under the previous Labour government, and that under Gordon Brown’s stewardship it lost track of its main job – i.e. keeping on top of public finances. Under Labour, the role of Chief Secretary to the Treasury was downgraded and lost importance, and in this time the Treasury also became a rival to No 10, pushing policies such as tax credits, science, aid, and being deliberately hostile to others, he added. Brown ran public expenditure on a bi-lateral basis, and lost any sense of objectivity and self-criticism. Turnbull pointed to the fact that by 2008 public expenditure was out of kilter with the UK’s GDP and that it is only beginning to get close to being realigned again now. Turnbull called the Treasury very weak on European financial services – saying that Solvency II is deeply flawed and riddled with problems, and yet it has still managed to progress very far. Where are we now? Turnbull claimed that under the coalition these ‘pathologies’ have been readdressed, and that the ‘nettle has been grasped’ following the crisis. He said that as the coalition has come forward with measures to fiscally readjust the economy, this has meant that the Treasury has returned to the collective governmental programme, and with Osborne not trying to be an alternative source of power (like Brown, who always harboured ambitions to be PM), this has helped matters. Speaking more generally, Turnbull said that the UK taxation system is a complete mess with no overall philosophy, with nothing to encourage sectors such as savings and pensions. He claimed that the Bank of England (BoE) has too much power, and that to counteract this, the Treasury should be more explicit about its role. The Governor of the BoE has an extremely difficult job, he said, before praising Mervyn King as a world class operator who manages to cope with the brief. Concluding, he described the Treasury’s acquiescing on the policy of decarbonisation as sheer lunacy, said that stimulating demand in the economy isn’t the same as stimulating growth and said that the Treasury’s role should be to turn the spotlight on all aspects of the government (including itself) to ascertain where growth and public expenditure savings will come from. Kitty Ussher Ussher began by saying that there are two ways of looking at the question in hand:
  1. By analysing the last few years in detail, or
  2. Taking a broader view – and examining the mistakes that the Treasury continue to make, to ascertain whether there are any institutionalised problems that can be fixed.
 Ussher said she would take the second approach, because she thought that there are some things about the Treasury that are predisposed to policy errors. First, she said that the Treasury is, on its own, a special interest itself, and that its view of the economy is that the private sector will generate growth as public sector spending is regulated. She said that some of the other institutional problems included a loss of collective memory (i.e. it is full of bright young officials that are constantly moved around) and a lack of accountability. This is a point she continued to return to, claiming that often people don’t dare to question the Treasury (e.g. when it was at its most powerful under Brown). She claimed that there is no real way MPs can question its true effectiveness. To remedy this, she proposed an independent Parliamentary Budget Office that would assess the effectiveness of its operation. As a general aside, Ussher went on to describe the role of the Finance Bill as ‘a joke’, where the most esoteric tweaks are heavily debated. Following the recent publication of her pamphlet (National Treasure, DEMOS), Ussher then moved on to discuss taxation. She said that MPs are not experts on many tax issues and while the Treasury Committee does its best, tax policy is not properly considered. There should be a Taxation Select Committee to scrutinise these policies properly, she said. The main problem ministers’ face is the ad hoc changes made in the run up to the Budget, she also claimed, saying that there should be a Taxation Policy Paper that explains the rationale for various policy changes in full. She also claimed that the relationship between HMRC and HMT does not work properly, and there is a cult of youth managing older experts. She proposed a tax policy career stream, where tax experts take seats in various departments to fully build their expertise, in turn becoming more useful civil servants. On financial services, she said regulation is a huge problem for Europe, but the Treasury is consistently uninterested in engaging with the issue. Ussher claimed that as is often mooted in government, there may even be the argument to move the issue of European financial services regulation to BIS. The changes to the FSA by the current government were politically driven and a mistake, she said. However she did acknowledge that the PRA will be useful and should take a macro-economic regulatory role. Ussher also highlighted that there is no conversation about whether there should be a fiscal response to asset price booms (i.e. house prices), and questioned whether there are in fact tools that could deal with asset price bubbles (such as housing), and adjust taxation according to the cycle. Lord Oakeshott Oakeshott cited four examples which he thought demonstrated policies emerging from the Treasury can go wrong and take a long time to reverse. He said these incidents give a flavour of some failed policies that demonstrate its combination of ‘arrogance and incompetence’:
  1. Abolishing stamp duty in supposedly disadvantaged areas (an obvious mistake that took years to change)
  2. Legislation that people could put assets such as second homes, cars and fine wine into their SIPP (this was quickly changed after pressure on Brown)
  3. Northern Rock (where he met with Darling supporting Cable in opposition)
  4. Iceland (could have been stopped much sooner, according to Oakeshott, who then questioned whether we will ever be compensated)
Predictably, he said that figures on bank lending to small businesses (Project Merlin) spoke for themselves. Oakeshott then said that if you think he is being critical of the Treasury, don’t start him on HMRC, which has serious problems! Opening the debate up to questions from the floor, the panel was asked what the UK can do to prepare for the serious regulatory changes from Europe that are imminent. Kitty Ussher responded that the UK misses a trick when it comes to European financial regulation, saying that Whitehall finds it impossible to lead in the European policy arena when it should be doing more. She said it did lead on MiFID but failed to on Solvency II. Otto Thorensen, head of the ABI, asked how the UK can deal with the impact of its ageing population, and questioned whether is it currently debated or understood enough? Quite simply, Lord Oakeshott said, we’ll all have to work longer. Oakeshott even revealed that he had bought back the business which he had previously sold in recognition of this fact. Lord Turnbull said that the government deserves credit on its approach to this issue, because the policy is now getting serious thought. He said long term care depends on bringing people into the ‘risk pool’ when they’re close to retirement. He called Lansley’s death tax ridiculous, and said that this issue would be reclaimed by Andrew Dilnot when his review is published next month. On this question Ussher said she was excited by the role the private sector can play in long term care, saying that the government’s role here should be to shape the market for this to take place. Closing remarks (in which the panel was asked to score the Treasury out of 10 for its stewardship and steering of the British economy over the past 20-30 years). Lord Oakeshott Naturally, the performance of the Treasury fluctuates, and is very variable. In the mid 2000s the Treasury got it wrong, and didn’t heed the warnings of market bubbles, although throughout the 1990s it did a fairly good job. He agreed with his fellow panelists that the shake up of the FSA was wrong, and said that the Bank of England shouldn’t do macro/micro regulation. The answer to the problem of financial regulation isn’t just to set up new institutions, he said (companies don’t do this when they face problems), but continuous learning and changes are needed to solve these problems. Kitty Ussher For its effectiveness, she scored the Treasury 6/10, for its level public accountability she scored it a 2/10 and for its grasp on financial services she scored it 8/10. She pointed to the Treasury’s performance in autumn 2008 (immediately post-crash), when its direction was followed throughout the world and when Brown led at the G20. Lord Turnbull The period from September 1992 – 2003, the Treasury scored an 8/10 in his eyes, he said. But he went on to criticise the failures to see the warning signs, meaning it slumped to 4/10 at the time of the crisis. He concluded by saying things are now on the up again for the department, under the current coalition.