Peter Franklin: Abolish the Treasury

I know what you did last summer. 

Amid the hosepipe bans and dwindling reservoirs, you slashed the flood defence budget. 

By ‘you’ I mean Her Majesty’s Treasury, which would no doubt object that the budgetary decision was taken by the Department for Environment, Food and Rural Affairs, which has immediate responsibility for flood defence. Never one to miss a trick, HMT would also point out that Defra had been given all the money it needed and only ran short thanks to its lavishly incompetent implementation of the Single Payment Scheme for farm subsidies. This much is true. But what has flood defence to do with the Single Payment Scheme? Not much. Until 2001 they were the responsibility of different departments.  Nevertheless rules are rules, and the rule in this case was that, irrespective of Britain’s flood defence needs, flood defence work had to be postponed because somebody somewhere buggered up yet another public sector IT contract. 

Welcome to the wacky world of the Treasury, the guys who make the rules in Whitehall. 

It says something that the best decision that Gordon Brown ever made was to take power away from the Treasury. This, of course, was in respect to monetary policy, which had been mismanaged by HMT for decades (apart from the few brief years of Britain’s ERM membership, when we allowed former officials of the French finance ministry to mismanage it on our behalf). However, what Brown took away on the monetary side, he compensated for (and then some) on the fiscal side. Indeed, the Treasury has never enjoyed such power, effectively running the spending departments as if they were mere agencies. 

Thus we have social security, once the responsibility of the Department of Work and Pensions, now controlled through the tax credit system. Child poverty, a complex phenomenon, is reduced to a single target, an arbitrary line below which one is poor, above which one is not-poor. Child Tax Credits and Working Tax Credits combine in such a way as to push the maximum number of families from just below the line to just above it, thereby enabling the Government to claim it has ‘lifted’ the largest possible number of children ‘out of poverty’. It’s a shame that the system is designed in such a way as to make overpayments inevitable, routinely plunging families into debt and financial crisis when the money is clawed back. However, that’s OK, because – officially – no amount of debt can cause poverty! This is because the Treasury definition of poverty takes no account of outgoings, only income.

Sometimes the Treasury causes problems by not giving people money. Just ask successive Home Secretaries. We are incapable of dealing with crime in this country because our prisons are full to bursting. Not only does this mean inadequate sentencing and early release for dangerous criminals, it also puts paid to any chance of effective offender rehabilitation, thus ensuring sky high levels of recidivism and further pressure on prison places. The social and economic case for building new prisons is obvious, so why won’t the Treasury make the investment available? Part of the reason is political. Chancellors and Home Secretaries tend to find themselves as rivals for the top job. The former are in position to sabotage the ambitions of the latter by starving them of resources. Thus Treasury control of public spending virtually guarantees underinvestment in the criminal justice system. 

But there’s much more to it than that. We, in this country, seem incapable of incentivising long-term solutions to deep-seated social problems. This is the result of centralisation, short-termism and an unwillingness to tackle the root causes of dependency. These are vices that can be found throughout the public sector, but the darkest and dankest den of vice is the Treasury, to which all the incentives and disincentives of fiscal policy can be traced. 

This will never change under Labour, but what could a Conservative Government do about it? Well, with a Conservative Chancellor in place, we could just try to manage things better. But this is to forget that it will still be Gordon Brown’s Treasury. For ten years he had sat like a spider at the centre of his web, infusing every strand and thread with his way of doing things. The incumbency of his viceroy, Alistair Darling, will have done nothing to change that. So rather than unravelling the web, the next Conservative Chancellor would be better advised to sweep it aside.

It is time to break up the Treasury, doing for its fiscal powers what Gordon Brown did for its monetary powers. Essential regulatory functions could be combined with the pensions brief, so that the stability of the financial system would be the responsibility of one cabinet minister – who’d also have ultimate oversight of the work of Monetary Policy Committee of the Bank of England. A small Department of the Exchequer would be responsible for redesigning (i.e. simplifying) the tax system and for public borrowing (which would be strictly controlled according to independently-audited fiscal rules). The jewel in the crown, control over public spending, would be placed in the hands of temporary commission charged with the task of localising funding streams to the maximum possible extent, with incentives to solve problems woven into the very fabric of the new arrangements. Remaining powers over the allocation of public expenditure would be exercised by the Prime Minister through the Cabinet Office. 

Oh, and one more thing:

In the last ten years, the Treasury has been busy moving vast amounts of public borrowing off the balance sheet. Through the Private Finance Initiative and similar schemes, current and future taxpayers have been saddled with huge liabilities, with scandalously little in the way of meaningful democratic assent. The next Conservative Government should instigate a full public inquiry, so that the politicians, officials and corporations responsible for this matter can be held to account.

Comments

[Andrew Lilico]

Actually the government does not use a single target measure of poverty, as you suggest. Instead there is a three-part definition, including a relative income component, a "backstop" component (based on income in the past), and a "material deprivation" component based on access to key goods and services.

It is true that the government tends to *talk* about the relative income target more than the others. But it seems a little harsh to blame the Treasury for that...

[TomTom]

The Treasury has NOT given up influence over Monetary Policy. The Chancellor selects the Committee Members and a Treasury Official sits on the MPC - and the Deputy Governor John Gieve is a former Treasury Offiial

There is merit in breaking up the Treasury into a Ministry of Finance and a separate Office of Management & Budget attached to Downing Street and the Cabinet Office.

Separate Budgeting from Revenue collection and make The First Lord of the Treasury responsible for Budgeting

[James]

It does seem staggering that one man, the Chancellor of the Exchequer, has the authority to decide the spending levels for each individual Government department. He decides how much money they get, broadly what they can spend it on, and what targets they need to achieve. As Peter says, the great Departments of State are reduced to the status of agencies, subcontracted to carry out the Treasury's grand plans.

Surely spending priorities across Government (what proportion of Govt spending is allocated to which departments) should be decided by the Prime Minister and the Cabinet. Then spending priorities within each department, and any targets deemed necessary, should be decided by the relevent Minister. Thus each is accountable for the performance of their Department.

Isn't that how it used to be?

[Peter Franklin]

Andrew and TomTom,

You are, of course, both right -- but I hope you can forgive a little simplification for the purposes of brevity.

[Andrew Lilico]

Incidentally, it isn't actually correct that monetary policy was "mismanaged by HMT for decades". For most of history Britain has not run monetary policies. Instead we used fixed exchange rate policies. The only times since the second world war that we had monetary policies were a brief period during the early 1970s, then from the late 1970s until probably late 1986 (depending on exactly when you want to start the "shadowing the deutschmark" period), then a few months between Lawson's resignation and ERM membership, then from 1992 onwards. With the possible exception of the early 1970s (and even that is debatable), monetary policy was highly successful in each of these periods. Contrary to billing, HMT was a very effective exponent of monetary policy on those few occasions it implemented it. (Of course, its record on choosing when to implement monetary, as opposed to fixed exchange rate, policies, and its record on fiscal policy, were much worse.)

One other thing: there isn't any particularly good evidence from around the world that independent central banks perform better than government departments in managing monetary policy, and I am confident that this experience would be more than duplicated in the case of fiscal policy. (Before others leap to point at the many countries with low inflation that also have independent central banks, I alert you to the issue of causality. Further, I commend to you the statistics on "sacrifice ratios" - how much output loss and unemployment one has to accept in order to reduce inflation by one per cent. Independent central banks have no better sacrifice ratios than government departments. If you want credibility, you have to earn it. And if you earn it, you have it, whether you are a central bank or a government department.)

[TomTom]

Before others leap to point at the many countries with low inflation that also have independent central banks,

That is of course true. Germany uses monetary-base control with strict reporting - Britain has never managed monetary base control and permitted lots of OFIs to exist outside the core bank reporting system - and generously allowed housing finance to escape from the effects of The Corset and the expansion of Permanent Building Societies as opposed to Closed-End Societies removed the link between Deposit Shares and Mortgage Borrowings.

In fact to fund the Government's spending the B of E ran a very lax monetary policy backed up by the Exchange Control Act.....once that was repealed the Government failed to control Domestic Credt Expansion especially during the years of North Sea Oil and Thatcher used a policy over Overfunding through issuing Gilts at high coupon rates to soak up liquidity

[Wat Tyler]

I guess we all agree that HMT has accumulated too much power.

And I guess we all agree that we want funding localised.

Fiscal rules? I'm a strong believer because I don't trust political discretion. But that of course is a real bone of contention, as we know from all the slanging over "sharing the proceeds".

And on Andrew's sacrifice ratio point, I must say I haven't looked at the evidence recently. IIRC it always used to be the case the evidence clearly showed independent CBs were best. Maybe that's changed.

But I think we do now have a deal of evidence (eg the OECD growth work) that low and stable inflation is a key condition of securing long-term growth.

So yes, inflation targets may well involve short-term growth sacrifices, and maybe CBs are no better at managing that trade-off than politicos. But politicos have a horrible history of reaching for the escape hatch marked Discretion and then leaving us to hit the mountainside.

[Andrew Lilico]

Wat Tyler@11:58

Inflation targets are quite separate, conceptually and in practice, from independent central banks. For example the UK had an inflation target from 1992 to 1997 but not an independent central bank. It is perfectly possible to be a keen advocate of inflation targeting and yet an opponent of independent central banks (e.g. that was Conservative Party policy from 1992 until 2000). Further, inflation targeting is not the absence of discretion, but merely a set of constraints imposed upon it.

[Andrew Lilico]

Wat Tyler@11:58

Concerning evidence on the performance of independent central banks. The traditional view (up to, say, Alesina and Summer (1993)) was that countries with independent central banks had lower inflation but no worse real (output and unemployment) performance. It was assumed (without either decisive theoretical mechanisms or empirical evidence as to causality) that this was because independent central banks had a "credibility bonus". This notion was pervasive enough to penetrate the broader public consciousness, especially because a number of very influential free-market advocates (particularly IEA authors) had favoured central bank independence for general reasons of scepticism about politicians.

But after Alesina and Summer empirical studies focused on the credibility question, in particular asking whether countries with independent central banks managed to reduce inflation with less cost in terms of output and unemployment - as should have been the case if the credibility argument were correct. A series of important studies (up to and including Posen(1998)) suggested that, in fact, the reverse is true - when central banks are independent the costs of reducing inflation are *higher*. A current important research programme is challenging/offering mechanisms to defend this finding.

This should be obvious, really. An independent central bank is just a commitment mechanism. But there are other commitment mechanisms - e.g. promises. When other commitment mechansisms are effective (e.g. Thatcher's "You turn if you want to - the Lady's not for turning) then the (now-close-to-zero) credibility benefits of central bank independence will, in theory, start to be outweighed by the coordination losses - e.g. we would find it hard, now, to use coordinated monetary and fiscal policy to bear down on inflation in the way that we did, with great success, from 1979-1981.

[Yet Another Anon]

It does seem staggering that one man, the Chancellor of the Exchequer, has the authority to decide the spending levels for each individual Government department.
The Treasury though handles revenue and ultimately has to be responsible for setting total spending limits for different parts of government and setting a total control total in order to rein in public spending - if there wasn't some central body able to tighten the belt across a range of public spending then Public Spending would have even more of a tendency to rise.

Bringing together Business Parts of DIUS into the Treasury along with DWP and simplifying the Tax & Benefits systems and radical deregulation could held both downsize government while intensifying central restrictions on spending.

[James]

Yet Another Anon @ 2.48pm

You quote my 0922 comment.

I entirely accept that the Treasury is the authority for total government spending levels. My issue is this: how dare the Chancellor decide what percentage of that should go to the Home Office, and what percentage to the MOD. Then how dare the Treasury tell the MOD what internal targets it should use.

The PM and the cabinet should decide how the total amount of Govt spending should be split up over the different departments according to the Government's (not the Treasury's) priorities.

Then the Minister responsible for each department should decide what targets etc to use internally (perhaps advised by the Treasury and the NAO) - and should then be accountable to the PM and to Parliament for the performance of his/her department.

[Bill Brinsmead]

Franklin’s Treasury proposal is silly. ‘Causes problems by not giving people money’!! That its job. More difficulties would be caused by splitting its functions – remember the Department of Economic Affairs as created by Harold Wilson. Problems associated with Brown’s tax credit policy notwithstanding, the Treasury is the most professional and effective of all Government Departments. Better to abolish the Department for Business, Enterprise and Regulatory Reform [former DTI] as it is both pointless and usless.

[Yet Another Anon]

The PM and the cabinet should decide how the total amount of Govt spending should be split up over the different departments according to the Government's (not the Treasury's) priorities.
So where do the Departments get the money from, deciding how to spend money that they raise themselves would be one thing, but the MoD and Home Office still have to get the money from somewhere, as for the government deciding the government does decide on how public money is spent, the Treasury is part of the government and the ministers in the Treasury are appointed by the monarch on the request of the PM - you might as well say that the Home Office shouldn't decide how to deal with crime and instead that should be done by the PM and a cabinet committee, you could say that the same way for every area of policy making.

[William Norton]

Peter: This is a stunningly daft idea. What you're saying is that, because you once went to a bad dentist, you're going to cure toothache in future by having your head cut off.

I'm not sure that I fully understand the proposal in all its glory, but some off the cuff remarks would be:

(1) I think you've misunderstood how the flood defence accounts work.

(2) You appear to suggest weakening an elected Chancellor of the Exchequer in favour of a 'temporary commission', which sounds like some sort of arm's length quango to divide up revenue. You think the BBC Model deserves to be tried with bigger numbers?

(3) We agree that the target state hasn't worked. There are two types of targets these days: Public Service Agreement (PSA) targets by which the Treasury control spending departments' use of funding, and more public sector performance targets, which are ultimately run out of the Cabinet Office. The CO targets have been the more damaging - you propose rewarding them with greater scope to set targets.

(4) There already is a govmt department responsible for revenue collection, but not policy formulation. It's called HM Revenue & Customs. Your proposal adds nothing.

(5) 'Localising funding streams to the maximum possible extent' doesn't actually mean anything, does it? If you mean either (a) hypothecating tax revenues; or (b) cutting central taxation and allowing local authorities to set their own taxes, please be more explicit. I've got nothing against either in principle, but they are radically different structures and the element of confusion in your proposal is unhelpful.

(6) I suspect the reason why the Treasury has underfunded the Home Office in the last few years is because they think the Home Office is staffed by idiots. They're quite right.

(7) The system you describe would have even weaker internal audit and financial control than the present mess. I'd be interested in hearing of any large organisation with the financial control structure you propose.

(8) The Blair/Brown Reich has been a novel and challenging experiment to prove that the Harold Wilson approach to running an economy was right all along. Resurrecting George Brown's DEA is an odd way of breaking with the Blair/Brown years.

[James]

Yet Another Anon @ 5.44pm

I'm really not sure if you're being deliberately silly or if you genuinely misunderstood me...twice?

You seem to be suggesting that it's fine for the Chancellor and the Treasury alone to decide whether Defence spending should account 1% of GDP or 10%? Whether we should spend more money on the NHS or on Schools? Whether the environment should be a higher priority than overseas aid?

These priority decisions are for the PM and the Cabinet (of which the Chancellor is a member). Not for the Treasury. The Chancellor and the treasury tells the cabinet how much money is available for the Government as a whole to spend, but shouldn't decide how the pie is then divided among competing priorities.

The Treasury is not the Government, and talk of the Home Office raising its own revenue is just silly.

[Yet Another Anon]

You seem to be suggesting that it's fine for the Chancellor and the Treasury alone to decide whether Defence spending should account 1% of GDP or 10%? Whether we should spend more money on the NHS or on Schools? Whether the environment should be a higher priority than overseas aid?

These priority decisions are for the PM and the Cabinet (of which the Chancellor is a member). Not for the Treasury. The Chancellor and the treasury tells the cabinet how much money is available for the Government as a whole to spend, but shouldn't decide how the pie is then divided among competing priorities.
And the PM is the one deciding who should get what post, and if they aren't happy with the Chancellor then the Chancellor can be fired or over-ruled, the Treasury also does not have almighty power because the PM is still the boss of the Chancellor of the Exchequer - Norman Lamont as Chancellor of the Exchequer had to defend the ERM despite being wholly against it, Nigel Lawson was against the Community Charge but had to provide money to help with it, when he refused to do what Margaret Thatcher wanted she brought in Alan Walters who had a hand in deciding economic policy over the head of the cabinet and Nigel Lawson. Tony Blair announced the change to uprate the State Pension above inflation without consulting Gordon Brown, if Gordon Brown had said no then he would be have been told "I'm terribly sorry Gordon, but you're fired! It's going to happen!".

If a Chancellor of the Exhequer decided that Defence Spending should be halved the following year, if the PM was determined to maintain Defence Spending as a proportion of GDP or raise it then it would probably come down to the Chancellor of the Exchequer either having to get with the programme or get the sack!

[Yet Another Anon]

>>>>You seem to be suggesting that it's fine for the Chancellor and the Treasury alone to decide whether Defence spending should account 1% of GDP or 10%? Whether we should spend more money on the NHS or on Schools? Whether the environment should be a higher priority than overseas aid?<<<<
That bit should have been in italics which don't seem to be available on this page.

[Yet Another Anon]

>>>>The Treasury is not the Government, and talk of the Home Office raising its own revenue is just silly.<<<<<
I didn't say it was the government, I said it was part of the government.

So you seem to be suggesting that the Home Office should be able to decide how much it needed to spend and then just take whatever it felt like taking?

The whole point about the Treasury is that it is there to manage the national accounts and decide spending and tax levels, this is something that gets discussed in cabinet and in which the Prime Minister as First Lord of the Treasury has an important say on, Gordon Brown has been given more leniency to decide his own economic policies than any other Chancellor of the Exchequer in history, but was still in a junior position to Tony Blair who had the power to and did sometimes over-rule him and had the power to do so a lot more!