Britain’s mighty Treasury needs to change

Few finance ministries wield as much influence over national affairs as Britain’s. Many advanced economies split responsibilities for tax, spending, and economic growth across departments, but His Majesty’s Treasury has all of these in its domain. This power has made it an easy scapegoat. In recent years its bean counters have been accused of imposing austerity after the financial crisis, and then spending wastefully during the pandemic.

Much of the blame is misguided. Politicians ultimately set the fiscal rules and policy agenda, not Treasury civil servants. In fact, a strong finance ministry is a feature, not a bug, of a well-functioning state. It needs to impose discipline on government spending to counter politicians’ predilection to overspend. Co-ordination is also needed as individual departments struggle to weigh their needs against broader government objectives. Still, some criticism of the Treasury is fair and calls for reform are justified. With significant, and often contrasting, economic objectives it struggles to get the balance right.

First, the Treasury’s growth mandate can often be usurped by its drive to make the books balance and ensure taxpayers receive value for money. This has been called “Treasury brain”: an overemphasis on near-term costs and benefits, and a hesitancy towards ambitious proposals that only pay off in the future. Insiders say the Treasury initially opposed an extension of the London Underground to Canary Wharf in the early 1990s — a project that ultimately ended up supporting the growth of London’s financial district.

Second, it has a tendency to micromanage. Its civil servants control how funding is allocated to departments and regions, as well as how underspends are used. This centralisation means other public bodies lack accountability and fail to develop internal financial management capabilities. Third, the Treasury’s close control over tax policy has led to charges of excessive secrecy. Indeed, withholding proposals for political purposes — such as “rabbit out of the hat” announcements at Budget time — undermines how affected departments set their plans.

So how should the Treasury be reformed? Some advocate splitting it into separate finance and economy ministries, similar to Germany and Japan. But reorganisations can be needlessly long and messy. A better approach would be to make the current arrangement function more effectively. Above all, the prime minister and their cabinet need to lay out a clear economic agenda — to help guide civil servants’ decisions over the parliamentary term — and co-ordinate its implementation across departments. Fiscal rules also need to be designed to discourage capital spending cuts to meet short-term needs. And, having fewer fiscal events would help encourage more strategic discussions about funding between the Treasury and departments.

Some internal changes are necessary, notably decentralisation. More powers should be devolved to other government departments. Their specific expertise makes them better at designing policy. Local authorities, which are similarly more responsive to regional economic needs, ought to have more revenue-raising powers. Budget allocation processes need to be more collaborative and transparent.

Putting the Treasury’s growth unit on a more equal footing with its budgetary functions would help to ensure that growth considerations — and the government’s strategy — are factored into tax and spend decisions. And, a better resourced Office for Budget Responsibility, which could more effectively score the impact of policy recommendations on long-term growth, would improve the Treasury’s accountability.

The department’s “penny wise, pound-foolish” tendencies need to be curbed by the next government. But it is even more important that the next prime minister can articulate and commit to a coherent strategy for it to implement.