The future of the UK Treasury
Samuel Brittan: Paper at London Seminar, October 13, 2000
Comment on paper by Lord Lipsey

May I begin by saying that the departmental Treasury needs to be more powerful rather than less. It is the only department that stands for the interests of the taxpayer, the consumer and the general citizen against all the sectional interests and pressures which bear on any government all the time. These are points which it is necessary to emphasise to MPs and fellow journalists; but even in this more rarified atmosphere there is no harm in recalling a whole series of projects ranging from Concorde to the Pergau Dam, and current taxpayer and financial aid for arm sales to dubious regimes, which would not have taken place had the Treasury more power.

This does not mean that the department is always right. There are issues where simply holding back public expenditure may actually waste more resources on a wider view. This is known to some ecomomists as "fiscal illusion". When the late Lord Soames was Minister of Agriculture, and well before the UK was in the EU, he started negotiating limits on imports of foreign foodstuffs to maintain domestic prices. The effect was simply that the consumer paid directly through prices in the shops; but this kind of protection was much less transparent than direct fiscal subsidy through deficiency payments, and therefore much more difficult to control.

More generally, there needs to be a second opinion on many matters concerned with the allocation of both national and government resources. I will just recall the many experiments tried in this direction. There was the Central Policy Review staff established by Edward Heath under Lord Rothschild. Before that we had George Brown's Department of Economic Affairs. More recently we have had the Downing Street Policy unit. There is no ideal solution and the approach must vary with personalities and the issues of the day. But it is important that this second opinion should be, as far as possible, divorced from the short-term electoral considerations with which prime ministers are inevitably preoccupied.

David Lipsey is far more up to date than I am on the organisation and role of the Treasury. Moreover I am not by nature an administrative creature and find it difficult to think about the machinery of government without looking at events, issues and policies.

Like Lipsey, I welcome the more sophisticated public expenditure control and emphasis on matter such as "welfare to work". The Treasury's greater involvement in social security matters is likely to extend its remit. Indeed I have often puzzled about the role of the Social Security Department as a kind of second finance ministry with the largest single two-way cashflow of any department.

Now that the interaction between tax and social security payments is realised, it might be sensible to merge the policymaking parts of the DSS with the Treasury, bringing in too that part of the Department of Environment concerned with housing benefits and any other transactions of a basically social security kind. The nearer we get to a negative income tax the more sensible such a merger will be. The more direct role of the DSSS in dealing with and helping social security claimants and others could be taken over by an executive agency, rather as the Inland Revenue and the Customs & Excise deal with the tax gathering side.

I agree that the Fundamental Expenditure Review went too far in downsizing the Treasury. Not only did it become too thin on the ground. But it lost a number of good officials who thought that they did not have much of a role any more and who went instead to the private sector or into international organisations.

Although the move to concentrate on analysis and global totals and to disengage from detailed argument about the candle end of expenditure is a good one, it has its dangers. It is very difficult to see where mistakes are being made and taxpayers' money compromised without getting involved in at least some of the spending details. I do not pretend to have a neat answer on how to reconcile these two principles. More frequent interchange of officials, which is so often recommended, might help. But I would put more emphasis on sample detailed inquiries, preferably not of too predictable a kind.

Let us not forget, however, that the Treasury retains an important macroeconomic role. I shall assume that the operational independence of the Bank of England is here to stay. The Chancellor sets the objectives for the Monetary Policy Committee. Since 1997 the simple target of 21/2 per cent inflation has been rolled forward. But this decision will not always be so easy or uncontroversial. The business cycle, and boom and bust, have not been abolished. Nor have international disturbances come to an end.

At times there are going to be arguments about how fast to squeeze inflation out of the system; and at other times there are also going to be arguments about how much policy needs to be loosened in the face of a slump threat. Moreover, although inflation targets are fashionable worldwide, we have not seen the end of arguments about whether there should be wider objectives which could still be compatible with not financing inflation. In quiet or successful times like the present these issues will be dormant; but this is just when most backroom thoughts need to be given to them.

Suppose the UK were to enter the euro? It is after all just possible! I am pretty sure that British governments would then become much keener on the Council of Euro Finance Ministers; and the ECB itself often talks about the need to match its efforts with structural reform and fiscal co-ordination. Finance Ministers will need to get their own part of the dialogue together; and I cannot imagine that the ECB will forever be allowed to interpret its mandate for stable prices just as it likes without any dialogue with governments whatever.

Moreover, I cannot imagine that the issue of exchange rate policy will go away, irrespective of whether Britain is in the euro or not. This is an easier point to make now that the British government has, wisely or not, taken part in intervention to shore-up the euro. The deputy director of the IMF, Stanley Fischer, has recently envisaged a world which would still consist of floating currencies, but with far fewer of them.

If we have a world dominated by the dollar, the yen, the euro and perhaps one or two other major currencies, there will be some need for cooperation however, informal. We may see something like a global Monetary Policy Committee even though that will not have in our own lifetimes the legal force of the MPC. This is surely not something to leave entirely to central bankers.

Policy input will also be required on the domestic fiscal framework. This of course is not a new idea brought down from Everest by Gordon Brown, but is a continuation and strengthening of the Medium Term Financial Strategy introduced by the last government. Indeed the roots go back even further to the Plowden Committee on Public Expenditure of the 1960s.

One difficulty here is that there is much less agreement today among economists about fiscal policy than there is about monetary policy. I very much hope that the medium term framework is here to stay. But there will always be questions about the rate of an economic growth prudent to assume for public expenditure purposes, as well as the role of short-term variations in the fiscal balance in supporting -- or just occasionally undermining! -- monetary policy.

Finally, the Treasury should in my view have a role not only in determining the fiscal balance but also in decisions about the total size of public spending and in decisions about which areas should be left collective provision and which for the individual citizen to finance for himself or herself. Although these matters will always be highly political, there is also an analytical input, which can be something more than the way in which the government of the day interprets the gut instincts of the electorate.

A postcript, if I may. I remember one previous Treasury Permanent Secretary (William Armstrong) wondering aloud whether there was much that the mainstream Treasury official could contribute to the discussions of professional economists. This was in the heyday of demand management when the status of economists was perhaps higher than it is today. Nevertheless since then economics has become even more rarified and almost a branch of applied mathematics. This does not make dialogue even with economically literate civil servants any easier. But present fashions may not last for ever; and whatever happens in universities, there is likely to be a rebirth of political economy in the more traditional sense, as well as a growing scepticism about the quantified objectives and targets so fashionable at present among political leaders of all persuasions. If both sides can be persuaded to discuss ideas, as well as perform technical exercises, the opportunities for a dialogue may occur again.