• C. Peters

How HM Treasury Works - Part 4

Updated: May 16

Finance sector = sum of all other sectors combined, squared (or Square Miled)


As the blog builds out, it will become more and more obvious that every department in government represents its most important stakeholders and institutions. The Department for Transport is the department for trains above all other forms of transport, Department for Education the department for schools above all other education institutions, the Home Office is the department for the police, Health the department for hospitals… HM Treasury is the department for banks. It just happens that in our government, the Treasury is more powerful than every other department combined, so the financial sector is more important to the government than every other sector combined… and then some.


Alongside taxation and spending, “financial stability” is the third but the paramount priority for the Treasury. The spending group in the Treasury is all about keeping spending low, and the taxation group is all about keeping revenue high. Part of the reason the Treasury is so obsessed about this balance is because there is nothing more important to the Treasury – currently, historically, or in future – than financial stability. It is this part of the Treasury and government that has been most influential on the UK’s culture, status and reputation as a country. I would suggest that the UK’s uneven and unequal economy is partly because we favour the financial sector above everything else, given the financial sector is based in London and the south-east and other major cities such as Edinburgh and Manchester. This is because it is one sector the Treasury represents. You may think this sounds a bit much but hear me out…

Our financial services sector is just under 10% of the economy, and employs 1.1 million people. Among large rich countries, the UK is the most reliant on this sector for our economy according to the OECD. London has 50% of our financial services industry – and London is only narrowly behind New York as the world’s biggest financial services city, three times bigger than its nearest rival in Europe, and Edinburgh is the 7th biggest financial centre in Europe. And it’s not just London and Edinburgh, Manchester alone employs 280k in financial, professional and business services – 20% of its economy. This is a sector that raises about £60bn a year in tax – 50% more than the £40bn raised through Council Tax every year. So financial services are important. It also props up every other sector through loans and investment, so it is an absolutely crucial sector. But to the Treasury, it might as well be the only sector of the economy in the UK.




[Source: Financial services: contribution to the UK economy - House of Commons Library (parliament.uk)]

I said in part two that the Treasury was dedicated to spending as little as possible, well there’s a few major exceptions to this: Above all, the 2008 “Bank Bailout” came to £500billion – that’s over five times the amount spent on the NHS that year – this was justified in the name of financial stability. It was a decision that received widespread acclaim at the time but prior to it, and ever since, the concept of bailing out any other company in any other sector is met with derision by Treasury officials and Ministers. The graph in the middle above shows how the financial sector became an even larger part of the economy after the bailout than before it.


On the other hand, only extremely reluctantly did the Treasury agree to bail out Bulb energy last year for an estimated £2.2bn, or 0.33% of the bank bailout once inflation is taken into account. The context of these bailouts are obviously different, but not as much as you might think: both during an international crisis in their respective sectors, both the energy and finance sectors are enablers to other sectors to function, both are crucial to consumers and commercial interests, both are major parts of the UK economy, and both are highly political sectors - energy maybe even more so than finance. The sums will never be comparable, bank capitalisation generates eye-watering numbers, and Bulb is more the equivalent of the smaller consumer facing Northern Rock bailout in 2007 than the then investment and consumer banking behemoth that was RBS - that would be like bailing out one of the “Big Six” energy providers. Nevertheless, my point is that Treasury officials feel as if they lost a public and political battle when they agreed to bailout Bulb, in 2008 they were jubilant like victors in an existential war.


We do not even need to look as far back as those strange days in 2008 to see how Treasury’s approach to the financial sector is so different to any other sector. Let's just take the pandemic. In 2020/21, economic affairs became the third largest area of spending behind health and social protection and overtook education. Much of the extra spending on economic affairs was HMRC’s spending on the Coronavirus Job Retention (Furlough) and Self-Employment Income Support Schemes, and other business support grants and business interruption loan schemes – but these schemes were not just about keeping unemployment down and business afloat. In terms of business support, it would have been far more fiscally efficient to target these schemes on the most covid impacted sectors, and certainly less prone to corruption had the Treasury not guaranteed 100% on loans which eroded bank due diligence on loans and exposed the taxpayer to corruption. This incredible guarantee on all business bank loans was as much to protect the banks as the businesses, arguably more so the banks given they were exposed to no risk and the businesses would still have to eventually repay the loan whoever was the lender.


The furlough scheme meanwhile was designed to ensure middle class professionals were not exposed to the horrors of the welfare system and universal credit. The furlough offered substantial salary subsidies - up to 80% of salaries - for employees who had been furloughed rather than let go. Had they been let go they would have to seek support from the welfare system, instead they were still paid by their employer for doing nothing. If on welfare they may have looked for work or taken up training, not allowed under furlough. Similar to the business support scheme, the furlough scheme increased the risk of false claims and corruption. The alternative would have been to significantly increase universal credit so salaried professionals and those in less secure work would both benefit from the same level of state support. In reality, those in secure work disproportionately lost out from covid support - and indeed were often those more exposed to the virus on the front line jobs. Furlough was unfair, inequitable, and highly fraudulent. Separate analysis by The Economist and The New Statesman, based on National Audit Office and departmental records, estimate that over £20billion was lost through fraud and wastage by these two schemes - about a third of the entire pre-pandemic Universal Credit annual budget.


The reason the Treasury were so permissive of fraud and corruption during the pandemic, and so promiscuous on spending to support salaried professionals and businesses, was that financial stability is far more important to it than fiscal probity or fairness. Its priority was to ensure income taxes were paid, the middle class’s mortgages were paid, loans were kept up by businesses so that bank credit was not put at risk. Even if these schemes cost substantially more taxpayers money and fueled flagrant corruption, they ensured financial stability - the only thing that trumps fiscal efficiency to the Treasury.

Of course the drive to set up the generous covid support schemes is obviously partly political, unemployment and business failure is not shrewd, but neither is hundreds of thousands of deaths… and it was the Treasury that consistently and belligerently argued against every lockdown and every social distancing measure in the name of “the economy”. Of course, the best thing for the economy was getting the virus under control, but protecting the economy wasn’t the real aim. As I will set out in part six, the economy is not a priority for the Treasury. The reason to end lockdown and social distancing was because of the impact it was having on the three Treasury’s prioriites: it was exploding spending; it was imploding tax intake; and continuous business closures were risking a debt bomb, severely risking financial instability should there be mass defaults. Debt was a bigger concern than death.


Somehow, the Treasury came out of the pandemic with its reputation enhanced. Even after a disastrous policy of paying people to mingle indoors to catch covid in summer 2020. Even after Theodore Agnew, a Treasury Minister, resigned at the turn of 2022 because he thought his department was doing too little to address fraud. Even after the numerous reports on billions of pounds of wasted spend. Even after a policy of protecting the jobs of the well-off but not the insecure. Even after refusing investment on catch-up education, or addressing the NHS backlog without increasing the taxes on low and middle income workers. Even after leaving the UK with among the highest levels of public debt in the rich world. Only after throwing fuel on the fire of the cost of living crisis is its wisdom finally getting questioned.


The other area Treasury policy is finally getting questioned is how financial services policy has corrupted the UK economy with Russian money… Let’s get into it in part five.


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