How HM Treasury Works - Part 5
Debt, Russians, Brexit
The UK is famously tolerant of allowing every sector of the economy to fail – in fact successive governments have often positively encouraged it. The UK was once dominant in clothing manufacture, coal, iron, steel, shipping and ship building, but they have all been let to quickly and dramatically collapse… for sensible reasons, mostly, albeit socio-economically painful ones. However, there is one exception - the finance sector cannot fail. After, it is the sector HM Treasury looks after. This is how the government works, how the Treasury works.
As set out in part four, the bank bailout and the covid support programmes have left the UK with significant levels of public debt – among the highest in the rich world, although this debt is tempered by the fact markets are confident the UK can pay it off. Lenders believe it is extremely unlikely we’ll default on that debt and, while we have extremely high levels of government debt, a few other countries are at much higher levels of risk than the UK – especially Japan, Greece and Italy. But the UK is creeping towards them at the top of the debt table. This confidence that the UK government can pay its debts is driven by the fact it keeps revenue raising high – by taxation, and spending relatively low compared to other European countries. So the Treasury’s two goals of increasing revenue and lowering spend are informed by this overall goal of financial stability.
This is further embedded because the Treasury underwrites the Bank of England’s ability to conduct quantitative easing. This is a very complicated way of indirectly putting cash into the financial system, which has been going up dramatically since the financial crisis, especially since Brexit and fuelled by the pandemic. The Bank of England (BoE) had pumped £900bn into the financial system by the end of 2020. Quantitative easing is a bit more like paying down a mortgage by buying an asset than pure spending as the BoE could get that money back by selling those bonds. But the Bank of England’s ability to buy these bonds at such scale is based on essentially printing money that is guaranteed by the Treasury – which acts as lender of last resort.
So while quantitative easing is not tax payers money but it is guaranteed by the tax-payer, which further heightens the priority for the Treasury to maintain financial stability to ensure government bonds retain value. And for government bonds to be worth something, the Treasury needs to ensure it raises as much revenue as possible, because bonds promise to pay the owner a fixed amount of money in future. Bond buyers need to have faith that the UK will have the money in future to pay that bond, urgo not spending too much and raising as much as possible. So the obsession around financial stability drives the Treasury’s other two priorities.
The obsession of financial stability goes much further too, as it has led the UK government to encourage, by almost any means, inward capital investment in the UK to grow the financial sector. As set out in part two, taxes on ordinary people and goods in the UK is relatively high but taxation on corporations is much lower than the rest of the G7, and taxes on the wealthiest individuals are lower than than the rest of the G7 aside from the USA. This is to encourage overseas wealth to flow into UK banks, properties and businesses. This lust for inward investment is one of the reasons the UK has been so permissive of Russian money - wanting their money in our banks, wanting their mortgages for the Mayfair mansions on UK bank’s books.
London has been described as the money laundering capital of the world, because of how easy the UK has made it to put dodgy money in our banks. This blind-eye turn has been Treasury policy for at least thirty years. Raise taxes on low-medium income working Britons, lower taxes on rich overseas corporations and “entrepreneurs” because their custom is worth more to banks and professional services firms. In a country that has infamously made so much political hay out of a intolerance to immigration, the interest of the financial sector has ensured the Treasury has titled tax, banking and investment policy in favour of some of the most intolerable of immigrants - with the UK sanctions on Russians revealing how many gangsters, oligarchs and Kremlin cronies were here in the first place. It makes you wonder how many non-Russian persons of disrepute are being chauffeured around the streets of London making the most of the loopholes and perks the Treasury has written into UK tax and banking law.
Speaking of immigration and the financial sector, it would be remiss to mention the government policy where those areas have been most impacted by - Brexit. Interestingly, before the referendum, HMT, its officials and its culture, were known throughout Whitehall and Westminster to be highly Eurosceptic. Mostly this is because the Treasury didn’t like the EU controlling part of the UK’s money, so they were highly sceptical of EU proposals, briefed against offering more powers to the EU and ensured it didn’t get credit for schemes it funded (often that the Treasury opposed to, such as growth investment in Wales and Cornwall). Most famously it persuaded Gordon Brown to veto the UK joining the Euro. Arguably the Treasury attitude actually fuelled Euroscepticism across government… But this approach turned 180 degrees as soon as the EU referendum was called, fearing the financial and economic disruption it might cause.
Since 2016 Brexiteers have often claimed the Treasury were trying to thwart Brexit, and they weren’t wrong. Under Theresa May the Treasury effectively side-lined the Department for Exiting the European Union and led on all meaningful Brexit negotiations. The famous Chequers meeting / debacle under Theresa May where Cabinet was meant to agree the Brexit deal was stitched up entirely by the Treasury; they controlled all the papers, the proposals, and set out a plan that favoured the financial sector and included the infamous Northern Ireland backstop among other things Brexiteers hated. What the Treasury didn’t appreciate is how much they would hate it… David Davis resigned, then Boris Johnson resigned 24 hours later after congratulating May on her achievement (“we did it”), and Theresa May was left limping along and finally we she resigned… Boris swept to power on his pledge to get Brexit done, screwed the Treasury and financial services got a bad deal… essential Treasury strategy backfired.
One positive from the chaotical way that Brexit was handled by the government is the shock to the system it caused; the Treasury realised it needed to do more to at least look like it cared about the other 90% of the economy… Hence a greater emphasis on productivity and growth.