• C. Peters

How HM Treasury Works - Part 6

Productivity and Economic Growth, We Really Should Get Around to That...

Last, and alas very much least, we should discuss the Treasury’s priorities for productivity and economic growth. Perhaps the biggest mistake people make about how the government works is that HM Treasury cares about economic growth above all - this is resoundingly mistaken. The economy is a forth and distant priority to the most powerful department in government.

This is reflected in the fact that the Productivity and Growth Group is the smallest, weakest and least important of the four main parts of the department. It is also reflected in the fact the Economic Secretary is the most insignificant of the five Treasury Ministers, usually not even paid and the one before last sat in Cabinet Office and didn’t even call himself Economic Secretary (Theodore Agnew, “Minister for Efficiency”, who resigned over the Treasury’s paltry attempts to tackle fraud). Meanwhile the Chief Secretary for the Treasury (CST), the person in charge of public spending, sits in Cabinet as the most senior of non-Cabinet level ministers.

The Treasury has contributed to the various economic growth plans that come out intermittently over the last few years; BEIS’s Industrial Strategy in Dec 2017, HMT’s own Plan for Growth in Spring 2021 last year, and more recently the Levelling Up White Paper – but all these plans are summarily ignored and completely blown out of the water by the Budget and Spending Review. In the case of the Industrial Strategy and Levelling Up White Paper, the Secretary of States for BEIS and DLUCH respectively insisted that their “transformational” plans came out before or at least at the same time as the Spending Review to inform the Treasury’s decisions and signal investment priorities. They didn’t. In both cases the documents came out after the 2017 and 2021 SR’s (the 2020 SR was rolled over, throwing off the three year cycle). In both cases the plans underwhelmed and failed to galvanise government departmental priorities. In both cases the Treasury sidelined the plans. In the case of the Plan for Growth, its own plan, few outside Whitehall have even heard of it as it was created to pretend to the rest of government that it had some sort of plan for economic growth… it didn’t. The document was a distraction featuring no meaningful new policy or strategic commitment.

This Treasury doesn’t really treat productivity and growth as a priority. Ultimately the cultural attitude of the Treasury is that the role of the government in productivity and growth is to back off and not intervene in the economy (aside for in the case of financial services, obviously)… But the post EU referendum pressure has at least meant it has reluctantly contributed to these growth strategies and published the underwhelming Plan for Growth.

It is a strange cultural attitude, as the fastest way to increase taxation revenue is to grow the economy, and targeted spending and taxation can improve productivity. For instance, investment in education is probably the single best way of improving long term productivity in a human capital dependent economy - which the UK is. Tax relief can increase investment in technology, training, labour and research, which in turn are known to boost productivity and economic growth. But investing in education beyond the OECD average would be contrary to the first priority of the Treasury - Ensure the UK government spends as little as it can politically and practically get away with. And while there are some tax exemptions for investment in training and research, they pale in comparison to most other rich nations, especially when set against overall government investment in training and research. Remember priority two: Ensure the UK government raises as much revenue as it can politically and practically get away with. Existent tax reliefs are so meagre that they exist merely to be pointed to that Treasury is doing something, albeit something insignificant.

Of course, the Treasury would raise more revenue if the economy grew faster. However, like a casino or the Monopoly bank, the Treasury itself doesn’t need to gamble on such an outcome. It doesn’t need to roll the dice on economic growth to generate income so why compromise its other priorities in pursuit of such a nice-to-have? Besides, were it to boost the economy via spending or tax relief then the investment for the return cycle takes too long (i.e. investing in education is an entire childhood investment). When Budgets are annual, Spending Reviews operate on three year cycles, and Parliaments only last five years, it has little incentive to bet on growth by compromising the receipts for this year's budget, the allocation for the next SR, or to suggest Ministers opt for policies that only benefit their successors in five to ten years. Keeping its crucial tools of taxation and spending to itself are more important than growth. The Treasury is happy with modest growth as long as it remains all powerful.

Other democracies have the same challenges as we do with investment for return cycles not aligning with political cycles but still take a different approach. This is because other countries don’t have as dominant a department as our government has in HM Treasury. The USA offsets its Treasury Department with the Department for Commerce, which serve as equals. Germany has a Finance Department for raising revenue and a Department for Economic Affairs to invest in economic growth. France has a Public Treasury to run the public finances that serves as an inferior agency to the dominant Ministry for the Economy and Finance. Meanwhile the UK government has BEIS, the beige department for random stuff that has gone through multiple different forms, which I will do a blog on one day but hardly seems worth it…

The make up of these governments reflect these countries priorities and their economies. If growth were a greater priority to the UK government, it would take an American approach of low tax and colossal investment in the few sectors the state controls, such as the armed forces and space - with the resulting science and technology industrial base that surrounds it. If productivity were a greater priority to the UK government, it would take a German approach by prioritising investment in a high skilled, high income workforce through high quality skills provision, generous welfare support and accompanying labour law that encourages firm level investment in skills and wages. If sectors other than finance were a greater priority, then the UK government would take a French approach and invest in priority sectors through high government stakes in energy, food and transport.

The British approach meanwhile is to meekly pull all these levers a little bit, flexing a touch depending on the government of the day, but betting the bank on the finance sector. Then of course Brexit happened, and now we’re flailing around offering up buzzwords like “Industrial Strategy” and “levelling up” but without a government structured to deliver these alternative economic priorities. The economy will never be “levelled up” with the Treasury so dominant, if the government was serious about economic change it would level the Treasury down.

The Treasury is an incredible institution, in that it dominates everything the government does. But it does so at a price. It protects the financial sector but no other sector, favours an unbalanced economy, is deeply reluctant to invest to grow, yet obsessed with raising revenue and not spending it. Yet it is also a very political institution, which means that it doesn’t fund by need but rather by pragmatism.

Finally, returning back to the first blogs on No.10, I should add one more thing – embedded in the letter box on that famous door it reads -


The ultimate reminder that it is the Treasury’s government…

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