Treasury Domination Is Bad For Government

5 min read19 min

Jeremy Heywood said that the piece of work of which he was proudest was the unglamorous ‘Fundamental Review of HM Treasury’s Running Costs’, which concluded 30 years ago in October 1994. That may have had something to do with the fact that he met his future wife doing the work (though it was not until later that they got together). Heywood, who would serve as cabinet secretary from 2012 to 2018, and Suzanne Cook, are two of the four credited authors. But his pride must also have come from the timeless sense of the Treasury that even today runs through the report.

It describes the Treasury’s overall aim as “to promote rising prosperity based on sustained economic growth”. It talks of the department’s focus on the stability of the macroeconomic environment and improving the long-term performance of the economy, while “keeping public expenditure to a level that is affordable”. And it sets out how the Treasury does this while adopting what would now be called ‘agile’ or ‘empowering’ internal leadership models (the 1994 equivalent was perhaps more comprehensible: “as much responsibility as possible should be delegated down the line”).

The prime minister needs more economic support, and the Cabinet Office needs fundamental reform.

All of this could be comfortably adopted by Rachel Reeves and her top team today, and represents the stable settlement about the objectives of the Treasury from at least the Thatcher period onwards. That sustained even as the Bank of England was made independent, multi-year spending reviews became the norm (or at least the aspiration), and the Office for Budget Responsibility was created.

At the Institute for Government we often talk about the importance of government departments setting clear objectives and choosing priorities. But making the case in the abstract sounds platitudinous. Looking at the Treasury helps get beyond platitudes: it is the clarity and longevity of its objectives, and how they set government priorities, that gives the Treasury its strategic power.

In recent years the very consistency of Treasury objectives has been criticised as an ‘orthodoxy’ or ‘Treasury Brain’ that holds back growth and stifles creativity. On investment in particular critics argue this leads to decisions that are penny-wise and pound-foolish. Treasury officials are accused of blocking good policies and obstructing the political objectives of the government.

Some of this is true. The Treasury can be short-termist, micro-managing and risk-averse. It is definitely too secretive. The Fundamental Review concluded three decades ago that the Treasury’s objectives could “only be achieved in partnership with others”. That remains true and is one of the lessons the Treasury still needs to learn, and re-learn.

But much criticism is a crude caricature. Treasury officials are highly politically responsive – nobody is more sensitive to the views of the chancellor and the need to act accordingly than senior officials in the Treasury.

The problem is with how the core institutions at the centre of government work together.

The Treasury’s unpopularity with spending departments is also in part by design. It is the department that says ‘no’ to countless requests for additional spending, a necessary function in all organisations. And it is better for an institution like the Treasury to have consistent objectives than to lose sight of its purpose.

The problem is with how the core institutions at the centre of government work together. There is a fundamental imbalance of power. The institutional might of the Treasury overwhelms the prime minister’s puny support and ability to frame decision-making in advance of budgets and spending reviews. A prime minister unsure of their governing strategy leaves a vacuum which of course the Treasury fills.

The Treasury problem is the same as the Cabinet Office problem, and the same as the No10 problem. The British centre of government does not work. A succession of prime ministers have been frustrated by chancellors who wield so much power over government policies and priorities, as cabinet secretaries have found the incoherence of the Cabinet Office too easily frustrated by resistance from permanent secretary colleagues. However good (or bad) personal relationships are, the incentive structures under which senior actors in the centre work are broken.

This means change is needed. Not, as many argue, breaking up the Treasury (though that time may come if other reforms are resisted). The prime minister needs more economic support, and the Cabinet Office needs fundamental reform. But even though it is a less catchy headline, an equally important change would be for the Treasury’s budgeting and spending review process to fall in to fully support the government’s overall missions.

There was scant evidence of that in the recent budget, and Starmer’s mission boards have so far failed to get a meaningful grip on the system. The next – and final – test will be the spending review in the spring. If the centre of government is not sorted out then, the government’s agenda risks melting away.

Alex Thomas is a programme director leading the Institute for Government’s work on the civil service. 

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