Is It Time To Split Up The Treasury?

7 min read14 min

Stagnant growth. Inadequate investment. Failing public services. Britain’s parlous economic performance since the 2008 financial crisis, combined with the centrality of the Treasury to economic policymaking, has fuelled rising concern over the Treasury’s dominance in government.

One of the most radical ideas is that the Treasury itself should be effectively broken up, to reduce its influence and give greater priority to some of the roles it’s seen to have neglected.

It’s a big idea – but can it work?

Stian Westlake worked as a policy adviser at the Treasury early in his career, and later worked at the Department for Business, Energy and Industrial Strategy prior to his current role as executive chair of the Economic and Social Research Council. He is a longstanding advocate of breaking up the Treasury’s functions.

“The Treasury is a fantastic institution,” he says. “Genuinely, it’s a place that’s full of very, very smart, very, very capable people. The big question surrounding the Treasury is not ‘are the people bad, are the people ill-intentioned?’, but does the combination of roles that the Treasury has … create the wrong incentives for the UK government as a whole?”

The Treasury is effectively the finance director of the government, responsible for the nation’s creditworthiness, and the most influential department on economic growth, all at the same time. It is very effective – possibly too effective – in the first two of those roles, but its record on the third role, around economic growth, is often seen as hamstrung by a narrow focus on making short-term numbers add up instead of investing for the long term.

“There is always a tension between the need to exercise control over the public finances – so that finance director role – and the broader questions of how to promote economic growth,” says Westlake. “That’s always a challenge, for all governments where you combine these roles.”

Based on his own experience at the Treasury, he refutes any suggestion that it instinctively blocks pro-growth measures. “The Treasury has the sort of people who care a lot about economic growth and actually have a lot of the right instincts,” he says. “They care a lot about planning and housing issues. Often the challenge is that they don’t have the bandwidth to focus on it as much as sometimes they would like.

“I certainly remember years ago being in meetings at the Treasury where you would have people saying there are important issues we need to fix around planning in bits of the country that do a lot of research and development, to allow businesses to grow and jobs to be created there – something that I know the current government is very focused on. I remember having conversations many years ago at the Treasury, they were very aware of this. But they simply don’t have the person-power to make that happen.”

Making sure that we maintain a suitably stable international financial position feels like the hygiene factor for this

Jonathan Portes worked at the Treasury at the start of his career before rising to become chief economist at the Cabinet Office under Gordon Brown’s premiership. A trenchant critic of austerity, he does not think breaking up the Treasury is the answer.

“I’m quite sceptical about structural changes to departments as the solution for anything, because most of them don’t work,” he says. “If you try and split out the responsibility for economic strategy to another department in the UK context, it’s not that it’s doomed to fail … but the chances of success are pretty small.”

Both Portes and Westlake see Gordon Brown’s term as Chancellor as an example of the Treasury trying to boost its economic growth function. Brown’s political agenda ranged well beyond the bean-counting associated with so-called “Treasury Brain”, with a personal commitment to tackling child poverty among other priorities, and a development of the Treasury’s economic growth functions.

Brown’s stewardship of the Treasury, which saw increases in public spending, is in some ways a test case of whether it can effectively juggle its multiple roles rather than simply blocking investment.

“There was enough money around that the choices were not nearly as hard as they are now,” says Portes. “So you did actually have public expenditure rounds that internalised the idea that ‘actually this government really, really cares about child poverty, and when we do the spending allocation we’re going to make sure that there’s money allocated for its child poverty vision or mission’, or whatever you want to call it.”

There are pitfalls to having a crusading chancellor, of course. If the chancellor’s agenda differs from the prime minister’s, damaging splits can ensue.

Westlake sees echoes of Brown’s efforts to beef up the Treasury’s economic growth capacity in two appointments to Rachel Reeves’ economic advisory council – microeconomists John van Reenen and Anna Valero. “You see some kind of renewed interest in saying, ‘how can the Treasury focus on economic growth?’ But it’s always difficult to do two or three things rather than one thing, I think, for any organisation, even one run by such brilliant people as the Treasury.”

Other countries such as France and the US have split up their Treasury functions, but isolating the impact of this separation of roles on economic performance is difficult.

But Britain has also tried this before. In the 1960s, Harold Wilson set up the Department of Economic Affairs, focusing on long-term economic and industrial planning while the Treasury was restricted to short-term financial management. It lasted five years – its first minister, George Brown, was an erratic alcoholic, while the fragility of Britain’s international economic standing in the 1960s meant the government had to focus on placating bond and currency markets over the sort of longer term strategising the new department had been set up to prioritise.

“It was almost our worst possible time to split things up,” says Westlake. “Making sure that we maintain a suitably stable international financial position feels like the hygiene factor for this – it’s something you have to have in place to make this work.”

Another factor that felled the Department for Economic Affairs was that the Treasury understood the threat to its dominance, and worked to marginalise the new kids in town.  This latter speaks to a specific of the British context – the Treasury is already powerful, and would be no more likely to accept having its wings clipped next time round than it did in the 1960s.

“What the Treasury would try and do is ensure that this body just writes lots of strategy documents, but doesn’t actually do anything,” says Portes. “What would quickly happen is that this body and its minister would realise that in order to achieve anything, they do need to have a substantial influence on the course of tax and spending. And you’d have endless rows, and it would all be determined by who was more powerful.”

His preferred solution is to beef up the economic capability of Number 10, to help provide more challenge to the Treasury’s inherent caution. He doesn’t think splitting the Treasury would necessarily fail, and Westlake doesn’t believe more limited alternatives to splitting the Treasury would necessarily be inadequate.

But there is no formulation of the Treasury or its functions that magically solve Britain’s onerous challenges.

“No structure is going to get away from the fact that we are in a position where spending and tax are historically quite high, and people don’t like that, and the output of public services is in some areas pretty disastrous, and people don’t like that either,” says Portes. “And getting out of that is really not easy.”

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