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Few finance ministries wield as much influence over national affairs as Britain’s. Many advanced economies divide responsibilities for taxation, spending and economic growth between departments, but Her Majesty’s Treasury has it all under its control. This power has made him an easy scapegoat. In recent years, his accountants have been accused of imposing austerity after the financial crisis and then splurging during the pandemic.
A lot of blame is wrong. Ultimately, it is politicians who set the fiscal rules and policy agenda, not Treasury officials. In fact, a strong Ministry of Finance is a feature, not a bug, of a well-functioning state. It needs to impose discipline on public spending to counter politicians’ predilection for overspending. Coordination is also needed as individual departments struggle to balance their needs against broader government goals. Still, some criticism of the Treasury is fair and calls for reform justified. With important, and often contrasting, economic goals, you struggle to strike the right balance.
Firstly, the Treasury’s growth mandate can often be usurped by its drive to balance the books and ensure taxpayers receive value for their money. This has been called “Treasury brain”: an overemphasis on short-term costs and benefits and a hesitancy toward ambitious proposals that will only bear fruit in the future. Insiders say the Treasury initially opposed an extension of the London Underground to Canary Wharf in the early 1990s, a project that ultimately ended up supporting the growth of London’s financial district.
Second, you have a tendency to micromanage. Its officials control how funds are allocated to departments and regions, as well as how underspends are used. This centralization means that other public bodies lack accountability and do not develop internal financial management capabilities. Third, the Treasury’s tight control over fiscal policy has led to accusations of excessive secrecy. In fact, withholding proposals for political purposes (such as “rabbit out of the hat” announcements at budget time) undermines the way affected departments set out their plans.
So how should the Treasury be reformed? Some advocate dividing it into separate ministries of finance and economy, similar to Germany and Japan. But reorganizations can be unnecessarily long and complicated. A better approach would be to make the current agreement work more effectively. Above all, the prime minister and his cabinet must design a clear economic agenda (to help guide the decisions of public officials during the legislature) and coordinate its implementation across departments. Fiscal rules also need to be designed to discourage capital spending cuts to meet short term needs. And having fewer fiscal events would help foster more strategic discussions about funding between the Treasury and departments.
Some internal changes are necessary, in particular decentralization. More powers should be delegated to other government departments. Their specific experience makes them better at designing policies. Local authorities, which are also more responsive to regional economic needs, should have more powers to raise revenue. Budget allocation processes must be more collaborative and transparent.
Putting the Treasury’s growth unit on a more equal footing with its budget functions would help ensure that growth considerations – and the government’s strategy – are taken into account in tax and spending decisions. And a better-resourced Office of Budget Responsibility, which could most effective score The impact of policy recommendations on long-term growth would improve Treasury accountability.
The next government must curb the department’s “save a penny and save a pound” tendencies. But it is even more important that the next prime minister can articulate and commit to a coherent strategy to implement.