Absolute power

Perhaps more importantly time has allowed these powers to be backed up by a pervasive culture. Overspending against departmental budgets is one of Whitehall’s most unforgivable acts and recent fiscal numbers bear this out. Public spending has come in pretty much on target, despite the government committing to one of the tightest spending rounds in history. The big problem is on the revenue side, which has been much poorer than virtually anyone expected in 2010.

Of course the Treasury is itself also responsible for revenue. Most directly it is in charge of tax policy – a rather odd corner of policy making in Whitehall. For historic reasons tax policy making is protected by ‘Budget purdah’, the convention that no hint of the Budget should fall into the public domain for fear of moving markets. Anyone who reads the papers will know we are long past the days when chancellors resigned if this convention was breached. But Budget purdah still allows the Treasury, when it wishes, to make policy without consulting anyone outside.

There used to be some internal tensions in the Budget process, with the HM Revenue & Customs officially responsible for coming up with policy ideas. The Treasury confined itself to having a small team checking for coherence and political landmines but since the mid-2000s making tax policy moved inside Treasury, removing this institutional check and balance. It is far too easy to see last year’s ‘omnishambles’ Budget as a result of this but more openness, as opposed to tactical leaking, in how we do tax policy making is long overdue.

More indirectly the Treasury’s impact on the revenue side comes through its role as the country’s economics ministry but its competence in this area tends to come in for criticism. As one former government official put it to me, the Treasury is both too strong and too weak at the same time. Too strong in that it can prevent any other department having much influence on economic policy. Too weak in that its own capacity for innovative economic policy making is relatively limited.

Certainly the Treasury’s capacity lags behind other public sector institutions, such as the Bank of England. The absence of growth in the past three years has probably caused serious damage to the Treasury’s reputation. From the outside it looks as if much of its time is absorbed in putting together packages of measures that suit the immediate headlines, but this does not necessarily amount to a credible, long-term economic strategy for the UK. The return of John Kingman, the architect of many of UK’s more successful supply side reforms in the 2000s, in late 2012 as second permanent secretary signalled an increasing emphasis on the economics ministry role.

Financial regulation is another area where the Treasury’s weaknesses have recently been exposed. Under the tripartite arrangements brought in by Gordon Brown in 1997, much of the heavy lifting in this area was supposed to be in the Bank and the FSA. The Treasury therefore had a small team working on financial stability on the eve of the crisis. The low numbers involved at the outset was less of an issue but as the scale of the crisis became clear the Treasury moved resources into this area, with a ten-fold rise in staffing. The real issue was around capability – the Treasury could call on few people with specific banking expertise.

This experience highlighted a recurrent issue for the Treasury. As an organisation dominated by economists, it has long argued that it can keep its wages low. It does not have a problem attracting highly-intelligent applicants and therefore it pays less than virtually every other Whitehall department, and far less than the Bank or the FSA. The consequences of such a strategy are reasonably straightforward with a staff turnover rate at the Treasury averaging 25 per cent a year. As the Treasury’s own review states, this level of turnover would more normally be associated with a call centre rather than a department of state.

Of course, such as all Whitehall departments, simply increasing the wages bill is not really an option. The Treasury faces a reduction of 33 per cent in its own operating budget and it is therefore shedding headcount. Since the 2010 Spending Review, it has reduced its headcount by more than 10 per cent and by 2014 it needs to get down to less than 1000, which is another 10 per cent out. These reductions have prompted cuts in some surprising areas. Ten years ago, the head of the government finance profession was a full-time Treasury official, reporting directly to the permanent secretary and supported by their own directorate. Now the head is a part-time post (the other part of the job being to run finance, policy and strategy for the National Health Service – responsible for a mere £100bn of spending) and the directorate has been abolished. The Treasury’s justification for these changes is that its financial expertise is being moved into its spending control teams. These teams have always been where the Treasury’s real power lies, so increasing its financial capabilities can only be a good thing.

However it remains unclear whether the Treasury’s new arrangements will provide Whitehall with the financial leadership it needs to get through the remaining fiscal crisis. Cost control is one thing, but fiscal consolidations on the scale facing the UK are quite another. Unfortunately they tend to have a familiar cycle, with chronic public finance problems running on for many years, even decades.

Many outsiders lament the Treasury’s power without accountability. It can, if it chooses, simply ignore the rest of Whitehall up to and including cabinet ministers. Those battered by the Treasury’s lofty disdain may be suffering from a case of sour grapes, but equally there is some truth in their criticisms. Even the Treasury is not quite immune from the consequences of an omnishambles Budget. It certainly cannot afford to be seen to be failing as an economic ministry and, in its role as a finance ministry, it needs to show that it can move from crude cost control to playing the more strategic finance role now common in business. These are big challenges but an institution with 450- odd years of history behind it should be able to rise to the challenge.

Julian McCrae is director of research of the Institute for Government

Key points

The Treasury’s grip on public spending is embedded in statute.

Financial regulation is an area where the Treasury’s weaknesses have recently been exposed.

Many outsiders lament the Treasury’s power without accountability.