“Treasury Orthodoxy” gets a bad rap. Shuffling responsibilities is pointless unless the policy choices improve. And the fiscal rules, OBR, and bond market vigilantes will all still be big constraints.
Andy Burnham has announced that responsibility for national economic growth policy will move from HM Treasury to No.10 North. I am surprised that this announcement has not attracted more attention.
As the PM says, it looks like a “huge transfer of power”, and the significance of No.10 North will become “more and more apparent as we go forward”.
So, what to make of this?
The idea that the Treasury is too powerful and that its “orthodoxy” is a brake on growth is hardly new. Few other countries combine the finance and economics functions in a single government department.
The Institute for Government published a useful primer on the issues in 2024, but this debate has been running for decades. Moreover, these concerns have been raised from all parts of the political spectrum.
Indeed, the Treasury itself sometimes seems muddled about its role: the department’s ‘responsibilities’, ‘priorities’ and ‘objectives’ on the gov.uk website each place a different emphasis on the relative importance of controlling public spending and delivering strong and sustainable growth.
Among other things, this has led to accusations of ‘short-termism’ and resistance to innovative policies that might transform the prospects for the economy in the long run.
Another frequent complaint (though not from me) is that the Treasury’s belief in free markets is somehow outdated and that a more interventionist approach is required in many areas – including industrial strategy, regional policy, and trade policy.
Nonetheless, it is unclear what happens next. Here are three initial thoughts.
First, it is not that obvious that “Treasury orthodoxy” is a major constraint on growth. These principles can be summarised as follows (borrowing liberally from former Treasury Permanent Secretary, Nick Macpherson):
1. that markets generally work
2. that free trade is good
3. that spending must be controlled
4. that taxes can only be raised so far
5. that fiscal policies should focus on improving the supply-side of the economy rather than managing demand
6. that sound money and low inflation are important
7. that credible rules and institutions are important
Perhaps I am biased, but these principles seem pretty sound to me. At the very least, they can be seen as “necessary” conditions for delivering strong and sustained economic growth.
Moreover, Treasury Orthodoxy has evolved over time. For example, in the late 1980s and early 1990s there was a strong belief in the benefits of managed exchange rates to control inflation. This has long been replaced with a policy of benign neglect towards the pound and increased faith in central bank independence instead.
The Treasury’s view can also still be shaped – or overruled – by a strong Chancellor and strong advisors. The double act of Gordon Brown and Ed Balls was able to deliver significant changes in economic policy (for good or ill).
More recently, the Treasury swung behind Rishi Sunak’s expensive interventions during the pandemic, such as the ‘job retention scheme’, and did at least attempt to implement the September 2022 mini-Budget and ‘Growth Plan’.
The Treasury has also backed – or at least failed to stop – plenty of policies that appear to run directly against the Orthodoxy, such as the large increases in minimum wages and various subsidies to first-time homebuyers.
Second, even accepting that the Treasury has its flaws, what is actually going to change? Moving responsibilities around government will matter little unless the policies themselves improve.
Will the staff working in the HMT directorate responsible for growth and in NISTA (the National Infrastructure and Service Transformation Authority) simply be expected to relocate, or will new people take over?
Does this mean even more influence for the IPPR (Institute for Public Policy Research), which already has an IPPR North in Manchester?
(I am doubtless revealing my personal bias again, but I do not think giving more power to left-wing IPPR alumni would be a “good thing”!)
Third, what does mean for the rest of the fiscal framework? Arguably, the combination of the current fiscal rules, a strong independent watchdog in the Office for Budget Responsibility (OBR), and the discipline of the bond markets is a much bigger constraint on policy than HMT. Put another way, “Treasury Orthodoxy” will live on in these other institutions. Will there be any changes to the rest of framework – and what would nervous investors make of this?
To be fair to the IPPR here, they published a thoughtful piece on the fiscal framework just last week. Among other things, it acknowledged the risks if credibility is undermined any further (“big changes in borrowing to invest could thus have adverse effects on the gilt markets, if they are not part of a clear plan with clear economic returns”).
In summary, moving growth policy from HMT to No.10 North could amount to something big, or it could simply reshuffle responsibilities with no material change in the outcomes. Most likely, it will fall somewhere between. But as a former Treasury wonk myself, I will be following developments here with particular interest…
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