06 June 2017

Following the election, the Prime Minister will put together a new Cabinet. The appointments of the Chancellor and other Treasury ministers are the most important decisions, given the complexity of the economic issues facing the UK (including Brexit) and the pressures on national finances. Julian McCrae and Bronwen Maddox look at the Government's options.

There has been a long debate about whether the Treasury is too powerful, a debate sustained through many governments over decades as the Treasury’s reach has grown. John McDonnell, the Shadow Chancellor, has made it clear that he favours splitting up the department. The Financial Times reported on 26 May that Treasury officials have been worried by speculation that Theresa May might reduce the powers of the Chancellor after the election or even split up the Treasury, although Conservative officials have denied this.

That debate has often – as now – been inflamed by tensions between the occupants of No. 10 and the Treasury. There have been clear disagreements between the two, particularly around the Budget. Theresa May’s team wants to inject economic and spending policy with a stronger flavour of her personal commitments to social justice and industrial strategy.

Radical restructuring at this point would be a mistake. It would distract from Brexit, the task that dominates all others facing the next government, and in any case represents organisational change on a scale that needs time and thought to be done properly.

That said, when Britain’s negotiations with the EU appear to be on a stable course there are good reasons for questioning whether the role of Chancellor is serving its purpose well, and whether the Treasury is performing well in its key responsibilities. The IfG is embarking on work to consider these arguments in depth.

However, in the immediate future, it should be possible to reconfigure the team of ministers within the Treasury to address some of the Treasury’s weaknesses without causing distraction. Given the need to implement Brexit and to deal with pressures on public services, there needs to be a renewed focus on ensuring that spending actually delivers the necessary results. Since the 1960s, the scale of the Chancellor’s job has usually meant that the Treasury has two cabinet-rank ministers. The Chief Secretary to the Treasury has traditionally taken the lead within the Treasury on spending matters. Strengthening this role would allow better control of spending and improve the resulting performance, while freeing up the Chancellor’s time to concentrate on Brexit. 

The IfG’s proposal to the next Prime Minister is:

  • Don’t split the role of the Chancellor and create a new department, at this point. You have enough on your plate, and while there are serious issues to consider about the Treasury’s performance, now is not the time.
  • Instead, strengthen the role of Chief Secretary to the Treasury by re-establishing it as a full Cabinet post and reaffirming its primary responsibility for allocating spending. There is a case for giving it oversight of the Cabinet Office initiatives aimed at making sure spending delivers results. This minor change in responsibilities could lead to major improvements, even if a more profound solution may have to wait for more radical restructuring. While prime ministers might hesitate to make a change that in theory would strengthen the Treasury’s team of ministers in relation to No. 10, in practice appointing a Chief Secretary who embraces the Prime Minister’s agenda should allay worries.
  • Reduce the number of ill-thought-through initiatives flowing from the Treasury by ensuring that the Chancellor sticks to the commitment to have only one Budget a year, and does not invent another major fiscal announcement: as both Gordon Brown (via his Pre-Budget Report) and George Osborne (via his Autumn Statement) did.
  • Ask the Cabinet Secretary to work with the Treasury’s Permanent Secretary to create a more professional workforce, building on moves over the last five years to strengthen Treasury staff’s knowledge of finance and taxation.
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...but HMT will, unavoidably, be involved in social policy. Whatever line is developed on social care, it will involve finding sources of revenue and that brings HMT in. Ditto the future course of central-local relations and business rates/council tax, which carries into industrial strategy/policy for the regions of England. Either HMT abandons most of its traditional attitudes (eg scepticism about industrial policy) or it is diminished or bypassed ...but we've seen failed attempts to arm the DBEIS/DTI department in the past.

Isn't the key to HMT's role whether Theresa May maintains austerity, albeit in the diluted form prescribed in the March budget or whether she loosens fiscal policy further. HMT loses salience the more departments acquire financial freedom.