Most comment on the conference speech by Labour's Shadow Chancellor John McDonnell is about his plans for employee ownership, industrial democracy and nationalisation. But his speech also includes hints of how he sees the Treasury under a future Labour government. He is right to raise those questions; they are important and pressing, as we have argued in this month’s report about next year’s spending review. Unfortunately, the implications of some of what he says could represent a step backwards for effective government.
This is not the first time McDonnell has considered how Labour might want the Treasury to change to implement its programme. In 2017, he commissioned a review by Lord Kerslake, former Head of the Civil Service, and called at its launch for “a Treasury ready and properly equipped for the 21st century.” We have long argued that this kind of thinking by oppositions about the “how” as well as the “what” of government is an important part of preparing for power – as long as they do not let ambitions for changing the machinery of government distract them from their programme.
Clearly McDonnell sees the Treasury as the powerhouse of a Labour government, saying that “the full weight of the Treasury will be used to take on any vested interests that try to thwart the will of the people.” There would be a Public and Community Ownership Unit to lead the reversal of three decades of privatisation. Given that the speech also asserts his ownership of policy on employee shareholding and industrial democracy, this suggests that he sees his Treasury as resembling those of Gordon Brown and George Osborne in its reach across government. In a sense, he implies the Treasury would have even more power over nationalised industries than it did before the 1980s when formal responsibility rested with departmental secretaries of state. There seems unresolved tension between this apparent centralising urge and other remarks in the speech about not wanting “to take power away from faceless directors to a Whitehall office.”
Our report about the spending review raises concerns about the level of financial expertise in the Treasury and experience of the public services whose finances it is determining. It is therefore encouraging to see McDonnell speak of bringing in “the external expertise we will need.” (He has also brought in Joseph Stiglitz to help with international economic thinking; the Nobel Prize winning economist, and former chief economist of the World Bank, has been forthright on his views of the failings that led to the financial crisis, but also about the way much development aid is wasted.) Now that the Government owns only a dozen or so trading organisations (including Network Rail) plus banks renationalised after the 2008 crisis, we think the Treasury would certainly need to build up its skills in the management of commercial businesses. Among other things, it would need to give strong advice to ministers about not compromising the management of government-owned businesses for short-term political reasons, for example on the balance between keeping down prices for consumers in the short term and generating sufficient revenue to support the investment needed for successful future operation.
In a surprisingly technical reference for a party conference speech, McDonnell says he would rewrite the Treasury’s “rule books on how it makes decisions about what, when, and where to invest”. By this he means particularly the “Green Book” which sets out the rules for project appraisal in government. He would “end the Treasury bias against investing in the regions and nations” and make sure “it assesses spending decisions against the need to tackle climate change, protect our environment, drive up productivity and meet the investment challenges of the 4th industrial revolution.” These comments sound wholesome, even platitudinous – but his criticism of the Green Book could herald a serious backward step in the rigour and economic principles determining when and where government invests public money.
The Green Book sets out these principles, and the rules for calculating costs and benefits of a proposed project. In our recent report on infrastructure, we observed the many flaws with the practice of cost benefit analysis – but also concluded that there are no good alternatives to the approach. The danger potentially lurking in McDonnell’s remarks is that a Labour government might seek to make investments even when the cost benefit analysis did not show an economic benefit. In our work, we certainly acknowledged that wider economic benefits or other strategic benefits are legitimate reasons to go ahead with a project but that these should be treated consistently and with the same scrutiny as other costs and benefits. It would be regrettable if a new government did not scrutinise the value secured by proposed new projects, or were too lenient on claims of wider benefits to the country (often hard to quantify). Increasing public spending or investing in certain regions are legitimate matters of political choice, but there would still be a need to plan carefully and ensure the choices and trade-offs which remain draw on proper evidence and analysis.