House of Commons - Treasury

Select Committee on Treasury Third Report

I. INTRODUCTION

1. The Treasury Committee established a Sub-committee in 1998 to scrutinise the work of the various bodies for which Treasury Ministers are accountable. The Sub-committee has completed inquiries into the Office for National Statistics,[2] the Inland Revenue,[3] the Valuation Office Agency,[4] HM Customs and Excise,[5] and the Government's cash and debt management.[6] The Sub-committee's report on its work from 1998 to 2000 was published as part of the Treasury Committee's report on its work during this Parliament in December 2000.[7]

2. We decided in December 1999 to scrutinise the work of HM Treasury, focusing in particular on the role of the Treasury in Government, as well as the expenditure and administration of the Treasury. We heard oral evidence on seven occasions; from HM Treasury officials on 11 May 2000; from Sir Samuel Brittan, Lord Lipsey, Professor Nicholas Deakin, Honorary Professor of Social Policy, University of Birmingham, and Mr Richard Parry, Senior Lecturer in Social Policy, Edinburgh University, on 15 June 2000; from the Rt Hon Lord Barnett and the Rt Hon Kenneth Clarke MP on 22 June 2000; from Professor John Wanna, Head of the School of Politics and Public Policy, Griffith University, Australia, on 28 June 2000; from Sir Peter Kemp and Sir Alan Bailey on 6 July 2000; from Sir Michael Partridge on 9 November 2000; and from Mr Edward Troup, Head of Tax Strategy, Simmons & Simmons, and HM Treasury officials, on 14 December 2000.

3. We visited HM Treasury for an informal briefing and tour of the building on 12 April 2000; the Ministry of Finance in Berlin on 8 June 2000;[8] the Ministry of Economic Affairs, Finance and Industry in Paris on 19 July 2000; and the US Office of Management and Budget, the Congressional Budget Office, and the US Treasury on 26-27 October 2000.[9] We were also briefed by Dr Graham Scott, former Secretary of the New Zealand Treasury, and Ms Lynn McKenzie about the New Zealand Treasury and State Services Commission on 28 November 2000. We have printed several written memoranda submitted to us during this inquiry with this Report. We are grateful for all the evidence we received, written and oral, and for the help given by those who briefed us.

4. Our inquiry has been unusual in its focus on the way in which the Treasury goes about its work and its relationship with other parts of Whitehall, particularly the spending departments. No such inquiry has been undertaken since the departmental Select Committee system was set up in 1979, despite several far-reaching changes to the remit and working practices of the department.[10] This Report covers a number of key themes which emerged during the inquiry, including the accountability of the Treasury to Parliament, recent developments in the control of public expenditure, the involvement of the Treasury in policy-making, and the management of Treasury staff. Other aspects of the Treasury's work, including its relationship with the Bank of England and the Financial Services Authority, are not covered in this Report, having been the subject of other recent Reports of the Committee.[11] Nor have we sought to examine how well the Treasury manages the economy, a fundamental question, but one which the Committee, and the House, considers on a regular basis, for example in Reports and debates on the Budget.

HM Treasury—An Introduction

5. The Treasury is one of the central offices of State, lying at the heart of Government. It is the Government's financier, responsible for raising revenues (although tax collection is handled by other agencies), disbursing funds to the spending departments, and keeping the Government's accounts. It is also responsible for presenting financial information to Parliament, including the estimates of expenditure which the House must approve, future spending plans and the annual Pre-Budget and Budget proposals. The Treasury is also an economics Ministry: it told us that its aim was "to raise the rate of sustainable growth, and achieve rising prosperity, through creating economic and employment opportunities for all".[12] This aspect of the Treasury's work brings it into contact with other departments such as the Department of Trade and Industry (DTI) and the Department of Social Security (DSS) whose activities have a bearing on the well-being of the economy. The Treasury represents the UK's economic interests abroad and plays a part in promoting international financial stability and prosperity. The Treasury has two other major roles: it seeks an efficient market in financial services and banking, working with other agencies such as the Financial Services Authority, and it aims to improve the quality and cost-effectiveness of public services, including through the Office of Government Commerce which was established as an executive agency of the Treasury in April 2000 to improve public procurement.[13]

6. The Treasury is a small department, with around 900 staff (excluding those working for the Office of Government Commerce) and running costs of £66 million, over half of which is spent on salaries.[14] Some witnesses were concerned that the Treasury was too small to function effectively. Sir Alan Bailey, a former Permanent Secretary of the Department of Transport, described the Treasury's public expenditure sections as "perennially understaffed", Sir Samuel Brittan argued that the Treasury was "slimmed down too much under the last Fundamental Expenditure Review", and Mr Parry, of Edinburgh University, thought that "there should be extra people in the Treasury", particularly on teams monitoring spending departments.[15] Sir Andrew Turnbull, the Permanent Secretary of the Treasury, attributed recent cuts in staff numbers to "a substantial de-layering of the upper echelons of the organisation" and told us that new recruitment initiatives were being pursued to bring the department up to optimal strength.[16] We recommend that the Treasury review its staffing level, particularly the number of staff devoted to the control and monitoring of public expenditure.

RECENT CHANGES

7. The Treasury's remit, and its methods of working, have changed considerably in recent years. Lord Lipsey described the last decade as "a period of change bordering on tumult".[17] The most significant changes have been:

— the replacement of the annual public expenditure round with the three-year Spending Review process[19]

— the introduction of resource accounting and budgeting[20]

— the increasing emphasis placed on ensuring that public expenditure efficiently and effectively achieves certain outcomes, particularly since the introduction of Public Service Agreements in 1998[21]

— the Treasury's growing interest in micro-economic policy, particularly productivity and welfare policy

— the 1993-94 fundamental expenditure review, which led to a reorganisation of the Treasury and its management. Mr Kenneth Clarke MP who, as Chancellor of the Exchequer, instigated the review, told us that he did so because the Treasury "had got a bit left behind" by "more modern management approaches, attitudes and styles" which had spread through the rest of Whitehall during the previous twenty years.[22]

SPLITTING-UP THE TREASURY

8. The breadth of the Treasury's responsibilities is reflected in the fact that it has nine Public Service Agreement (PSA) objectives, more than any department except the Ministry of Agriculture, Fisheries and Food and the Department of the Environment, Transport and the Regions. Sir Andrew Turnbull, Permanent Secretary of the Treasury, said that nine objectives was "about the minimum you could sensibly have without people saying there is some important part of the Treasury's work that is not reflected" but acknowledged that in some countries the responsibilities of the Treasury were shared by more than one Ministry.[23] In particular, countries such as Germany, Belgium and Italy have separate finance and economics ministries to undertake the work handled in the UK by the Treasury.

9. Witnesses expressed little enthusiasm for dividing the Treasury into separate Economics and Finance Ministries. Sir Samuel Brittan did not think there was a case for such a change "because so much of what an Economic Affairs Ministry would do, especially on the macro side, has gone to the Bank of England".[24] Professor Deakin, of Birmingham University, said that "there is no purpose in undertaking such a drastic piece of surgery at a time when the Treasury has already gone through repeated operations and has formed itself into a new style operation which is still untried in circumstances where it would be tested".[25] Lord Barnett thought that it was "not a proposition that should be seriously adopted because you cannot separate those two areas of public concern and the Treasury is bound to be concerned with both".[26] Perhaps predictably, Treasury officials did not advocate splitting-up their department. Sir Andrew Turnbull concluded that "with its present responsibilities I do not think anybody is contemplating an option of splitting. Responsibilities could change on the borderline between benefits and tax, through, for example, the arrival of an integrated child credit. But there is more likely to be a change elsewhere in the Chancellor's Departments than the Treasury itself."[27]

10. During the 1964-70 period an attempt was made to split the Treasury's finance and economics functions with the creation of the Department of Economic Affairs (DEA). The experience of the DEA does not suggest that such a reorganisation would work today. Sir Samuel Brittan argued that "the problem with the Department of Economic Affairs was that it had no role, it had no power" and Lord Barnett said that the "idea of setting up a separate Department of Economic Affairs was to solve a particular political and personal problem and had no reference and relevance to what the Treasury was doing and continued to do".[28] One reason why the DEA failed to survive was that the devaluation crisis after the 1966 election blew the economy off course and rendered the department's national economic plan redundant. Secondly, the Treasury's control of short-term economic management and the Government's finances ensured that it continued to be regarded as the pre-eminent economic Ministry.

11. We have heard no compelling arguments for the Treasury to be split into separate economics and finance Ministries. There are, however, other ways in which the Treasury could be split, as shown by experience elsewhere in the world. In Australia, for example, the Treasury is responsible for economic and competition policy, tax policy and revenue forecasts, international finance and banking policy while the Department of Finance and Administration oversees the expenditure budget, public assets and asset sales, Government accounting policy and resource management.[29] In New Zealand, the Treasury's work on public expenditure control is supplemented by the work of the State Services Commission which advises on the performance of Government departments and agencies and makes recommendations for improvements.[30] We will return to possible changes to the UK Treasury's remit in relation to budgetary policy and the monitoring of the performance of Government below.[31]

PERCEPTIONS OF THE TREASURY

12. We acknowledge at the outset of this Report that there are praiseworthy aspects of the Treasury's role and organisation. Treasury staff are widely regarded as amongst the best in Whitehall.[32] The Treasury told us that "we encourage our staff to move around fairly regularly between different areas of work. This encourages a broad outlook and promotes the development of a wide range of skills — an essential requirement of flexibility".[33] We return to the subject of the Treasury's staff below.[34] The Treasury may also be considered as being on the side of Parliament and the taxpayer in ensuring that public expenditure is spent as efficiently as possible. Sir Samuel Brittan told us that the Treasury "is the only department that stands for the interests of the taxpayer, the consumer, and the general citizen ... politics is full of sectional interests of all kinds and the rest of us only have the Treasury to fall back on ... if the Treasury had been more powerful we would not have had Concorde, we would not have had the Pergau Dam and we would not have a lot of dreadful taxpayer financed aid for arms sales to dubious regimes."[35] The department has also declared itself to be committed to more openness, the promotion of innovation and change, and best management practice.[36]

13. After our visits to overseas Treasury Ministries and our meetings with experts on the Treasury Ministries in Australia and New Zealand, we are aware that the UK Treasury is one of the world leaders in implementing reforms such as resource accounting and budgeting, the private finance initiative and Public Service Agreements.

14. Criticisms of the Treasury, perhaps inevitably for a department which holds the Government's purse strings, are legion. It is sometimes described as short-termist in its thinking and overly concerned with finding ways of reducing public expenditure, at the expense of necessary or desirable public sector spending. It has long been alleged that, by controlling public expenditure, the Treasury also controls or exerts undue influence over policy matters which are rightly the concern of other departments.[37] Sir Alan Bailey told us that he was "concerned about the distractions and the tendency, as I see it, of the modern Treasury to go after all sorts of other aspects of departments' business which I would not regard as central and I think get in the way of departments doing their own jobs".[38] Sir Michael Partridge, a former Permanent Secretary of the DSS, argued that "the Treasury can be useful but they can also destroy good ideas [and] ... they themselves can promote bad schemes".[39] Another common complaint is that the Treasury is remote, isolated from the real world, and resistant to parliamentary scrutiny and accountability. The Institute and Faculty of Actuaries, for example, wrote that "the department's commitment to openness has not been sustained in practice, giving the impression that the Treasury's Ministers are more reluctant to meet us than their counterparts in other Ministries".[40]

15. In this Report we have chosen to concentrate on three broad areas in which we believe the Treasury could work better. These are:

the strategic position of the department within Government and the Treasury's own vision of its role:

— openness, transparency and accountability: whether the role and influence of the Treasury in Government is sufficiently clear or well understood, or whether it is adequately accountable to Parliament for the full range of its activities

— the examples of good practice offered by the Treasury to the rest of Whitehall: whether, given its central position in Government, the Treasury is well placed to offer examples of good practice to other departments.

2 Treasury Committee, First Report, 1998-99, Office for National Statistics, HC43 and Second Report, 2000-01, National Statistics, HC137 Back

3 Treasury Committee, Sixth Report, 1998-99, Inland Revenue, HC199 Back

4 Treasury Committee, Tenth Report, 1998-99, Valuation Office Agency, HC420 Back

5 Treasury Committee, Second Report, 1999-2000, HM Customs and Excise, HC53 Back

6 Treasury Committee, Sixth Report, 1999-2000, Government's Cash and Debt Management, HC154 Back

7 Treasury Committee, First Report, 2000-01, Work of the Treasury Committee and Treasury Sub-committee, HC41 Back

8 This briefing was organised as part of a Treasury Committee visit Back

9 This briefing was organised as part of a Treasury Committee visit Back

10 See paragraph 7. In fact, the only similar inquiry into the work of the Treasury since 1945 was undertaken by the Estimates Committee, Sixth Report, 1957-58, Treasury Control of Estimates, HC254-I Back

11 For example, see Treasury Committee, Third Report, 1998-99, Financial Services Regulation, HC73-I and Eighth Report, 1998-99, The Monetary Policy Committee - Two Years On, HC505. We did receive a memorandum from the Bank of England, however, see App 8 Back

12 Ev, p1 paragraph 2.1 Back

13 For further details see The Government's Expenditure Plans: Chancellor of the Exchequer's Departments 2000-01 to 2001-02, HM Treasury, Apr 00 (hereafter HMT Annual Report 2000), section 1 Back