Select Committee on Treasury Third Report


Treasury's Role in Government

16. It would be wrong to suggest that the Treasury should not be interested in the Government's strategic direction and the policies pursued by individual departments. These matters all involve public expenditure, the stewardship of which is one of the Treasury's core roles. As public expenditure has increased in recent decades, so too has the Treasury's power and influence inevitably grown. Some policies, for example competition and welfare policies, may have significant economic effects. It is important that the Treasury strikes the correct balance between pursuing its legitimate interests in Government policy-making and determining significant chunks of the policies administered by other departments. As Sir Peter Kemp, former Second Permanent Secretary of the Cabinet Office, put it "the trick will be to keep [the Treasury's] firm banker's function while letting departments and departmental Ministers get on with actually delivering their policies properly".[41]

17. Several witnesses warned of the dangers of the Treasury exerting too much influence over policy-making. Sir Alan Bailey wrote that the Treasury's concern for ensuring that public expenditure achieves value for money could lead to "detailed second-guessing of each department on all its systems and policies, which clogs departmental discretion and blurs the accountability of spending Ministers".[42] Sir Michael Partridge thought that the Treasury's involvement in detailed policy making could make the department less effective at undertaking its core work on financial management and the control of public expenditure and would also take responsibility away from managers in other departments.[43] Sir Peter Kemp argued that the Treasury was moving "into a position of power which is dangerous in our society" in which it was acting as judge and jury of a range of policy matters.[44] He said that "some wider machinery, going beyond the banker function, is desirable to consider longer-term and overall domestic objectives, especially against the inevitable [economic] down-turns".[45]

18. We heard different views from witnesses outside the civil service, however. Mr Parry and Professor Deakin, authors of a recent book on the Treasury's role in relation to social policy, argued that the Treasury had sought strategic control of a wide range of policy matters, using PSAs to set common values and objectives throughout Government. Professor Deakin said that there was greater acceptance in the Treasury "that issues that previously were not regarded as being particularly Treasury relevant are now seen as being part of the mix for decision making purposes". As a consequence, the Treasury had changed from the department which said "no" to spending proposals to one which said "we will discuss it with you and make sure that your mind set is in harmony with ours".[46] Lord Lipsey also emphasised that the Treasury's attitude to public expenditure control had changed, describing this as "an improvement rather than a deterioration".[47] Sir Samuel Brittan did "not think [the Treasury was] nearly powerful enough" but "that does not mean it is always right. It needs some other kind of economic check, whether it is in No. 10 or elsewhere".[48]

19. We believe that the Treasury has become more powerful in two significant respects in recent years. Firstly, its influence over the strategic direction of the Government has grown. The Treasury's role in leading the welfare reform programme and introducing stakeholder pensions and tax credits has led to the Treasury taking a greater role in social security policy. Secondly, Public Service Agreements have substantially increased the Treasury's influence over the affairs of spending departments. We consider these two developments in more detail below.


20. Several witnesses commented that the Government lacked a central unit for strategic policy-making and that the Treasury had filled the vacuum. Sir Michael Partridge said that "Strategy ... is not being used enough and developed enough in Government at the moment. I blame some of it on Parliament for not holding Ministers to account on these sorts of things, some of it on the structure of Cabinet Government and a bit of it on the Treasury who likes to grab the policy and do it. If there is a vacuum they will move in."[49] He argued that "it would be much better if there was a business-like approach where the Cabinet set the overall strategy before you started as to where you thought expenditure ought to go up and where it ought to go down and then Departments went away and worked out the detail. The Departments should do the policies, the Treasury watch the money like a hawk and assist and then the policy should come back to the Cabinet for decision before it was announced".[50] Sir Peter Kemp called for a "more powerful No. 10 unit" to counterbalance the Treasury and to provide "more availability to departmental Ministers to appeal if they do not like what the Treasury is doing".[51] Sir Alan Bailey said that he was "sceptical about machinery changes" but thought that the Government as a whole could benefit from a revival of the Central Policy Review Staff (CPRS) which wrote analytical papers about current problems to help resolve conflicts between departments.[52] Mr Parry raised the question of "where inside Government — and it could be anywhere inside Government — should the analytical capability be on the relationship between public expenditure on the one hand and public services on the other" and suggested that because "the Treasury will always remain central to all of these issues ... you should perhaps make the Treasury stronger internally so it would have a broader range of input into all the decisions on which it will always remain central".[53]

21. Questions concerning the role of the Cabinet and the desirability or otherwise of there being a department of the Prime Minister go well beyond the remit of our inquiry and indeed this Committee. The strategic direction of the Government is obviously a matter for the Prime Minister and the importance of individual departments in setting the Government's agenda must depend upon his or her political judgement and the relative political weights of individual Ministers. A number of witnesses commented that the political strength of the Chancellor of the Exchequer was one factor explaining the current power and influence of the Treasury and Professor Wanna's evidence about experience in Australia also emphasised potentially short-term political factors.[54] We are concerned that the Treasury as an institution has recently begun to exert too much influence over policy areas which are properly the business of other departments and that this is not necessarily in the best interests of the Treasury or the Government as a whole.

22. Sir Michael Partridge, in his oral evidence, was particularly outspoken about the Treasury's role in determining welfare policy. He said that "particularly in the last five years ... the Chancellor tends to cook up ideas and the [DSS] is either told at the last minute or not told at all. There is no chance to work it through like a proper policy and say 'will this really work? Is it feasible? Is it practicable? What is the best way to do it?', it gets rushed in and things get done and they do not work".[55] He argued that the Treasury had a "general bias against National Insurance and in favour of means tested benefits" because expenditure on the latter was easier for the department to control, and that, as a result of recent policy changes, "we will all have means tested benefits within ten years ... I do not believe it is a DSS policy. I think it is a Treasury driven policy".[56] The Faculty and Institute of Actuaries wrote of "general concern in the pensions field that pensions policy is being driven by fiscal policies of HM Treasury as much as by the social policy of the DSS".[57]

23. The Treasury has pointed out that "the way welfare benefits are constructed has incentive effects that are hugely influential in the way the labour market works. Somebody who is looking at social security purely as amounts of money that we are going to be spending is not going to see anything like the full picture".[58] There is a need for what Sir Michael Partridge described as a "constructive dialogue" between spending departments and the Treasury, so that policy development and public expenditure control do not pull in opposite directions.[59] Modern government is a complex business. It increasingly appears to be the case that policy decisions cannot be neatly compartmentalised. Still less can Government departments expect to work in isolation from one another. In this context, it has been a welcome development in recent years that departments have sought to work together in policy areas where responsibilities overlap. Examples of this movement abound in the case of the Treasury.

24. Under its current Public Service Agreement, it has an objective of "promoting a fair and efficient tax and benefit system with incentives to work, save and invest", and it shares a target with the DSS to "make substantial progress towards eradicating child poverty, by reducing the number of children in poverty by at least a quarter by 2004". Again, where there is overlap with the work of the Department of Trade and Industry, the Treasury has a joint PSA objective to "improve UK competitiveness by narrowing the productivity gap with the US, France, Germany and Japan".[60]

25. Where there are these attempts to achieve "joined up government" there are clearly balances to be struck: which department takes the lead in which areas? How is duplication to be avoided? Will decision-making be elongated to an unhealthy degree? We are not convinced that in the examples we have given the balance is yet optimal. In the case of the DSS, the impression is given that the Treasury has taken charge of the welfare reform process. In the case of the DTI, the Treasury gives the impression of having taken charge of micro-economic policy. We recommend that, at the strategic level, the Treasury gives greater attention to ensuring that it gets the balance right in its co-operative workings with other departments.


26. Public Service Agreements are still new and Parliament and Government are still working towards making them useful management tools. They were launched in 1998 as part of the Comprehensive Spending Review to link the allocation of public expenditure to departments' aims and objectives. The first set of PSAs related to the spending allocations for the period from 1999-2000 to 2001-02. The Committee heard evidence on PSAs in spring 1999, publishing a Report in July 1999.[61] The Report broadly welcomed the introduction of PSAs and included recommendations on PSA targets, cross-departmental and regional PSAs, audit and monitoring issues, and how the results of such activity might be used.

27. The second tranche of PSAs was published in July 2000, alongside the results of the 2000 Spending Review, and is intended to run from 2001 to 2004.[62] Departments have fewer objectives and targets now than previously: the Treasury itself has ten PSA targets under the new system, compared to 33 before. Mr John Gieve, of HM Treasury, told us that "we had too many measures in the first set and too many targets" and that the new PSAs were "more outcome based and a better attempt to specify real top level business and political priorities". He also explained that the process for negotiating PSAs with departments had changed, with earlier discussions about key priorities in a "co-operative process with departments and with the other central departments".[63] The new PSAs are complemented by Service Delivery Agreements (SDAs) which, Mr Gieve said, "explain how departments are going about achieving their main business objectives" and incorporate the "Cabinet Office agenda on such aspects as diversity, equality of opportunity and so on".[64]

28. During our inquiry we discussed with Treasury officials and others the details of the new system of PSAs, revisiting many of the issues raised in the 1999 Report.[65] Our focus was on how PSAs affected the relationship between the Treasury and the rest of Whitehall, which we discuss in the following paragraphs. We hope that the Treasury Committee in the new Parliament will look again at the new system of public expenditure control and update the 1999 Report on PSAs.

29. Professor Talbot, of the University of Glamorgan, said in his written memorandum that "decisions about what does or does not get funded ... carry clear implications for policy" and that the Treasury's role in policy making has become "both more powerful and more explicit" as a result of the introduction of the Spending Review and PSA process.[66] Some witnesses were sceptical about the Treasury's ability to improve the efficiency and effectiveness of public expenditure using PSAs. Mr Kenneth Clarke MP said that "in principle, it must be right that everybody is agreed what the money is for and how you are going to make a success or failure in delivering it" but warned against the Treasury "coming back all the time and second-guessing what one was doing in particular areas" and of the danger of PSAs becoming "a bureaucratic paper chase and a process which takes up more time than the value of that being delivered".[67]

30. Treasury witnesses rejected the characterisation of PSAs as a tool for facilitating the micro-management of other departments' affairs by the Treasury. Mr Gieve argued that "what the PSA is about is not imposing a Treasury template on everyone, it is about getting an agreement between ministers and officials at the centre and in departments about what is really important and what people should be doing over a number of years. In that way it is the opposite of what you fear. It is reducing the risk of constantly having your elbow jogged and being told, 'That was important two months ago but now we have decided it is something completely different'."[68] Although elbows might no longer be jogged about priorities, the Treasury is keen to question the ways in which departments spend money.[69] Mr Parry and Professor Deakin argued that the Treasury was seeking "an intellectual victory" over other departments so that they come to "think 'correctly' in the Treasury's eyes".[70]

31. We are in no doubt that public expenditure should be spent as efficiently and effectively as possible and that the Treasury, as the guardian of the public purse, has a major obligation to ensure this. It is important, however, that once expenditure priorities have been set, departments are left with the task of detailed delivery. The sorts of situations described by Sir Michael Partridge, in which the Treasury sought to determine how departments spent their money, are inimical to good government and parliamentary accountability.[71] We are concerned that the structure of the PSA system encourages the Treasury to micro-manage other departments' business. In this respect, we welcome the simplification of the PSAs the Government has recently carried out. The Treasury's recent stress audit referred to a general perception amongst Treasury staff that the department retained "an often excessive focus on detail" rather than on the strategic role it was meant to have.[72] Not only does the Treasury set global expenditure controls and take the lead in negotiations on PSAs, the Treasury "monitors progress against PSA targets" and is best placed to take action against departments which fail to meet targets, or to change objectives and targets where necessary.[73] Mr Gieve told us that "there is not a rule that if you break your PSA target you lose all of your money" but sanctions against managers and individual civil servants could be taken.[74] We recommend that the Government should be clearer about the incentives and sanctions associated with the PSA system.

32. We do not think it is desirable for the Treasury both to set the framework within which departments should operate, using the Spending Review and PSA process, and to act as the sole assessor of whether or not departments are achieving their objectives. The current system lacks independent monitoring of whether or not departmental targets have been met and, within Government, the means by which departments' performances against their targets are assessed and responded to are unduly dominated by the Treasury. In relation to external audit, we detected some recognition by Treasury officials that the current position was unsatisfactory. Sir Andrew Turnbull said that, in many areas, "the analysts mark the exam" because progress against PSA targets could be measured against publicly available data, such as macro-economic statistics.[75] Mr Gieve argued that "the more parliamentary scrutiny and public scrutiny the better" and told us that the technical notes, which provide the definitions and measures underpinning PSAs, were devised after consultation with the National Audit Office, the Audit Commission, the Office for National Statistics and other interested parties.[76] The same bodies are involved in the Sharman review of whether or not further mechanisms for external validation are required, particularly where the statistics used by departments to measure their performance are not National Statistics. Mr Gieve said the Treasury was "open minded" on this question although he emphasised that there already existed "an awful lot of published, independently validated measurement information".[77]

33. We concluded in 1999 that "the figures reported for progress against quantifiable targets need to be made credible by being externally validated".[78] We remain strongly of the opinion that the assessments of departments' performance against their PSA targets should be the subject of external review, by a body accountable to Parliament, such as the National Audit Office, the Audit Commission, or another body, rather than the Government. Such a system of audit could show more clearly where the Government was achieving its objectives, and where progress was less satisfactory, and stimulate public debate about the Government's priorities and the policies associated with them. External validation of the Government's assessment of its own performance could help build public confidence in the system of performance management and there is also considerable scope for Parliamentary input, both into the discussions of why targets have or have not been met and how the allocation of public expenditure should reflect this. Mr Gieve is right to point out that much published information already exists, but it is often scattered across dozens of departmental reports, forward plans and business plans and it can be difficult to compare departments' performance across Whitehall and from year to year. We recommend that, if the Government appoints an external auditor of its PSA targets as we suggest, the auditor should publish a concise annual report showing the progress made against targets by every department and making recommendations for improvements.

34. External validation is most urgently needed in relation to the Treasury's own PSA targets because the Treasury both sets its own targets and measures its own performance. For example, the Treasury formulates the estimate of trend growth which it has a target to raise by 2004 and the Chancellor is responsible for the composition of the retail price index, which the Treasury has a target to keep at 2.5 per cent. Although, as Sir Andrew Turnbull observed,[79] analysts and this Committee are able to scrutinise the Treasury's handling of the economy, the potential exists for the Treasury to ensure that its own targets are always achieved or, if they are not, that the targets are changed in a way which suits the department. This problem can be overcome by the appointment of an external auditor. The Audit Commission performs such a role in relation to auditing the performance of local government bodies and we have been shown no convincing reason as to why a similar regime should not operate in relation to central government.We recommend that, even if the Government decides against appointing an external auditor for the whole PSA system, the measurements of performance against the Treasury's own targets should be externally validated.

35. Professor Talbot argued in his memorandum that the introduction of PSAs could include a "substantial role for Parliament (through the Select Committees) in scrutinising plans and facilitating input from key stakeholders. Final decisions could then be based on much more open, consultative and inclusive debates".[80] Mr John Garrett wrote that "it would ... be valuable if Select Committees were invited to specify what they need to monitor the performance of the departments they shadow instead of having to put up with whatever the Treasury imposes on them".[81] Although Treasury officials were keen to stress that Parliament could be involved in the ex post scrutiny of PSAs, there was no parliamentary involvement in their preparation.[82] Nor was there any opportunity for other interested parties beyond Whitehall to contribute to the development of PSAs in a structured way. Sir Samuel Brittan warned against having "PSAs put to committees for prior approval" because "it would lead to inordinate delays and the special interests would then start to work".[83] PSAs are ultimately a matter for Government, but we see no reason why the Government should not invite comments on improving the current set, or why draft PSAs could not be published well in advance of the next Spending Review for consultation. We envisage that the publication of an annual report on the progress made against PSA targets by an external auditor could give Select Committees a more explicit role in the development and scrutiny of PSAs, both ex ante and ex post.

36. We asked several questions of Treasury officials about how performance against the new PSA targets will be monitored. Mr Gieve said that a quarterly report would be prepared for the Public Services and Public Expenditure Committee, a Cabinet Committee chaired by the Chancellor of the Exchequer and on which the Chief Secretary to the Treasury also sits.[84] Unusually for a Cabinet Committee, the secretariat is drawn from both the Treasury and the Cabinet Office, rather than only from the latter.[85] Mr Gieve said "in effect the whole of the spending side of the Treasury is supporting the Cabinet Committee".[86] We are concerned that the Treasury's role within Government in respect of the monitoring of PSAs is too powerful. The Treasury must clearly have the leading role in relation to the control and allocation of public expenditure but it is less clear why it should also be chiefly responsible for monitoring the progress made against targets by departments. Mr Gieve argued that "it is difficult to have an allocating process that does not look to see what the money is being allocated for. These things have to be done together. To split them out and say the Cabinet Office deals with what departments should be aiming to do and the Treasury deals separately with how much money they have would just lead to confusion." In the same answer, however, Mr Gieve told us that "Government objectives are set in a collective way" and that "we co­operate with the Cabinet Office and, obviously, with the Policy Unit in Number Ten very closely".[87]

37. We heard evidence on the systems used in Australia and New Zealand for the allocation of public expenditure and the measurement of departments' performance. In Australia, the Treasury is responsible for overall macro-economic policy and sets the global total of public expenditure each year and the Department of Finance and Administration negotiates the allocation of resources between departments and seeks to ensure that value for money is achieved.[88] In New Zealand, the Treasury's role in relation to economic and budgetary policy is complemented by the State Services Commission, one task of which is to advise the Government on departments' performance and recommend appropriate action.[89] Neither of these systems is necessarily ideal for the UK, and we heard several criticisms of the New Zealand system, for example for being too formal or overly based on contracts,[90] but they demonstrate that there could be scope for the UK Treasury to share its responsibilities for the PSA system more widely.

38. We recommend that the Public Services and Public Expenditure Cabinet Committee be reconstituted so that its dominance by Treasury Ministers is reduced. This could be achieved by establishing a separate sub-committee for performance monitoring, chaired by a Minister from a department other than the Treasury, for example. The advantage of this change would be to associate other departments more explicitly with PSAs as, at the moment, their role is somewhat opaque. It would also demonstrate that PSAs are not simply tools of the Treasury and that the priorities enshrined in them serve the Government as a whole, rather than just the Exchequer. The Treasury would, of course, remain concerned with the monitoring of PSAs and would continue to take the lead on their development, although with an enhanced input from other departments. The Treasury's ability to delve inside departments to influence the management of resources would be lessened, however, allowing the department to focus on strategic goals, an aim outlined to us by Treasury officials.

41   Q360 Back

42   Ev, p95 paragraph 7 Back

43   Qq437, 439 Back

44   Ev, p89 paragraph 2 and Q374 Back

45   Ev, p90 paragraph 7 Back

46   Q114; and see the comments of the Chancellor of the Exchequer in Treasury Committee, Minutes of Evidence, 1999-2000, Pre-Budget Report, HC986-iii, Q297  Back

47   Q113 Back

48   Q112 Back

49   Q450 Back

50   Q447 Back

51   Q366 Back

52   Qq370, 375 Back

53   Q112 Back

54   Q284 Back

55   Q435 Back

56   Qq435, 468 Back

57   App 1, paragraph 13 Back

58   Q5 Back

59   Q447 Back

60   Spending Review 2000: Public Service Agreements 2001-04, HM Treasury, Cm4808, Jul 00 (hereafter PSAs 2001-04), p35 Back

61   See footnote 21 Back

62   PSAs 2001-04, p1 Back

63   Q591 Back

64   Q598 Back

65   Qq5, 18-38, 585-7, 590-632 Back

66   App 7 Back

67   Q266 Back

68   Q13 Back

69   Ev, p2 paragraph 2.5 Back

70   Ev, p34 paragraph 12 Back

71   Qq431-2, 439 Back

72   HM Treasury Stress Audit, Final Report, Robertson Cooper Ltd, 11 May 00, (hereafter Stress Audit) paragraph; and paragraph 60 for more information on the stress audit Back

73   Ev, p27 paragraph 12; and Qq607-24 Back

74   Qq23-4 Back

75   Q30 Back

76   Qq585-6 Back

77   Qq587, 605-6 Back

78   PSAs Report, paragraph 51 Back

79   See paragraph 32 Back

80   App 7 Back

81   App 3 Back

82   See paragraph 32 Back

83   Q135 Back

84   Q611 Back

85   Q621 Back

86   Q617 Back

87   Q6 Back

88   Qq306-9 Back

89   App 9, paragraphs 30-1 Back

90   Qq8, 301 Back

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