House of Commons - Treasury

Select Committee on Treasury Third Report

II. IMPROVING THE TREASURY

STRATEGIC DIRECTION AND PSAS: CONCLUSION

39. During the post-war era, the Treasury acquired a reputation as a department which lurched from macro-economic crisis to crisis, unable to take a long-term view of the policy issues it encountered because of short-term contingencies.[91] Times have changed. A relatively long period of economic growth, coupled with the transfer of monetary policy to the Bank of England, has allowed the Treasury to re-evaluate its role, at least for as long as macro-economic stability continues. The Treasury told us in its memorandum that "with the macro-economic framework now firmly established, more resources can be directed towards examining microeconomic issues".[92] Sir Michael Partridge, quoting former Treasury Permanent Secretary, the then Sir Terence Burns, described the Treasury view as "macro-economic policy is very boring ... so ... we are getting very interested in social policy".[93]

40. We acknowledge the importance of micro- and macro-economic policies working in tandem. The Treasury has a legitimate interest in ensuring that welfare, employment, education and other policies all contribute to reducing unemployment, maintaining low inflation and other key macro-economic goals. Moving into these areas has inevitably caused the Treasury to step on the toes of other departments, as the evidence of several witnesses has shown, and has given the impression that the strategic direction of the Government in many areas is being set by the Treasury. The new Spending Review and PSA process, although in many ways a continuation of trends in public expenditure control dating back to the Plowden Report of 1961, are powerful new tools by which the Treasury can exert influence over the management of departments' resources. These developments have occurred gradually, without explicit parliamentary debate or assent.

41. Discussion of the Treasury's role is necessarily related to the respective roles of the other central offices of the Government — the Cabinet Office and the Prime Minister's Office. Sir Peter Kemp strongly argued that there should be a "rebalancing" of the power and influence of the three central agencies so that the Treasury's resource allocation function was more strongly challenged. He advocated a stronger Prime Minister's Office.[94] Sir Alan Bailey expressed scepticism about major changes to the machinery of Government but also called for a "re-evaluation of the role of the Treasury to make it effective in its crucial central job but not usurping the proper functions of other departments" and wanted "to see any machinery brought back which helps to restore this sense of collective Cabinet responsibility".[95]

42. We have identified two functions which should be undertaken at the centre of Government, but not by the Treasury. One is helping the Government establish a strategic overview of its policies, perhaps similar to the function of the now defunct Central Policy Review Staff. Sir Alan Bailey, a former Deputy Head of the CPRS, told us that the body was "designed to operate for the use of, for the benefit of, the Cabinet as a whole. I think it did that in the sense that its main role in my time was to write analytical papers about current problems which would then illuminate or help to resolve conflicts between departments, including between departments and the Treasury on specific questions but from an impersonal, so to speak, dispassionate point of view bringing out the issues for ministers to decide."[96] This role could be assumed by a strengthened Performance and Innovation Unit in the Cabinet Office. The second function is the monitoring of the performance of departments, which should involve more input from other departments. The capacity of other departments to help the Government set strategic priorities and to monitor the performance of departments should be strengthened.

TAX POLICY

43. The Treasury has an objective to promote a "fair and efficient tax and benefit system", which Mr Edward Troup, of Simmons & Simmons, argued it was largely failing to achieve. He called for a more coherent framework for the tax system, a more analytic background to policy decisions, and more technical expertise in the Treasury so that debate with the revenue departments on complex tax issues could be engaged in more equally.[97] Mr Troup argued that the "principal failing ... is the lack of a coherent centre within which all the competing interests in making a good tax policy can be brought together" principally because there "was the lack of knowledge of tax within the Treasury itself".[98] Some of Mr Troup's comments were echoed by the Chartered Institute of Taxation and the Institute and Faculty of Actuaries in their memoranda.[99]

44. Sir Andrew Turnbull made a virtue of the extent to which work on complex tax issues is left by the Treasury in the hands of the revenue authorities. He told us that the Treasury tax policy team were asked "to bring perspective" to the more detailed and expert work of the revenue authorities, not "to duplicate the revenue departments' detailed knowledge of the tax system".[100] Mr (now Sir Robert) Culpin, the Treasury's Director of Budget Finances, emphasised that the Treasury's tax policy team included secondees from the revenue departments and the private sector and specialised particularly in environmental taxation and European tax issues.[101]

45. A recent review of the Inland Revenue's policy advice by a team led by the Permanent Secretary of the Department of Health and including Mr Andrew Dilnot, Director of the Institute for Fiscal Studies, made a number of fundamental criticisms of the Revenue's tax policy work and its relationship with the Treasury. The review team "were left with the overall impression that even now high quality analysis is not as common, nor as highly valued, as we believe it should be" and "were surprised by the lack of any equivalent in the business tax area of the personal tax and benefit model". It considered that "it remains difficult to identify anyone in the structure who has the background and the capacity to think about the tax system as a whole" and that "policy is more likely to be successfully formulated and implemented if everyone is clear from the start what the objectives are and why ... we were given impression that this had not always been the case in the past".[102] There may be good reasons for the revenue departments to retain significant expertise in tax policy, but we are convinced of the need for the Treasury to build up its own capacity to analyse detailed tax issues and to take a more strategic view of the tax system and of the impact of taxes on the economy than hitherto. We recommend that, in response to this Report, the Treasury informs us of what action it intends to take in response to the peer review of the Inland Revenue's policy-making capacity.

46. Tax policy may be less exciting than reforming the welfare system but it is no less important. Our past Reports, and the memoranda we regularly receive from tax professionals and others, support the conclusions that the tax system is too complex and that serious attempts to reduce complexity have been avoided; that tax reforms are too often undertaken without adequate analysis of the likely effects; and that consultation on detailed tax reforms is not yet regarded as standard practice, despite the introduction of the annual Pre-Budget Report.[103] The peer review of the Inland Revenue's policy-making capacity should demonstrate to Treasury Ministers and officials that a more hands-on approach by the Treasury to tax policy is now required. Recent problems with detailed tax policies, such as the IR35 proposals for countering tax avoidance in the provision of personal services, and the review of double taxation relief for companies, point in the same direction. We firmly believe that in the area of tax policy the Treasury could do better. We recommend that the Treasury give more attention to this area in order to ensure that the tax system is "fair and efficient", one of the Treasury's PSA objectives.

Transparency and Accountability

TRANSPARENCY

47. In many ways, the work of the Treasury is entirely transparent. It publishes reams of paperwork, particularly at the times of the Budget and the Pre-Budget Report, setting out the Government's economic policy and analysing macro-economic issues. In seeking to understand the relationships between the Treasury and the rest of Whitehall, however, we have encountered difficulties in establishing the nature of the Treasury's role. Treasury witnesses have emphasised their strategic approach to public expenditure control and micro-economic issues, while former senior officials from other departments have painted a picture of excessive, unnecessary meddling in departments' affairs. The Treasury's role in allocating public expenditure, determining, monitoring and adapting PSAs, and influencing policies which have economic effects is opaque, hidden behind a curtain of Whitehall secrecy. Lack of transparency reduces public understanding of how and why policies are developed and helps stoke suspicions that the Treasury is unduly powerful. Excessive secrecy about its role may harm the Treasury, enabling departments to blame the Treasury for every unpopular policy decision. The Government's accountability to Parliament for its policies is also weakened if the Treasury is responsible for decisions ostensibly taken by departments, or if departments are allowed to blame "Treasury rules" for their actions.[104] We have a number of recommendations to make which, if implemented, would make the Treasury more accountable to Parliament for its activities.

RELATIONSHIPS WITH OTHER DEPARTMENTS

48. It is widely accepted that the relationships between the central departments of State — the Treasury, Cabinet Office and Prime Minister's Office — are not sufficiently transparent. The Cabinet Office report "Wiring it Up", published in January 2000, recommended the publication of a concordat spelling out these three bodies' roles. We were told that it would be published by Christmas 2000, but that target was missed.[105] If the Government sees merit in making the demarcation of the responsibilities of the Treasury, Cabinet Office and Prime Minister's Office clearer and more transparent, it could also be helpful to draw up similar documents covering the relationships between the Treasury and the spending departments. This would introduce more transparency to such relationships and enable Parliament and the public to judge more accurately who was responsible for particular decisions. Mr Gieve was not convinced that elucidation of the Treasury's role in relation to the spending departments was required, telling us that "the description of the Treasury role is, in effect, a description of its role in relation to other departments".[106] We disagree and we recommend that the Government publishes a formal statement of the relationships between the Treasury and other departments, particularly in relation to public expenditure control and micro-economic policy.

49. Select Committees have often had cause to complain that the Treasury has determined the policies of the departments they scrutinise, usually without having taken oral or written evidence from the Treasury, which has traditionally resisted such scrutiny.[107] The Agriculture Committee, for example, considered during its inquiry into the Ministry of Agriculture, Fisheries and Food's 1999 departmental report that the department's PSA targets "reflected a lost battle with the Treasury" and that the Intervention Board's targets emerged as a result of the "same Treasury-led process".[108] The Defence Committee, in its inquiry into defence research, said in relation to the ownership of the Defence Evaluation and Research Agency that "the problems of access to capital and human resources are largely self-imposed by the Treasury's rules. To sell your research birthright to circumvent these theological niceties of the Government's financial rules would be a wholly disproportionate response to the problems they present".[109]

50. In the Committee's Report into its work during the current Parliament, we said that "with the increasing prevalence of policies explicitly involving more than one Government department, it is to be expected that other Committees will wish to take evidence from Treasury witnesses from time to time. Provided that this does not conflict with our own work, we have no objection to this development".[110] There are several good reasons why departmental Select Committees should take evidence from Treasury witnesses, particularly those officials responsible for public expenditure control, on a more frequent basis than has previously been the case. The Treasury should be held to account for its role in influencing or determining decisions ostensibly taken by other departments. We agree with Sir Michael Partridge's comment that he did "not think the decisions made behind the scenes are answered for enough publicly".[111] A more open approach to scrutiny by departmental Select Committees could also be of assistance to the Treasury, allowing it to dispel the notion that its interventions in other departments' affairs are at anything other than a strategic level and discouraging civil servants in other departments from blaming the Treasury for difficult decisions.[112] It is our view that departmental Select Committees would benefit from relevant evidence from the Treasury on its relationships with other departments. We hope that, in the next Parliament, arrangements will be made defining how and when the Treasury should give such evidence. We can see that Treasury Ministers and officials could be overwhelmed by too many such requests for evidence, but there needs to be a recognition that the Treasury shall give evidence on appropriate occasions. A protocol should be devised by the Liaison Committee to set out the ground rules.

51. During our inquiries into the Chancellor's departments, we have observed that the Treasury has a closer relationship with them than with departments headed by other Ministers. Treasury officials gave oral evidence during our inquires into National Statistics and the Government's Cash and Debt Management, for example, and there are Treasury officials with co-ordinating responsibilities for bodies such as the Royal Mint. Sir Andrew Turnbull told us that "with the exception of the Debt Management Office and the Office of Government Commerce [the Chancellor's departments] are not agencies of the Treasury, they report directly to Ministers. In that sense they are equal with us ... [although] we have an informal co-ordinating role or, in the case of tax, it is probably more formal".[113] We suspect that the Treasury's informal role is rather more important than Sir Andrew suggested and that the Treasury is powerfully placed to supervise and, when necessary, direct the Chancellor's other departments. We recommend that the Government clarify the relationships between Treasury officials and the officials who staff the Chancellor's other departments.

PARLIAMENTARY WRITTEN QUESTIONS

52. The Treasury's 1998 PSAs included targets relating to the percentage of parliamentary questions answered by the due date. These targets were not particularly stretching: for example, the Treasury aimed to answer only 50 per cent of the most urgent questions (those tabled for answer on a named day) on the day the answer was requested by the Member. For the 1998-99 session these targets were mostly missed: just 35 per cent of questions tabled for answer on a named day were answered on time.[114] A recent Report of the Public Administration Committee has shown that, during this Parliament, the Treasury's performance in answering questions tabled for a named day has been consistently worse than that of other departments.[115] The Treasury has a duty to Parliament to provide helpful, timely answers to questions tabled by Members. We recommend that the Treasury reviews its policy on answering parliamentary written questions, with a view to improving its performance.

PARLIAMENTARY DEBATES

53. In several respects, the opportunities for the House to debate and decide key aspects of economic and finance policy are limited:

— Parliamentary scrutiny of the Government's estimates of future expenditure has long been regarded as inadequate. The Procedure Committee said in 1999 that "the voting of the Estimates is almost a formality, and the Estimates Days debates are likely to focus on policy, rather than expenditure".[

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— The passage of Finance Bills through Parliament has been criticised for affording insufficient opportunities for scrutiny of the many complex measures such legislation contains. Lord Barnett, a former Chief Secretary to the Treasury, thought that the "Finance Bill and the way it is examined by Parliament is totally inadequate so you get very bad legislation on the statute book and there is no opportunity for the House of Lords or any select committee to look at it from a purely technical point of view".[119] Mr Troup, Head of Tax Strategy at Simmons & Simmons, said that parliamentary scrutiny of the Finance Bill was "very depressing" and commented that "as a professional and someone who is involved with representative bodies, our view is once it is in the Finance Bill you might as well give up"[120]

— The Chancellor's announcement of the Government's spending plans for the 2001-04 period, and new PSAs, on 18 July 2000 was made by means of an oral statement, on which there was opportunity for about an hour of questions but not a debate or vote. There was opportunity for the Government's plans to be debated on 20 July 2000 during the regular debate on public expenditure, but again there was no opportunity for a vote. The full PSA package, including SDAs and technical notes, has not been subject to a Government-initiated debate.

54. We share the concerns of the Procedure Committee that the opportunities for Parliament to debate and decide public expenditure questions, such as the annual estimates of expenditure and the Government's Spending Review plans, are woefully inadequate. We are also dissatisfied with procedure on the Finance Bill, which lets badly drafted and insufficiently tested tax legislation onto the statute book every year. We return to scrutiny of tax legislation below. A commonly expressed view is that Parliament should be modernised in order to make its scrutiny of the Executive more effective. We have given our suggestions for improving the scrutiny of PSAs. We believe that the new procedure for dealing with resource accounting and budgeting also allows for improved scrutiny if Select Committees make best use of it. We also support the Liaison Committee's proposals for strengthening the Select Committee system. We trust that proposals to make a reality of these improvements in parliamentary scrutiny will be devised by the Modernisation Committee and quickly brought before Parliament.

RELATIONSHIP WITH THE TREASURY COMMITTEE

55. Like other departmental committees, the Treasury Committee's remit is to examine the policy, expenditure and administration of specified government departments (the Treasury, the Inland Revenue and HM Customs and Excise) and "associated public bodies", particularly the Chancellor's smaller departments. The Treasury's role at the centre of the Government machine leads to the Committee's remit including the whole economic system and the levels of public receipts and expenditure. Relations with the Treasury were therefore a matter of importance from the start of the Committee's work in 1979 and appear to have been reasonably good from the beginning, particularly since the establishment of effective liaison arrangements in 1995. Problems do occur from time to time, for example, with the timing and content of Government Replies to Reports and the timely production of memoranda.[121] Further details on our relationship with the Treasury can be found in our First Report of this session and in a memorandum to the Liaison Committee of 1997.[122]

56. The programme of the Treasury Committee since it was first set up in 1979 has been dominated by routine scrutiny of Budgets, major expenditure proposals, and more recently, the Financial Services Authority, the Bank of England Inflation Report and the meetings of European economic and finance (ECOFIN) Ministers. The remit of the Treasury itself has changed considerably in recent years, for example taking over responsibility for financial services regulation, and, as we have concluded, the Treasury's influence over a range of policy matters has increased. It is a challenge for us to scrutinise adequately all of the areas within the Treasury orbit and in relation to tax policy in particular, the case for more detailed scrutiny is apparent. There are various ways in which regular parliamentary scrutiny of the Treasury could be improved, including:

— the establishment of a new body in the House, perhaps along the lines of the Congressional Budget Office in the US Senate. The Liaison and Procedure Committees have already recommended the establishment of new bodies in the House for the examination of expenditure plans[123]

— providing the House of Commons Library with more specialist staff with economics backgrounds, so that Members can be better prepared in challenging Treasury policies.

CONCLUSION

57. Parliament lacks the resources necessary to hold the Treasury fully to account. Parts of the Treasury's work, such as on the tax system, are inadequately scrutinised, while other aspects, such as the Treasury's influence over other departments in relation to public expenditure, are hidden from our view. We strongly support the calls by the Liaison Committee and others for the House to employ more permanent staff to help Parliament better hold the Treasury to account.

91 See Qq4, 220, 238 Back

92 Ev, p3 paragraph 3.2 Back

93 Q457 Back

94 Q365 Back

95 Qq371, 375 Back

96 Q375 Back

97 Ev, p125 paragraph 4 Back

98 Q529 Back

99 App 1, paragraph 7 and App 2 Back

100 Q651 Back