Administration and expenditure of the Chancellor's departments, 2008-09 - Treasury Contents


4. All Treasury-associated bodies faced extraordinary challenges during 2008-09, mainly arising from the need to respond to a growing financial crisis and associated economic downturn. In his foreword to the HM Treasury Annual Report and Accounts 2008-09, the Chancellor of the Exchequer placed these challenges within the context of a world economy that "has faced exceptional pressures through 2007 and 2008, with the financial crisis of late 2008 resulting in the sharpest and most widespread global downturn in well over 60 years" and acknowledged, with a degree of understatement, that "this has been a difficult year for the Treasury".[3] His Permanent Secretary, Sir Nicholas Macpherson, told us that 2008-09 had been "certainly the toughest year in my working life."[4]

5. We obtained a similar sense of challenging times from other Treasury-associated bodies. For Robert Stheeman, Chief Executive of the DMO:

    2008-09 provided the most challenging operational environment to date for the DMO. The requirements of the DMO this year have been greater than ever before and the market conditions in which the DMO had had to operate have been the most difficult in the organisation's eleven year history.[5]

Lesley Strathie, Chief Executive of HMRC, wrote in HMRC's Annual Report that "the last year has been one of great change for HM Revenue and Customs" and that "the prospect of a sustained global economic downturn meant we had to fundamentally review the way we delivered our core functions."[6] Similarly, Paul Spencer, Chairman of NS&I felt that "this has been an exceptional year, in the truest sense of the word,"[7] whilst Jane Platt, NS&I's Chief Executive, told us that "over the last year we have certainly lived through some exceptional times, as we have dealt with the flight to safety post the Lehmans crisis in the autumn"[8]. The full force of this drama was felt less by the Royal Mint, though it too had change to report since in April 2007 the Chancellor announced that it was to be vested into a Government-owned company, with transition expected to be completed by 31 December 2009. Chief Executive Andrew Stafford confirmed to us during oral evidence in October that "yes, we are on track. Everything is being done to complete the process by 31 December."[9]

6. The rest of this section draws out common themes, including the extent to which the Treasury and its associated bodies have had to take on new activity and/or greatly increase the volume of normal activity. We consider how successful this activity has been, and the cost in terms of pressure on people and other work.

New activity


7. Over the course of 2008-09 the Treasury and its associated bodies had to take on a number of new activities. HM Treasury undertook a series of interventions to stabilise the financial system, of which the most novel were:

  • the creation of UK Financial Investments Limited to manage, on behalf of the Treasury, the Government's investments in Northern Rock, Royal Bank of Scotland and the Lloyds Group;
  • the development of the Asset Protection Scheme to provide protection against future credit losses on certain assets, in exchange for a fee. The terms and nature of the Asset Protection Scheme changed through the year as financial conditions improved; and,
  • the establishment of the Asset Purchase Facility, or "quantitative easing" to enable the Bank of England to inject money into the economy through the purchase of assets, primarily Government gilts.


8. As announced in the Chancellor's 2008 Pre-Budget Report, HMRC introduced a new Business Payment Support Service designed to "offer otherwise viable businesses, in temporary financial difficulty, a fast and streamlined service for arranging to pay their tax bills to a timetable they can afford."[10] In October 2009, Chief Executive Lesley Strathie informed us that "by 11 October we had taken 335,700 calls from businesses and we had arranged more than 217,700 time to pay arrangements worth just over £3.8 billion."[11]


9. Finally, at the height of the financial crisis in autumn 2008, the NS&I became a safe haven for savings as savers lost confidence in private banks and building societies. Net inflows into NS&I (including reinvestments) rose to £9.57 billion in Q3 2008-09, a dramatic increase compared with previous Q3 results of £2.49 billion (2004-05), £2.98 billion (2005-06), £4.42 billion (2006-07) and £3.78 billion (2007-08). As the table below shows, it is also revealing that, over a 5 year period, the next two biggest quarterly net inflows were recorded in Q2 and Q4 2008-09.

Table 2: Gross inflows into NS&I (including reinvestments)[12]

As a consequence, as the table below shows, NS&I took record levels of sales through each of its principal channels—post office counter sales, post office postal sales, direct postal sales, telephone sales and internet sales—during 2008-09.

Table 3: Sales performance by principal channels[13]

High volume of 'normal' activity


10. When not taking on new roles, HM Treasury and its associated bodies have also had to handle increased volumes of high priority 'normal' activity. The Treasury still had its full range of objectives to carry out. Robert Stheeman, Chief Executive of the DMO, told us that although over the last year his priorities "have not changed that much. The overall task that we have been set has become that much larger."[14] In the case of the DMO, this involved the successful selling of £146.5 billion of gilts through 66 auctions during 2008-09, "by far the highest volume of gilt supply in a financial year…delivered following two major revisions to the financing remit set by HM Treasury."[15]


11. HMRC too had to work harder to fulfil its primary tax collection objective during a recession. For example, it had to react quickly to introduce, at short notice, a reduction in VAT. Lesley Strathie told us that "…the huge burden for us was the speed at which we had to implement that change."[16]



12. HM Treasury and its associated bodies were understandably keen to highlight their successes during the 2008-09 period. In general, HM Treasury sought credit in its Annual Report for taking measures which stabilised the financial system. More specifically, the DMO could point to its continued ability to sell record levels of gilts, and Sir Nicholas Macpherson stressed to us that "the DMO has been remarkably successful at funding sudden needs."[17]


13. Lesley Strathie pointed to the creation of the Business Payment Support Service as "a huge success and a real demonstration of how fleet of foot HMRC can be when asked to deliver. Within three weeks we had this service up and running."[18] She also commented, in relation to the introduction, at short notice, of a reduction in VAT, that "again we did a fantastic job to reach 2,000 businesses and the media and everybody else in the industry to make sure people were in shape to do it."[19]


14. Jane Platt, NS&I Chief Executive, told us that:

    NS&I and its operating partner, Siemens, did a marvellous job in the face of huge unsolicited volumes in staying open for business. Our contingency plans worked, staff cancelled their holidays, they did extra shift, they really 'busted a gut' to be able to make sure that we offered a good service to customers.

Asking us to consider "what would have happened if NS&I had not been open for business at a time when people were so concerned about their savings" she recalled visiting NS&I call centres during the 'flight to safety' and "listening to people of all ages, some of them in tears, talk about how concerned they were about the safety of their savings" and how experienced NS&I operators "were able to calm people down at a time when emotions were running very high."[20]

Measuring performance

15. It is striking that, during the course of 2008-09 HM Treasury, NS&I and the Royal Mint all changed their objectives. Both HM Treasury and NS&I explained their changes as a consequence of the prevailing conditions.


16. HM Treasury re-wrote indicator outcome 1 (a)—meeting the fiscal rules—of its first Departmental Strategic Objective (DSO). Famously, this indicator outcome used to measure the Government's performance against the 'golden rule' that the central budget be in balance or surplus over the course of an economic cycle. HM Treasury's 2008 Pre- Budget Report explained that, to achieve its wider financial stability objectives in exceptional circumstances, the Government would depart temporarily from the 'golden rule'. Accordingly, HM Treasury's 2009 Annual Report measures performance with regard to meeting the fiscal rules against the following temporary fiscal operating rule:

    To set policies to improve the cyclically-adjusted current budget in each year, once the economy emerges from the downturn, so it reaches balance and debt is falling as a proportion of GDP once the global shocks have worked their way through the economy in full.[21]

During oral evidence, we put it to Treasury Permanent Secretary Sir Nicholas Macpherson that this new statement was full of motherhood and apple pie but not a lot of meaning. He responded that:

    It is always very important to have some sort of objective or rule to guide fiscal policy. I can remember that under successive governments the objective had changed from time to time, but in terms of credibility one needs something that guides policy.

He accepted though that:

    Given the events of last year I would not attach so much importance to the rule as to the actions of the government. There comes a point when you can announce whatever rule you like. What gives you credibility fiscally is what you do. [22]

And admitted that:

    There was a debate about whether we should just suspend the rules. Our view and that of the government as a whole was that to suspend the rules would create more uncertainty than if at least we made clear that there was some objective that informed policy and then we would set policy consistent with that objective. I do not believe this rule will be a permanent one.[23]

Finally, he pointed out, in a reference to the Government's Fiscal Responsibility Bill, that:

    if the government is to legislate a hard budget constraint, which is my understanding of the announcements in September and October, that will provide a harder edge and an opportunity for both the public and parliament to hold the government to account on whether it is hitting the target.[24]

We remain unconvinced that HM Treasury's present DSO outcome 1(a) temporary indicator serves any real value. We will monitor with interest the extent to which the Fiscal Responsibility Bill, should it become law, comes to provide a rule against which such measurement can be made.


17. NS&I's usual first objective is to create at least an agreed amount of 'Value Add' from its products. This is normally a key measure of NS&I performance because it reveals the extent to which it is cheaper for the Government to raise money through NS&I compared with its other sources of financing, such as gilts. During 2008-09, however, NS&I gained Treasury agreement to suspend the Value Add target for 2008-09 and set no Value Add target for 2009-10. NS&I Chief Executive Jane Platt explained to us that:

    We temporarily suspended value add at the time when interest rates, the base rate, went down to half a per cent. The base rate has never been that low since the Bank of England was founded and certainly not since Premium Bonds and our other products were introduced. So we looked very carefully at the value add measure and realised that if we did not suspend it, it would drive us to make some very difficult and unfair decisions in terms of pricing for our customers. For example, with base rate at half a per cent, that would assume on our value add measure that the Gilt Office (DMO) would be able to raise financing for 11 or 12 years at less than 0.3%. That is just not true, so therefore we had to suspend the measure because it was distorted and did not give a true measure. [25]

In other words, the Value Add measure was suspended because, with interest rates so low, and the cost of selling gilts falling accordingly, it was simply impossible in these exceptional circumstances for NS&I to raise money more cheaply than the DMO. She reassured us that "as soon as the comparators which make up that target and benchmark have some meaning, then we will reintroduce it."[26] She told us that "technically" Value Add could be reintroduced in-year, "but only when the comparators have some meaning."[27] She also observed that a proxy measure which NS&I had worked up with the Treasury focusing on administrative ratios "does indeed show that during the time that Value Add has been suspended so far we are raising money more cost-effectively than the Gilt Office (DMO)."[28] It would have been helpful to have seen NS&I's proxy measure, and the rationale behind it, clearly set out in its 2008-09 Annual Report. We recommend that, if circumstances do not allow the re-instatement of the Value Add measure during the course of 2009-10, the proxy measure is given greater prominence in next year's NS&I Annual report. More fundamentally, the unique circumstances of 2008-09—including the suspension of the Value Add indicator—do raise questions about the main purpose of NS&I, and the extent to which there is a tension between its customer-orientated and Government-orientated aims. We explore this in more detail in Section 5.


18. The Royal Mint's first target is to achieve an average rate of return on average capital employed—the target for 2008-09 was 5.1%, which was exceeded. The Royal Mint calculates the average rate of return on average capital employed by expressing profit as a percentage of average capital employed. Profit for this calculation will be taken as the retained profit plus interest and dividend. Average capital employed will be taken as the average of the monthly balance sheet capital employed plus loans and cash. For 2009-10, the Royal Mint has amended the calculation to include Bullion overdrafts within the definition of Average Capital Employed. This was presented to us as a technical change to, as described by Chief Executive Andrew Stafford, "make sure we have a more realistic method of calculating the terms for shareholders."[29] Financial Director Andrew Lawrence informed us that the change "made our target slightly harder, but it is the right decision for the business."[30]

Unfinished business

19. As we also noted in our recent Pre-Budget Report,[31] the UK population is living at a time of great economic (and political) uncertainty. Although the risk of a systemic collapse has now receded—and we acknowledge that some Government measures over the past year have contributed to this—substantial financial and economic challenges remain, and it is too early to draw a line under this extraordinary period.


20. It is hard to put a final evaluation on the success of HM Treasury's financial stability interventions. It is not, for instance, possible at the present time to ascribe a total overall cost to the taxpayer of all the financial interventions. In relation to Government shareholdings, Permanent Secretary Sir Nicholas Macpherson felt that "there was a good chance" that the Government would make a profit on some of them. He noted though that although "there was a trough in January when we made a loss on our shareholdings of £26 billion…a couple of months ago there was a brief period when we were in profit."[32] He also noted that HM Treasury had received "quite decent fees" for the credit guarantee scheme and the Asset Protection Scheme, though in a later oral evidence session Exchequer Secretary Sarah McCarthy-Fry MP felt that, with regard to potential losses under the Asset Protection Scheme, "it is an ongoing situation and I do think it is too early to give any timetable or exact figures at this stage."[33] Equally Sir Nicholas Macpherson told us, in answer to our question as to whether quantitative easing is working, that:

    This is a very difficult issue to assess because one is assessing against a counterfactual that none of us knows. …quantitative easing is a journey into the unknown. We do not understand every aspect of it. I am sure that it will keep academics busy for many years to come.[34]

21. We looked in more detail at the relationship between the Treasury and UK Financial Investments, the organisation which now manages the Government's bank shareholdings. Sir Nicholas Macpherson explained to us that, formally:

    UKFI works at arm's length from the Treasury, but there are a number of instruments designed to ensure that it has a very clear framework. It has to agree an investment mandate and business plan with the Treasury. If it is to do anything serious like selling shares in the two major banks that must be cleared with the Chancellor of the Exchequer...Appointments to the board must be approved by the Treasury.[35]

We examined how the separation of functions between the Treasury and UKFI was working in practice, asking in particular whether the Treasury had shared with UKFI its analysis of the balance sheets of the institutions in which it is now the largest shareholder. Louise Tulett, Group Director of Finance and Procurement, HM Treasury, who sits on the Board of UKFI, told us that:

    Everybody is conscious of the controls to protect information to allow only legitimate shareholder information to be known by UKFI and with the Asset Protection Scheme, which is now to be administered by an arm's length body in the opposite direction, there is clear water between the two.[36]

She admitted, however, that "in these early days it is quite difficult to get the demarcation right, but I think we are getting there."[37] When we probed further on where the line was drawn with regard to sharing with UKFI information about the banks' asset bases, she replied that "I do not quite know how we have articulated that line of principle being drawn..."[38] In an earlier report[39] we stressed how important it was that the arms length relationship between the Treasury and UKFI was clearly defined so that what constituted appropriate behaviour could be clearly discerned. It appears to us that the relationship between the Treasury and UKFI remains a work in progress, and we recommend that the Government considers whether the formal terms of the relationship need some re-definition in the light of experience. It is important that the lines of demarcation are clear, and reflect the reality on the ground, not least to ensure that other shareholders are properly protected.


22. The DMO has a continued requirement to sell unprecedented levels of Government gilts—for 2009-10 it currently has a remit to sell £220 billion gilts—and the outlook is uncertain with the potential for yields to rise and a risk that the market for Government gilts will become saturated. As Chief Executive Robert Stheeman acknowledged to us, "we have been fortunate as well over the last six months in that probably market conditions have been more benign than we and some commentators would have actually expected." [40] Benign market conditions for Government gilts are at least in part a consequence of the role of the Bank of England over the past year in acting as a guaranteed final buyer for gilts in pursuit of quantitative easing. Indeed Robert Stheeman stressed to us that "we have to be fully aware and cognisant of the fact that the Bank itself has been buying gilts in the secondary market."[41] As he explained to us in October, the net impact since the beginning of the 2008-09 financial year of the DMO selling gilts and the Bank of England buying gilts has been "a decline in available gilts in the market by approximately £30 billion."[42] Against this background, it is not so surprising that the DMO has been able to raise money "at relatively, in historical terms, cheap levels."[43]

23. Robert Stheeman remained confident in the ability of the DMO to continue to sell record levels of gilts, seeing no signs of market saturation. He accepted though that the climate will becoming more challenging when the Bank of England starts to reverse quantitative easing, and looks to the DMO to sell still more gilts, observing to us that "exactly where yields would be were the Bank not to buy, I don't know."[44] During our Pre-Budget Report hearings, both the Chancellor and Dave Ramsden, his Chief Economic Adviser, also offered reassurance on future demand for UK gilts. As we noted in our Pre-Budget Report, there remains the risk that the combination of the large amount of gilt auctions planned in 2010-11 and the cessation of quantitative easing will result in an excessive supply of UK gilts onto the market at a time when other governments will be offering similar products, with the possible result that auctions are uncovered and yields increase.

24. The significant deterioration of public finances during the 2009-10 period, casts a long-shadow, with public sector net borrowing projected to be higher than at any time since the Second World War. It follows that it is very difficult to draw final conclusions regarding the level of success that should be attributed to HM Treasury and its associated bodies for 2008-09—too much remains unfinished business.


25. Although it is not yet possible fully to gauge the level of success, it is possible to examine some of the costs to date, in terms both of people and effort on other priorities, arising from the need for the Treasury departments to respond to the unique challenges posed during 2008-09.


26. We looked first at people, taking into account Sir Nicholas Macpherson's comment that "there are people in the Treasury who have given an extraordinary amount of their time in the past year. A number of people have worked almost day in and day out over many weekends."[45] Against this background, we asked Robert Stheeman whether he had enough people to handle DMO's increased workload, and were assured that "we have had discussions with the Treasury about the resources. We have received the resources that we have requested and we requested more resources, also financial resources, and we have received those."[46] We asked a similar question of Sir Nicholas Macpherson about HM Treasury as a whole and received similar assurances that "we have taken in more resources and on the financial stability side in particular the Treasury is much bigger; it has grown in size during this period. All I would say is that it has been helpful to us to have the resources to deal with what we have had to do…"[47]

27. Conscious of the increased risk of overstretch and burn-out, we asked the Treasury whether it was prudent to proceed with its efficiency programmes at a time of greatly enhanced workload. Louise Tulett, The Treasury's Group Director of Finance and Procurement, accepted that increasing productivity at this time was a major task, but affirmed that "it is one that we are on track to deliver."[48] Sir Nicholas Macpherson was equally clear that the Treasury should not "give up on the efficiency agenda" not least because it was a means of freeing up more resources and "in a crisis one needs to bring in more resources."[49]

28. We also asked the Treasury whether other priorities had suffered as a consequence of the additional work required to stabilise the financial system. Unsurprisingly perhaps, Treasury Ministers were reluctant to go into details. Sarah McCarthy-Fry MP accepted that "obviously we have had to prioritise our resources, and there has inevitably been a priority, a focus, on stabilising the banking system", but she was equally clear that "we have tried not to let the bread-and-butter issues go. We are keeping them on track, but inevitably there has been a prioritisation on the banking stability side."[50] When we pressed her on whether any lower priority activities had been stopped, she replied that "we are trying to keep them ticking over."[51]

29. We asked in particular whether the Child Poverty agenda had suffered. The Financial Secretary Rt Hon Stephen Timms MP was quick to reassure us that "in terms of Ministerial commitment, I would not have been able to identify a negative impact from the difficulties that we have seen."[52] His Permanent Secretary, though, was prepared to admit that, with regard to the Child Poverty agenda, "inevitably, from a personal perspective I have had less time to devote to the details of this agenda as in previous years because I have had to spend much of the year dealing with the banks and the implications of the recession in terms of monetary and fiscal policy"[53] adding that "in terms of my personal time, I must prioritise otherwise, I would never get any sleep at all."[54] We look in greater detail at the Treasury's performance with regard to Child Poverty and its other objectives in the next section.


30. HMRC has an ambitious transformation programme to improve its efficiency involving a reduction in the number of people working for it, and a reduction and redistribution of the locations of its businesses. HMRC has already reduced the number of people in its organisation from 105,000 to fewer than 89,000. In her Annual Report Review, Chief Executive Lesley Strathie explained that "such is the scale of our transformation, it is not surprising the past year has been challenging for our employees."[55] Indeed, at HMRC the relationship between staff morale, efficiency measures and performance appears to be particularly sensitive, and we explore it in greater detail in Section 4.


31. We appreciate the magnitude of the challenges faced by HM Treasury and its associated bodies during the course of this extraordinary year, and commend the extent to which the workforce has been willing to go the extra mile in response to these challenges. It is important though that Departments do not take this commitment for granted and continue to monitor for signs of burn-out and over-stretch. This is particularly important because, as we have highlighted above and in other recent reports, the challenges posed during this extraordinary period remain very much ongoing business.

32. In the remainder of this report, we examine individually and in greater detail the performance of HM Treasury and its associated bodies. We look first at the Treasury Group's performance against its objectives.

3   HM Treasury, Annual Report and Accounts 2008-09, July 2009, HC 611, p 5 Back

4   Q 287 Back

5   Debt Management Office, Annual Report and Accounts 2008-09, July 2009, HC 853, p 9 Back

6   HM Revenue and Customs, Departmental Report 2009, July 2009, CM 7591, p 8 Back

7   National Savings and Investments, Annual Report and Accounts 2008-09, July 2009, HC 470, p 3 Back

8   Q 37 Back

9   Q 82 Back

10   HM Revenue and Customs, Departmental Report 2009, July 2009, Cm 7591, p 26 Back

11   Q 167 Back

12   National Savings and Investments, Annual Report and Accounts 2008-09, July 2009, HC 470, p 7 Back

13   Ibid., p 20 Back

14   Q 2 Back

15   Debt Management Office, Annual Report and Accounts 2008-09, July 2009, HC 853, p 9 Back

16   Q 190 Back

17   Q 293 Back

18   Q 166 Back

19   Q 190 Back

20   Q 39 Back

21   HM Treasury, Annual Report and Accounts 2008-09, July 2009, HC 611, p 34 Back

22   Q 313 Back

23   Q 314 Back

24   Q 317 Back

25   Q 73 Back

26   Q 73 Back

27   Q 75 Back

28   Q 75 Back

29   Q 143 Back

30   Q 144 Back

31   Treasury Committee, Fourth Report of Session 2009-10, Pre-Budget Report 2009, HC 180 Back

32   Q 292 Back

33   Q 469 Back

34   Q 307 Back

35   Q 299 Back

36   Q 300 Back

37   Q 300 Back

38   Q 302 Back

39   Treasury Committee, Seventh Report of Session 2008-09, Banking Crisis: dealing with the failure of the UK banks, HC 416 Back

40   Q 15 Back

41   Q 15 Back

42   Q 16 Back

43   Q 17 Back

44   Q 16 Back

45   Q 290 Back

46   Q 35 Back

47   Q 359 Back

48   Q 358 Back

49   Q 359 Back

50   Q 388 Back

51   Q 389 Back

52   Q 390 Back

53   Q 381 Back

54   Q 382 Back

55   HM Revenue and Customs, Departmental Report 2009, July 2009, CM 7591, p 9 Back

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