Chancellors - is the Ministry of Finance fit for purpose?

Chancellors – is the Ministry of Finance fit for purpose?

Let’s call it the shadow of William Gladstone. This great Victorian titan is known for his extensive reform of the British civil service and the initiation of the modern role of Chancellor of the Exchequer, an office in which he has served four times in 12 years.

Political patronage has been pushed as “favoritism, prioritization and shopping” have been replaced by impartial selection of talented officials through tests and greater progress on the basis of merit. The Treasury, formerly subordinate to the Department of Major Expenditure, was promoted to prestige and power under Gladston. The chancellor’s office began its relentless rise at the cabinet table.

But with the light came a shadow. As Howard Davies notes over the next 150 years, it has proved incredibly difficult for the British government to transcend this great vision of Gladston over the next 150 years. Chancellors.

As Davies says, as early as 1968, Fulton’s Civil Service Report framed the following issues well: too many general experts, too many short-term job shifts, lack of technical skills or focus, virtually no business, operational, or industrial expertise. To this could be added: poor leadership of politicians with little real experience, little interest in organizational change and little long-term ability to achieve them.

Meanwhile, as the financial crash of 2008, the Covid pandemic and the now Ukrainian crisis remind us, the world is moving on. Political challenges are becoming more complex, interconnected and sudden. Democratic pressures, social media demands and a 24-hour news cycle are constantly increasing – and with them the need for a more agile, agile and efficient state.

Davies’ book is incorrectly named because it focuses on the recent history, policy, and organization of the Treasury, from Gordon Brown, Chancellor in 1997-07, to incumbent Rishi Sunak, rather than just successive office holders.

Based on a series of interviews, this is a brief but comprehensive and sometimes biased introduction over the last 25 years by an experienced former expert from the Treasury and the Bank of England. Davies does not cover the current cost-of-living crisis or the looming prospects for British stagflation, and his view is broadly conventional. However, as the book updates the story, it fills a useful place.

Some of Davies’ judgments are controversial. It is stretched to suggest that the financial crisis in 2008 owed little to the Labor government’s regulatory policies. It was a global crisis, but the United Kingdom was uniquely and unnecessarily vulnerable. It had a very large financial sector relative to gross domestic product, and the financial leverage of the banking sector skyrocketed after 2000 from a steady 40-year average of 20 times its capital to 50 times in just seven years – all for Labor.

Elsewhere, the author sheds more light on how the Treasury is a small department with limited resources full of smart people. Despite its best efforts, it is still something of an intellectual monoculture, largely staffed by government officials educated at Russell Group universities, often in philosophy, politics and economics, with a one-year master’s degree at the London School of Economics, where Davies once was. director.

He has little diversity, little historical understanding and woefully little real business and operational experience. When Northern Rock Bank exploded in 2007, there was reportedly only one junior Treasury official who understood the bank’s balance sheet.

Remuneration incentives and culture reinforce these weaknesses. The average age of civil servants of the Ministry of Finance is 27 years, their starting salary is 50 percent compared to leading consulting firms and banks. Half of the employees have a term of less than three years. Officials therefore tend to relocate teams every two to three years to gain experience and progress. Understandably, but institutionally uselessly, they prefer fashion policy areas and ministerial private offices.

Together, these factors can be catastrophic. The Blair years’ private finance initiative had the wrong reason to spend public money while hiding its real costs; bad policy design; weak implementation by the department and insufficient enforcement of the treasury. The result was a huge waste, a mountain of public debt, and Maginot’s line of poorly built and expensive hospitals.

Elsewhere, Treasury records are better, sometimes excellent. Holidays and other programs designed and implemented within weeks were a remarkable response to the crisis.

The need to control the department’s expenses is an essential function of the treasury. However, it seeks to move from a “non-bank bank” to the thinking of a venture capitalist who uses public funds to flexibly and intelligently inject private capital into projects.

Without this shift in perspective, it is difficult to see how, for example, the government’s “compensation” program for the deprived regions of the United Kingdom can succeed. A useful change would be a new investment committee with external members who will bring proven investment skills. They should start by reading this book.

Chancellors: Managing the British economy in times of crisis by Howard Davies, Polity 15.99 GBP, 224 pages

Jesse Norman is a Conservative MP and was Treasury Secretary of the UK Treasury from 2019-21.

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