Last week we quoted an article in the FT  by Martin Wolf in which he commented on the role of the Treasury in strangling initiatives for growth. Martin promised to return to the topic, which he has done here.

Our take on the issue is below.

A Picture of Major Whitehall Departments

Until the Global Financial Crisis (GFC) struck, like many people, I had assumed that progress was the natural order of things. Of course, some years would be better than others, but most years – even after inflation – most people would find themselves getting slightly better-off. Each year, the difference would be small but over a generation, it would be huge. From 1997-2010, despite the GFC, real (inflation-adjusted)  median earnings rose by 22%. Over an entire generation, that rate of increase would amount to around 45% improvement in living standards. That makes a big difference.

Since the GFC, however, we have experienced regress: economic growth has been anaemic. Real wages have fallen: most people are worse off today than they were in 2008 – that is a period of wage impairment we have not seen for a century. Our public services – even the NHS – have been brought to the brink of failure; our infrastructure is crumbling, and our government is doing little or nothing to protect the environment.

For these reasons among others, many people are now desperate to see a return to progress; and the prospect of a change of government offers – at least in principle – a possibility of such a return.

This article explores the question of whether, institutionally, we have become almost hard-wired for regress and, if so, what an incoming government should do about it.

In short, I believe we are currently hard-wired for regress and to have a realistic chance of success an incoming government must re-wire for progress:

  • Many of our most important institutions have developed regress-preserving habits;
  • An incoming government which ignores this risks a Truss-like experience;
  • To tackle these issues, we must re-wire.

Many of our institutions have regress-preserving habits

HM Treasury (HMT) has long been famous for “The Treasury view” – a view not too far from market fundamentalism. This means that, for example, HMT does not believe that the government should provide anything that the market could provide and should seek to spend as little as possible in discharging its legal responsibilities so as not to crowd-out private spending.

The Bank of England (BoE) has a remit to keep inflation close to 2% and a single tool at its disposal to achieve this aim: interest rates. As the recent round of inflation has demonstrated, this can have a damaging effect on the economy and on household finances.

The Office for Budget Responsibility (OBR) was set up with a narrow definition of Budget responsibility: its job is to assess whether the Budget meets the Chancellor’s self-imposed fiscal rules and the long term impact on the debt:GDP ratio. Other aspects of responsibility/irresponsibility like underinvesting in critical national infrastructure or public services are considered only if they will impact on government debt. We are in the strange situation where the OBR highlights a risk that in five decades time our debt may be too high for comfort while not calling out the risk of the NHS, schools and local authorities failing within this decade.

The GFC was 16 years ago; the median tenure of a CEO is around 7 years. We have two generations of CEOs who have learned their craft in a low-growth environment. Although they have been told in every Budget that “this one is a Budget for Growth,” they have learned to be sceptical: it is safe to invest to reduce your costs – that makes sense even in a low-growth world – but it is risky to add capacity for demand which may be ephemeral or non-existent.

The Home Office has been conditioned to see its key role as reducing immigration.

When it comes to the fourth estate, over 60% of readers in the UK consume media owned by one of four off-shore, tax-avoiding billionaires with a strong vested interest in Conservative policies remaining in force. Social media are equally controlled: Meta (owner of Facebook, Instagram, Threads, and WhatsApp) is controlled by Mark Zuckerberg, and Peter Thiel sits on its Board of Directors. Twitter (now X) was bought by Elon Musk, another protégé of Peter Thiel.

Ignoring this risks a Truss-like experience

A government which comes into power and seeks to work largely within the constraints of today’s wiring, as the Mais Lecture by Rachel Reeves seems to suggest Labour might do, runs the risk of finding that, rather than being seen as the saviours of a troubled country, they will be perceived as being rather like Liz Truss’s ill-fated government.

To see how this could happen, consider the following hypothetical scenario: the government wishes to engineer a green transition involving the large-scale insulation of leaky British houses. They ear-mark a considerable sum for stimulus and trust that this will drive the change they require: a boost for the economy, a reduction in household bills and a reduction in the UK’s carbon emissions. A simple, powerful idea.

But now let us consider the potential impact of the UK’s institutions on this plan. A far more complex picture emerges:

In this scenario:

  • HMT shapes the stimulus, ensuring that it is not for government to act on the supply-side – that is to be left to the market;
  • The stimulus does drive demand, initially up to the level of capacity – which means that business happily meets that demand – and then beyond it. CEOs will hire already-skilled people for demand they can see, but after 16 years of false dawns, will be reluctant to make a major investment in training and developing new capacity for the future. They raise prices while they wait to be convinced that the demand will be sustained;
  • The Home Office does not allow immigration of ‘semi-skilled’ people, only those whose salary exceeds the threshold;
  • So inflation takes hold, and the BoE raises interest rates;
  • The OBR notes the combination of higher stimulus spending and higher interest rates and warns of ‘serious risks’ to the nation’s debt sustainability;
  • The media react hysterically, talking of the government ‘bankrupting the country’ and ‘economic Armageddon.’

If the scenario plays out this way, the government will, at best, suffer a huge loss of public confidence and at worst be forced to abandon its plan for green transition before it has made a significant impact.

Of course, we cannot be certain that such a scenario would materialise, but it would be foolhardy not to plan for such a possibility.

To tackle these issues, we must re-wire

The scenario above illustrates just one initiative that might fall foul of our institutional wiring, but of course there are many others. In fact, we can divide sound policies into two classes:

  1. Those which are good for the country, but not for the Exchequer – the example above fits into this category as does repair of critical national infrastructure, proper funding of the NHS and other public services, etc;
  2. Those which are good for the country and produce a financial return to the government – eg investing in closing the tax gap.

Any initiative in class 1 is likely to be strangled by our institutions unless we change the wiring – and that means that the national renewal we need will not happen.

So, if we want national renewal, what should we do?

I have just been re-reading John Maynard Keynes’ book, How to Pay for the War. Keynes had to think through how Britain would cope with a challenge far greater than we face today, maximising our chances of winning the war without starving the British population. He thought radically. Even though our challenge is not so great, it is great enough: we should also think radically.

The diagram below sets out a possible rewiring:

A redesigned Departmental structure for the UK

The first change is the creation of a Department for National Strategy. China and Singapore have long-term plans for their countries, using a range of systems thinking and other techniques to assess the trade-offs involved. They have been remarkably successful in achieving their aims. And virtually every large business has a strategy department. The UK, however, does not have a Department with the attitudes, instincts, and skills to produce such a plan. The result is a lack of joined-up thinking and a naïve reliance on ‘the magic of markets’ to solve every problem.

But of course, as a saying attributed to Sun-Tzu points out, “Strategy without tactics is the slowest route to victory. Tactics without strategy is the noise before defeat.” So there also needs to be a powerful Department capable of ensuring that the tactics are consistent with the strategy: ie that the national strategy is translated into operational plans, that these plans are resourced and coordinated and that they deliver. That would be the new role for the Cabinet Office, working with the other Departments of state.

The role of HM Treasury would be reduced to those areas where it can make a major positive contribution: revenue maximisation and ‘leakage’ prevention.

And the Bank of England would lose its inflation remit to a new independent body, the Inflation Control Office which would have a full range of inflation control tools: not just interest rates (which place the burden of inflation reduction on those least able to bear it) but also taxes, price controls and even rationing. It would also recognise that while inflation is harmful, sometimes the cure can be worse than the disease. As Paul Krugman pointed out, the risks in relation to inflation are asymmetric – we need an institution with a remit which recognises the asymmetry and does not harm the economy (and households) needlessly.

The OBR, in contrast, would see its remit expand beyond debt to consider all aspects of sustainability. If it sees that the government is moving towards failure on any important dimension, it should call it out. And the strategy should be modified.

Finally, we need proper regulation of our major industries. Currently everything from Energy and Water to the Press is regulated in ways which satisfy the shareholders of the companies involved but do not meet the needs of the British people. A new and powerful independent Office of Regulation should ensure that regulators are both free from political interference and protected from capture by those they should be regulating.

How would such rewiring affect our ability to deliver initiatives which are good for the country, but not for the Exchequer? In the short-term, it would prevent the initiatives from being strangled at birth in the way the scenario describes. In the long-run, it would increase the capacity for such initiatives.

What about the second kind of initiative? Those which are good both for the country and for the Exchequer? They can be done anyway – and they create more headroom for the first kind of initiative. We gave many examples of such initiatives in our alternative Budget, under the heading of leakage prevention. But that is not an exhaustive list: as Martin Wolf pointed out, fixing the housing crisis could be done in such a way as to create assets for the Exchequer whose value exceeds their cost.

Conclusion

We tend to think of our institutions as being largely immutable. That was not the kind of thought-process adopted by Keynes when faced with the question of how to pay for the war, and it should not be our thought process when faced with the question of how to deliver national renewal and a return to progress.

To succeed, an incoming government must recognise and tackle the issues raised in this article.

If you think this is important, please share using the buttons below; if you would like to make sure your MP is thinking about these issues, this website will make it very easy for you: https://www.writetothem.com/

And if you would like to be kept informed, take a look at the 99% Organisation and join us.