When Liz Truss was campaigning to be Conservative leader in August, she was asked at a hustings whether she planned to break up the Treasury. “I wouldn’t want to give them advance warning,” she replied. In an interview a few days later, she deplored the department’s insistence on the “abacus economics” of balancing the nation’s books. On arrival in No 10 Truss sacked Tom Scholar, the popular and experienced permanent secretary (which was very much part of her Margaret Thatcher tribute act; a similar clear-out of top mandarins took place in 1979) and forbade the Office for Budget Responsibility – a body funded by the Treasury and led by its former officials – from publishing economic forecasts of her plans’ impact.
None of this prevented the investors who buy government debt from doing their own “abacus economics” (or “maths”, as the professionals call it) and concluding that the one thing the Truss-Kwarteng Growth Plan was absolutely guaranteed to grow was government debt.
Perhaps Treasury officials explained to Truss and Kwasi Kwarteng that it was a terrible idea to launch their Growth Plan – funded by selling £62bn in government bonds – on 22 September, the day after the Bank of England announced that it would begin selling off the £847bn in government bonds held by its Asset Purchase Facility. Perhaps they warned the new PM that both events would drive down bond prices, which increases the cost of borrowing, and they may even have tried to make her understand that the Growth Plan was perfectly timed to get the blame for the effects. But perhaps they didn’t try all that hard.
After all, as Aeron Davis shows in this perceptive and revealing history of the past half-century of the department that underwrites every British political decision, the Treasury has a very strong instinct for self-preservation. Many of the most important – and the most damaging – policies of recent decades have been developed and promoted by the Treasury’s institutional compulsion to settle the national balance sheet.
From the end of the Second World War until the late 1970s, “Treasury orthodoxy” meant Keynesianism; government spending was good and deficits were appropriate because they promoted demand. Some of the longer-serving mandarins had worked with John Maynard Keynes himself when he was at the department during the war; a few were old enough to remember the Great Depression. Most officials in the postwar period were “generalists” who had only studied economics as part of a PPE degree, if at all. Professional economists were kept “in the cellar”, as one recalled.
But the inflation and recession of the 1970s broke the Keynesian consensus. In 1972 the Tory chancellor, Anthony Barber, revealed a Budget he called a “dash for growth” in which huge tax cuts would be paid for by borrowing. The result – amplified by a huge increase in the cost of energy – was very high inflation, a crisis in the value of the pound and, two years later, a Labour government that inherited an economy in shreds. History can sometimes be uncomfortably repetitive.
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It was during the Callaghan government that the Treasury underwent what Davis sees as its most formative experience: the 1976 sterling crash, in which, with inflation at 25 per cent, the government was forced to ask the International Monetary Fund for a bailout. The Treasury took the blame. One official recalls the crisis and the bailout as a “traumatic event”; the department was humiliated, having lost fiscal credibility and economic control.
The Treasury changed dramatically in response. It sought more control, not just over the spending of other departments but of who ran them. It replaced the PPE bluffers with professionals; if it was to be held accountable, it would need to show its working. “The economists invaded the Treasury,” recalled one former official. It became a department that was much more specialised and interested in theory; Ken Clarke would later say that working with Treasury staff was “like being on the high table at an Oxbridge college composed of brilliant people, none of whom would have been capable of running a whelk stall”.
But the Treasury’s most fundamental change was in dropping the idea that the economy could be controlled and stimulated through public spending, as Keynes had believed, and adopting a new creed: monetarism. This is the idea that the primary lever in the economy is the supply of money. While many in the reformed Treasury – and indeed the government – saw monetarism as “nuts”, “myopic”, and an academic position that could never actually be translated into reality, it allowed for a new settlement between a Treasury that had been traumatised by its loss of control over public spending in the 1970s, and a new Conservative government, led by Thatcher and her chancellor, Nigel Lawson, who believed in a smaller state, lower spending and lower taxes.
It is this settlement that Davis persuasively argues has become the most dangerous convention in British politics: the government’s most powerful department lends its weight to policies that keep the balance sheet clean. And so the Treasury got behind the privatisation of public industries because it took away a liability and created (short-term) revenue. “It was about getting the receipts in,” recalled one official.
The same was true of the sell-off of Britain’s social housing stock – the Treasury supported policies that limited how much, if anything, councils could reinvest in new housing – and the housing boom that followed, which has immiserated a generation but showed up very nicely in stamp duty receipts. Rather than addressing the spiralling cost of housing as one of the fundamental problems in society, the Treasury excluded it from the inflation measure, and allowed successive governments to pretend that rising house prices were a good thing.
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The deregulation of the financial sector and the support it was given through the tax system were also warmly supported by Treasury officials, who concentrated on the steep rise in receipts from banking and paid little attention to how the economy was being rebalanced in favour of one small area. The same areas of business that lost out to this process also lost out to globalisation, which the Treasury supported through the abolition of exchange controls and resistance to any sort of protectionism.
The shift to a deregulated, financialised and globalised economy would be felt as a series of shocks, most notably the financial crash of 2008 and the Brexit referendum of 2016. The Treasury and other financial authorities responded to their failure properly to account for reality with the biggest number-fudge the world had ever seen. Quantitative easing, as Gordon Brown modestly put it, “saved the world” from financial disaster, but with near-zero interest rates it created a zombie economy, and a dysfunctional realm in which real wages never rose but assets whizzed ever upwards, and the bill for the crash would be paid another time.
That time has now very much arrived. With inflation returning to levels last seen in the 1970s and economic policy once more being dictated by financial markets, the government’s abacus has never been more important. The Treasury has become the department for the management of crises – some of them of its own making.
Bankruptcy, Bubbles and Bailouts: The Inside History of the Treasury Since 1976
Aeron Davis
Manchester University Press, 328pp, £16.99
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This article appears in the 26 Oct 2022 issue of the New Statesman, State of Disorder