Sir Nicholas Macpherson – 2011 Demos Speech

The below speech was made by the Permanent Secretary to the Treasury, Sir Nicholas Macpherson, made at Demos on 8th March 2011.

The Treasury has had an extraordinary few years: a banking crisis followed by recession and a ballooning budget deficit.

But, even by those standards, the last year has been a defining one.

We delivered two budgets, in March and June.

We have been through only the second political transition in thirty years.

We delivered a Spending Review.

We have navigated through a sovereign debt crisis in Europe.

And we have embarked upon the biggest reform of financial regulation since 1997.

On top of this, we have made a number of institutional and organisational changes, in particular the creation of the Office for Budget Responsibility.

At the same time, the Treasury is getting smaller. Staffing levels which peaked at 1420 in September 2009 currently stand at 1260 on a like for like basis.

In my view, the Treasury will enter the new financial year with greater credibility as the nation’s finance and economics ministry.

This is partly because of what the department has achieved: in particular, the sheer scale of the fiscal consolidation. But also its associated outcomes: long gilt yields have fallen by 30 basis points over the last year, while they have increased by 130 basis points in Spain.

It is also partly about the way in which we have gone about these tasks. The official Treasury forged a strong working relationship with the new Government and quickly learned how to work with the first coalition in 65 years. I would like to think this was down to careful planning on our part. But credit should also go to the open and constructive way in which the new administration approached the civil service. Similarly, the successful delivery of the Spending Review relied not only on classic Treasury skills of analysis and negotiation, but also on an inclusive approach, both within and beyond Whitehall. And we are adopting a similarly open and consultative approach to the reforms to financial regulation: it is critical that any reforms are built to last.

And it is also because organisational changes have strengthened the Treasury’s influence.

The creation of the Office for Budget Responsibility is a good example. Its clear remit and independent status makes its forecasts that much more credible. And it strengthens the Treasury’s hand on fiscal policy since adjusting the forecasts to avoid difficult decisions is no longer an option.

We have also managed to effect this change in a way that minimises the duplication of work between the Treasury and the OBR. This is not only a good thing in terms of saving the taxpayer some money, but it also means we can maintain the macroeconomic analytical capacity that we need to be effective. For example, these changes have allowed our Chief Economic Advisor, Dave Ramsden, to spend much more time on analysis and policy advice, building up economic capacity across Whitehall, because it is now Robert Chote and colleagues that spend their time worrying about the forecast.

Other institutional changes have further strengthened policy making and the Treasury. The creation of the Office of Tax Simplification has created a force against unnecessary complexity; the absorbing of the Office of Government Commerce in the Efficiency and Reform Group by the Cabinet Office has enabled the Treasury to concentrate on its core objective of public spending planning and control; and the abolition of the National Economic Council has addressed the risk of the Cabinet Office becoming an economics ministry, which would have led to duplication and potentially confusion of policy responsibility.

The Treasury’s strength derives from its institutional and strategic coherence and the breadth of its oversight. As Britain’s economics and finance ministry, it is perhaps the only national institution that has a genuine interest in both public and private finances and in the economic success of households, businesses and public services.

The Treasury’s finance ministry role is clearly central. Only the Treasury can plan, control and account for public spending, and set the strategic direction of tax policy. And it has been doing it for eight hundred years.

But the Treasury also has an important economic policy role, on financial services, in the international arena, in steering macroeconomic policy, and in improving the supply side.

The Treasury’s effectiveness also derives from its small size. This requires the Treasury to be agile and to focus relentlessly on its core functions.

The Treasury is set to become smaller still. I expect staffing levels to be around 1000 in 2014, the smallest in my time at the Treasury (once machinery of government changes are taken into account).

We have recently carried out a Strategic Review of the Treasury – the first fundamental examination of the department’s role in two decades. It concluded that the department’s finance ministry role is vital, and none more so than in the coming period when making the consolidation stick must be the department’s number one priority. However, the economics ministry role remains as relevant as ever. But in carrying it out, the Treasury works best when it is operating at a strategic level: creating the framework or legislation, and leaving it to others to put it into operation. And so the challenge is to define clearly the boundary between the Treasury and its partners which maximises alignment and minimises duplication.

One example of this is public service reform. The Treasury needs to focus on the big strategic risks, rather than spread itself too thinly, interfering in what should be the responsibility of departments.

Another example is financial regulation. With the enactment of the forthcoming legislation, it will be the Bank of England which is responsible for macro-prudential policy, as well as prudential regulation and for the resolution of banks in a crisis. But we will still have responsibility for the framework as a whole and will need to retain a capacity to be an intelligent interlocutor and to take charge in a crisis when taxpayers’ money is put on the line. This is not new; the monetary policy framework follows a similar model, but the Strategic Review pushes us to be more rigorous in applying this approach across the Treasury’s other areas of business.

And it is right that responsibility for the financial services framework remains in the Treasury, as it has since the 1990s.

The banking crisis underlined the linkages between financial and economic policy. That is informing the Government’s reforms to the Bank of England; and it has also reinforced the importance of the Treasury’s historic relationship with the Bank. Moreover, most new regulation emanates from Brussels, it is finance ministers who take the important decisions on financial service issues whether in the EU Council of Economic and Finance Ministers, or in the G20 at a global level. And the Government’s interventions in the banking sector in recent years have involved fiscal as much as economic policy judgements.

Another good example of our focus on creating clear partnerships is tax. The Treasury is best placed to ensure tax policy decisions are taken in the context of wider financial and economic policy: and its proximity to Ministers means that it is well placed to take into account the fundamentally political nature of tax raising. But Her Majesty’s Revenue and Customs have a critical role in ensuring that tax policy is informed by operational and implementation issues. They are inevitably closer to the detail and data. The relationship works best when the comparative advantages of each institution are exploited, and where the two institutions can challenge each other from a position of mutual respect. The relationship is not a contract: it is more like a marriage than an arms treaty.

But the Treasury’s effectiveness is not just about the way we are organised, or about how we work with our main partners. It is also about the people we have working here.

The events of recent years have demonstrated the need for a flexible workforce that can move quickly and effectively into new priority areas, with a set of skills that allows them quickly to deliver.

This is not to say that our staff should be moved around so frequently that they cannot develop expertise in critical areas. And in the past the Treasury may have celebrated youth a little too much over experience.

Recent events have also placed a high premium on expertise. Here, I think we have made real progress. We now have a critical mass of tax professionals. Our economist cadre is strong. And we have strengthened financial management expertise, as well as attracting people with operational experience of delivering public services. We are managing staff’s careers more proactively. And our best staff are increasingly going out of the Treasury on secondment to deepen their experience, whether working in a local authority or a front line department or the Bank of England. In my view, we now have a much more plural workforce which is better placed to deliver the right mixture of challenge and experience, as well as mitigating the risks of mono-cultural group think.

The areas where expertise has made the most difference are those most directly affected by the recent crisis: debt management and financial stability. Of course, we need to learn the lessons of the causes of the crisis. And that is informing the Treasury’s painstaking approach to legislation. But the professionalism with which the Treasury handled the crisis from the autumn of 2008 onwards has been recognised by external commentators. Only last week, Lord Myners said

“the analysis, advice and support I received from…[Treasury] officials… was as good as any I experienced in 30 years in the private sector and at least as good as that received from commercial parties advising the Treasury”

We have so far been successful in retaining expertise and that allowed us to deal more effectively with the sovereign debt crisis in Europe and the subsequent loan to Ireland. And the challenge will be to retain the right staff as our headcount declines.

It’s been a challenging few years for the Treasury, as it has been for the global economy. But I believe the Treasury has come through stronger as the nation’s economics and finance ministry and is well placed to deal with whatever lies ahead.