The Treasury should have specific responsibility to promote greater fiscal devolution in the UK regions, according to the author of a major review of the government department.
Unveiling his report ‘Rethinking the Treasury’, Lord Kerslake – the former head of the Civil Service – said passing down more responsibilities to cities such as Manchester without meaningful fiscal devolution amounted “not to devolution but decentralisation”.
“If you could achieve real devolution and combine it with a proper place-based industrial strategy and investment in transport infrastructure, then you could begin to reverse regional imbalances,” he said.
Although commissioned by Shadow Chancellor John McDonnell, Lord Kerslake stressed his review was entirely independent. Among those who sat on its panel was Karel Williams, Professor of Accounting and Political Economy at Alliance MBS. Added Prof Williams: “This is about restarting a public debate about the role of the Treasury as an institution that controls government policy. Since the late 1970s there has been endless debate about Treasury policy, but very little discussion about its role as an institution.”
Lord Kerslake said continued economic growth cannot disguise long-standing structural problems in the economy, issues which the review highlights.
He added: “The gap between rich and poor is rapidly accelerating, while we have a massive regional imbalance which has seemingly grown inexorably. London is the wealthiest region in Europe, and London and the South East account for 40% of national output. Yet outside London no region in the UK has recovered its output from where it was prior to the financial crash. GVA per capita in the North East and Wales is half what it is in London. This is not a happy story.”
He said that despite seven years of austerity, latest Institute of Fiscal Studies projections suggest the UK is still many years away from closing its budget deficit gap.
“It would be wrong to lay all the responsibility of this on the Treasury, but its narrow focus on austerity has meant that it has had very little to offer on these wider structural problems. One of our key recommendations is that the Treasury has a clear mandate to address these economic issues. The Treasury must be more open to different and wider perspectives on how the economy should be run.”
Lord Kerslake said the report’s recommendations were reinforced by Brexit. “The Treasury has a crucial role to play in the effective delivery of the outcome of the referendum. There are huge economic risks attached to Brexit and it is crucial there is a trusted economic view at the forefront of any decisions made. We need a strong Treasury, but strong in the right way.”
However he said the standing of the Treasury had been adversely affected during the referendum and there was work to be done in restoring its credibility. “Its dire economic warnings were not believed by a large percentage of the population, and the Treasury became caught up in the political dogfight. It remains to be seen whether the Treasury was simply wrong in its forecast, or wrong in its timing.”
He said there were resource issues too. “The Treasury needs to be properly equipped to deal with the demands of Brexit while also delivering the rest of its domestic policy responsibilities. Our view as a panel is that there is very little evidence that the issue of resourcing has been properly addressed in planning for Brexit.”
Lord Kerslake said in recent times the Treasury had extended its reach well beyond its core financial role into becoming an arbiter, and sometimes an initiator, of policy. “The Treasury has immense power despite being a relatively small department. This power comes in part because it controls government finances, but also recently reflects the power and status of those who have held the role of Chancellor.”
He said that financial control had become “policy control”. “The Treasury should stick to its core brief – financial management – and work as an enabler with other government departments.”
The report does not recommend the break-up of the Treasury although it did look at whether its economic role should be split from its financial role. “On balance we felt the impact of that would be too disruptive and outweigh the benefits. It would also risk creating two departments that were permanently at loggerheads with each other,” he added.
Following his lecture Lord Kerslake was joined by Prof Williams as well as Review Secretary Ros Dunn, Professor Aeron Davis from the University of London, and Professor Michael Moran from Alliance MBS, for a panel debate.