Speech by the Chancellor of the Exchequer, Rt Hon George Osborne MP, at Speaker's House

This speech was published under the 2010 to 2015 Conservative and Liberal Democrat coalition government

Speech by the Chancellor of the Exchequer.

Thank you Mr Speaker for that kind introduction and for inviting me to give this evening’s lecture.

Many of your previous speakers have talked about their experiences in Government and the changes they have seen over their long careers.

I certainly hope that it’s a little too early in my career for a retrospective, and since this series features those who have occupied great Offices of State, I’d like to talk about the long history of the Office I occupy and add a few of my own observations of its modern role. 

Of all the Great Offices of State and all the Departments, few evoke such strong feelings as Chancellor of the Exchequer and the Treasury.

The late Sir Alistair Morton, whose role as Chief Executive of the Channel Tunnel put him at loggerheads with the holder of his purse strings, accused the Treasury of doing “more damage to the British economy than the Luftwaffe…”

Even that former Treasury official, John Maynard Keynes said the department is “an essential bulwark against overwhelming wickedness”. 

A central Treasury has been a part of our national life since at least the time of the Norman Conquest.

The Doomsday book can be seen as our first national tax register.

A brisk tour through Treasury’s highs and lows takes in the full sweep of Britain’s social, economic and political history - few institutions could claim their interests and decisions are more deeply ingrained in our national life.

Of course, not only is the Treasury a part of our history; it continues to play a central role on our nation’s behalf.

Or should I say “roles”, because the Treasury performs a number of different functions.

Tonight, I’d like to say something about the origins of those functions and about how they are performed today.

Let me start in a rather unexpected place: in Llantrisant in South Wales.

There is the home of the Royal Mint - a small part of the Treasury family that is more ancient than the Treasury itself.

It was established in the second half of the ninth century, and has been minting coins on behalf of the Crown ever since.

Its job has always been to provide confidence in the nation’s money - a job these days more than shared with the rest of the Treasury and the Bank of England, who print our banknotes.

The Master of the Mint is the Chancellor of the Exchequer, and has been since Victorian times.

Every year in the City, the Trial of the Pyx takes place. 

It is our country’s most ancient judicial ceremony.

First held in 1248, it is the annual occasion when the Master of the Mint is held to account for the quality of the coinage.

So I can say, hopefully without eliciting headlines that I have been put on trial twice.

In former ages, it was an essential occasion.

Unscrupulous medieval governments would debase the money supply by diluting the quality of the precious metal.

In the last century, the Treasury found more sophisticated ways to achieve the same thing.

When coins were made of silver or gold, they were constantly subject to counterfeiting or clipping by unscrupulous citizens.

Successive Masters of the Mint tried to tackle the problem - the most successful Master at doing so was Sir Isaac Newton.

He rebased the entire medieval coinage, because it had become so debased.

And he would personally inspect the coins in the taverns of Westminster to police the quality of the coinage.

These days, the Treasury officials are known to undertake similar field work in the Westminster Arms and the Red Lion.

When I first came to office I made the foolish error of thinking that since I was Master of the Mint, I could have some say over coin design.

After all, I regularly write to Her Majesty to ask her permission for new coin designs.

But when it comes to those designs, I have discovered I have little influence.

The true power lies with the Royal Mint Advisory committee.

Indeed, when early on I tried to reject one coin design I didn’t much like, I was told in a roundabout way that I couldn’t - and then discovered that Alistair Darling has also tried and failed to reject exactly the same coin design.

One of my first decisions as Chancellor that did stick was to reject plans to privatise the Mint.

When something has been part of your State for eleven centuries, you should think twice before getting rid of it.

And indeed, these days the Royal Mint leads the world in modern designs and technology -replacing our 5p and 10p coins with nickel-plated steel versions, producing new commemorative coins with colour in them - including a red poppy for Remembrance Day, minting this summer’s Olympic and Paralympic medals and making coins for over 60 countries.

I am happy to say that because of its overseas sales, it makes a handsome profit for the British taxpayer, and that money flows into the Exchequer.

Which is appropriate as after the Mint, the oldest part of the Treasury is the exchequer, which collected and issued money on behalf of the Crown.

The name “exchequer” comes from the chequered table - a sort of medieval excel spreadsheet - used from the beginning of the 1100s for calculating expenditure and receipts.

The Exchequer was overseen by a Lord High Treasurer and a Lord Chancellor.

The Lord High Treasurer was responsible for superintending all spending, while the Lord Chancellor acted as a check upon the accounts of the Treasurer.

By the 13th Century, the Treasurer and the Lord Chancellor had delegated most of their duties to an Under Treasurer and the Chancellor’s clerk - so in the reign of Henry III, the Clerk became an officer of the Court as the “Chancellor of the Exchequer”.

Exchequers were held twice a year when the Chief Justice, the Lord Chancellor, and the Treasurer sat round the chequered table, auditing the accounts of each local Sheriff who collected and spent money on behalf of the Crown. 

A historical remnant of that event is that today, the Chancellor still has a role in the appointment of Sheriffs.

The money received by the Treasury in medieval taxes was recorded using tallies - eight  inch long sticks, with notches to indicate the amount of money involved.

The stick would be cut in two, and one half given to the Sheriff as a receipt for the money.

These tallies were stored in vast quantities until 1834 when they caught fire and destroyed the Palace of Westminster - an early example of the sometimes incendiary relationship between the Treasury and Parliament.

Until the 17th century, a succession of Lord Treasurers had used their role in the Exchequer to consolidate their family’s personal power and wealth.

This reached its zenith when Sir Robert Cecil used his position as Queen Elizabeth I’s Treasurer to control not only the public purse but even to pay a network of spies to smooth the succession of his favoured candidate, King James I.

That’s why exactly 400 years ago this year, on Robert Cecil’s death in 1612, King James replaced the Lord Treasurer with the Treasury Board, to ensure that no one person could hold that level of power and influence over the Monarch.

That Treasury Board still exists today - and it is from the seat on this Board that the modern role of the Chancellor of the Exchequer began.

The most senior Board Member is, of course, the First Lord of the Treasury and by the 18th century was seen as the natural head of the Government - or the “Prime Minister”.

The door of 10 Downing Street still to this day bears the plaque “First Lord of the Treasury”.

And from 1827, the Second Lord of the Treasury was always the job of the Chancellor of the Exchequer.

At around this time, it also became tradition for the Chancellor to live at No.11 Downing Street, a tradition only overturned by Tony Blair when he realised the living quarters in No11 were bigger and kicked the Chancellor next door.

As well as the First and Second Lords of the Treasury Board, there were three other Lord Commissioners, who have evolved into the modern Government Whips. 

They still play a key role today, signing around 200 documents a year on behalf of Treasury, at any time of day or night.

To celebrate its 400th anniversary, we convened a very brief meeting of the Treasury Board this summer, for the first time in twenty nine years, and only the second time in a hundred years.

The First and Second Lords attended, along with the remaining Lords Commissioners, the Financial Secretary and the Permanent Secretary.

We held the meeting in the Treasury Boardroom, a magnificent eighteenth century room in the Cabinet Office.

A throne is still there in case Her Majesty wishes to attend a meeting, although a monarch has not done so for over 200 years.

And by what romantic name is this historic Treasury boardroom at the heart of Government now called?

Conference Room A.

Not that the Treasury can complain.

Winston Churchill’s war time bedroom on the ground floor of the Treasury building is named “Ground floor 18”.

When we held our Treasury Board meeting earlier this year, the agenda reflected both the enduring and new functions of the Treasury.

First, the enduring: the Board approved a Warrant under the Duchy of Cornwall Management Act, permitting the Duchy to borrow £900,000 for an extension to a Chocolate Factory at Poundbury.

Oversight of royal expenditure is still a modern function of the Treasury and the Chancellor is a Trustee of the Royal Household.

The second item on our agenda reflected the new functions of the Treasury: the Board signed a number of Asset-Freezing regulations against individuals hostile to the interests of the UK- a reminder of the vital but little known role the modern Treasury plays in helping to keep our country safe and upholding international law - implementing financial sanctions against the Taliban and Al Qaeda, and regimes such as Iran and North Korea.

That evening, we celebrated with a dinner at the Guildhall- attended by over 150 present and former Treasury Board members and Treasury Ministers - including those who had served in the Wilson and Heath administrations, and one who earned his invitation four times over - as a Lord Commissioner, as Chief Secretary, and as Second Lord and First Lord of the Treasury - Sir John Major. 

But before you raise an eyebrow at such a lavish affair in these austere times - please be assured that when the Treasury throws a party, we get someone else to pay for it - on this occasion; the Corporation of London generously paid the Bill.

So what does the Exchequer part of the Treasury look like today?

Since Pitt the Younger’s day, there really is a single government bank account - it’s called the “Consolidated Fund”. 

It was - and remains - a fundamental part of expenditure control

As William Pitt put it: “one fund into which shall flow every stream of public revenue, and from which shall come the supply for every service”.

Tax revenues, fines, penalties and other receipts come in.

And most payments to government departments flow out.

Last year, £514 billion pounds flowed through the Fund. 

These days, it’s the job of the 19 civil servants in the Exchequer Funds team in the Treasury to make sure things run smoothly.

If you were looking for the irreducible core of the Treasury, this would be it: the cash register of the Government. 

Every banking day, they essentially “write the cheques” so that millions of welfare payments, pensions and interest on government debt are paid out, and our schools and hospitals and other public services have money in the bank when they need it to pay salaries or buy supplies.

There is careful contingency planning to ensure this can always happen, whatever the circumstances.

To make the best use of taxpayers’ money, every day Treasury officials estimate how much cash the Government has, how much it needs and how much it has to borrow overnight from the markets. 

It’s known as the Swing.

Most days, it’s easier to forecast what’s going to happen.

Some days it is more difficult.

This summer, the Treasury civil servant operating the Swing on Black Wednesday retired.

In fact, he wasn’t supposed to be on the Swing at all - the normal operator was off having had a heart bypass operation. 

It is probably the largest number of transactions ever in a single day of Government operations, and things that had never been an issue before - like the fact that the Bank of England’s system could only cope with transactions of less than £100 million - suddenly caused problems. 

Of course, if you pay out then you have to collect in - and tax collection has been a function of government since the birth of the English State.

Even before 1066, the Anglo-Saxon Treasury collected taxes - such as the “danegeld”, which was first levied as a tribute to the Vikings to persuade them - sometimes unsuccessfully - to stay away.

These days there is a whole international division of the Treasury tasked with dealing with our troublesome neighbours.

The foundations of Parliament itself in 1254 owes itself to King Henry III’s need to seek consent from the nobles of England for taxes he wished to impose.

The nobles advised the king to summon knights from each shire to help and advise and consent to the new tax.

In the 1260s, men from the towns were included with the knights, forming the beginnings of the House of Commons.

In those days, tax collection was done by a few local sheriffs - who were usually local judges or crown officials - who had to submit their accounts to the Exchequer.

These days, under Permanent Secretary Lin Homer’s leadership, 66,000 people at Her Majesty’s Revenue and Customs collect around half a trillion pounds from 33 million people.

Just under 10 years ago, the historic departments of the Inland Revenue and Customs and Excise were merged into this single non-ministerial department operating at arm’s length from government and focussed on collecting taxes and administering benefits, but very much part of the Treasury family.

At the same time, responsibility for strategic tax policymaking was transferred to the Treasury itself.  

That brought the risk that those who knew how to actually collect taxes were no longer involved in designing the taxes.

I have sought to improve the relationship between the Revenue and the Treasury.

This year, we appointed as second permanent secretary at HMRC the most senior official on tax at the Treasury, and asked him to remain on the Treasury’s Board.

I would like to develop the relationship still further over the next few years, with the Treasury leading on the strategy, but informed by HMRC’s deep knowledge of the operational challenges.

This brings me onto the Treasury’s role in devising tax policy.

Every time you walk past a beautiful Georgian house and see a wall where a window used to be, you’re witnessing a visible sign of the Treasury’s well thought through tax policies in action.

When the Window tax was introduced in 1696, it was designed to make sure the wealthy paid more in tax.

These fine motives were soon undermined by as a new form of avoidance emerged.

Simply brick up the window.

Luckily we don’t have to deal with these sorts of issues today.

The window tax was hugely unpopular because it was seen as a tax on light and air - and nothing can be more essential than that.

Except as I discovered this year, the British people’s attachment to hot takeaway snacks.

In 1799, when William Pitt the Younger needed to fund the Napoleonic wars, he introduced a simple temporary tax to pay for it - called the “income tax”.

212 years later it is still temporary - and requires the annual Finance Bill to renew it. 

The Napoleonic Wars meant the share of the nation’s wealth taken in tax almost doubled, from 12 per cent to 23 per cent of national income - and at the same time, the national debt ballooned from five per cent of national income in 1688 to twice the national income in 1815.

War has always been a consistent driver of the Treasury’s rising power, since the Treasury’s success at financing wars was inextricably linked with British victories. 

William Pitt created the income tax and the consolidated fund, but it was William Gladstone who created the modern job of the Chancellor.

That is the reason his painting hangs in the Chancellor’s study in No.11 Downing Street. 

It was Gladstone’s force of character, and his compelling vision of free trade, simple taxation and sound public finances which established not only his own place as one of the towering political figures of the 19th century - but also the annual Budget’s place in the UK’s political economy.

It was Gladstone who initiated the Northcote-Trevelyan report which ushered in recruitment of civil servants by open competition and promotion on merit in the Treasury and other departments of government. 

It was Gladstone who created the Public Accounts Committee, increasing Parliament’s role in scrutinising waste and corruption in the use of public money.

And of course, almost every Chancellor is reminded of Gladstone’s instrumental role in the Treasury when they hold up his red box on Budget day.

When I took office, I was told the red box was too fragile to use.

But I insisted on using it one last time for my first Budget ,before consigning the original to a display cabinet in the House of Commons and reluctantly commissioning a replica.

To an outsider, the theatre of Budget day can seem like just another strange English tradition.

But I believe it is more than that.

It is an annual reminder of what Gladstone instilled in us like no other - that sound public finances are the bedrock of stability on which our country is built, and that what government spends has to be paid for. 

These days around 750 Treasury civil servants - almost three quarters of the department - are involved in ensuring all the various policies come together on the day.

Although for all the innovations and endless tax rates announced in modern Budgets - it’s worth remembering this fact: of the £470 odd billion pounds of revenue collected last year, £350 billion came from just three taxes: income tax, national insurance and VAT- taxes that have been in place since 1799, 1911, and 1973.

Of course, tax isn’t the only way of raising money - at least in the short term.

The other method is debt - and managing the public debt is another vital function of the Treasury.

Medieval kings had always borrowed money to fight wars.

But the first UK government debt dates from 1694, money borrowed to rebuild the navy after a crushing defeat by the French at the Battle of Beachy Head. 

A 1.2 million pound loan, at 8% interest with no fixed repayment dates was arranged with a collection of financiers.

This, incidentally, was the origin of the Bank of England - since the subscribers were incorporated by the name of the Governor and Company of the Bank of England - in exchange for giving the bank exclusive possession of the government’s balances, and was the only limited-liability corporation allowed to issue bank-notes.

The costs of borrowing grew as the Government’s fiscal credibility deteriorated, and in 1711, the Chancellor at the time, Robert Harley, unveiled an ingenious scheme to reduce the cost of the national debt.

He offered people the option to buy stock in the South Sea Company.

The expectation of vast wealth from trade with the South Sea was used to encourage the public to buy shares at hugely inflated prices, while the founders of the scheme engaged in insider trading to amass a vast personal fortune.

Thankfully, nothing like that happens these days….

When the South Sea Bubble finally burst in 1720, thousands of investors lost their money, and the whole country suffered.

It’s a reminder that dealing with the consequences of financial speculation and banking failure can do enormous damage to the real economy.

The Chancellor of the time was sent to the Tower - a reminder to modern Treasury officials that there was a fate worse than the P.A.C.

These days, as we pick up the pieces of perhaps the greatest banking collapse in our history, the Treasury has over a hundred officials devoted to financial services policy.

Since becoming Chancellor, I’ve had to make the difficult decision to allow one bank to fail.

The 250 depositors received protection under the Financial Services Compensation Scheme up to the insured limit of £85,000, but not beyond this level. 

And do you know the name of the bank I allowed to fail?

The South Sea Mortgages and Investment Company.

Thankfully, no government debt was invested with this particular South Sea Company.

Since 1998, a part of the Treasury called the Debt Management Office is responsible for raising money on the Government’s behalf.

You could argue that the 100 strong team at the DMO do the single most important job in the British civil service.

Without their gilt auctions and overnight money operations, the Government would literally run out of money.

As the scale of the UK’s debts has risen, so too has the scale of the challenge for the DMO.

In the entire period between 1694 and 1998, the Bank of England sold some £355 billion of government debt.

Last year, just thirteen years into its existence, the Debt Management Office sold its trillionth pound of debt. 

Of course, one of the present Government’s overriding objectives is to ensure those debt sales are reduced sharply as we bring the public finances back under control.

And because of the market’s confidence in the credibility of government policies, I have established a new record - 1.9% today.

I am currently borrowing money at a lower rate than anyone who has done my job in its 800 year history.

It’s more than a record.

It saves Britain billions of pounds a year - and it’s a reminder that when the Treasury loses the confidence of investors, debt interest can quickly squeeze out all other spending in government. 

This brings me to spending control - a function of the Treasury that employs a huge amount of time and effort.

It was naval humiliation which laid the foundation of modern public expenditure control.

Naval spending dwarfed everything else in those days, but King Charles II was so poor that the English Navy was seriously underfunded, culminating in the humiliating seizure of the navy’s flagship by the Dutch in 1667.

So in that same year, with George Downing as Secretary, the Treasury Board obtained the powers over public spending it holds today. 

The Treasury Board ordered that individual Treasurers - the forerunners of departments “do forebear making any payments without directions from the Commissioners of his Majesty’s Treasury”.

So the Chancellor of the Exchequer owes George Downing not only his or her home, but also their ability to control expenditure.

That principle - that all public money must have specific Treasury’s approval, even if it has already been voted for by Parliament - still largely holds - today. 

In 1961, the job of Chief Secretary was created to give the Treasury a Cabinet Minister focussed exclusively on spending control.

That brings the total number of Treasury Ministers in the Cabinet to four - if you include the Prime Minister and the Chief Whip.

The military remained the biggest item of spending until the early twentieth century - when what you can describe as the modern welfare state was founded.

In 1900 the British state consumed around 15 per cent of national income.

Today, it consumes 46 per cent - a number I regard as far too high.

If one Chancellor could claim more responsibility for this trend than any other, it would of course be David Lloyd George - the third Chancellor whose portrait hangs in No.11 Downing Street, alongside Gladstone and his rival Disraeli.

Lloyd George’s famous People’s Budget of 1909 introduced social insurance for the first time, funded by taxes on cars, on petrol, and a new tax on land and property.

Though those tempted by a modern version of a property tax should note Lloyd George’s land tax was eventually abandoned when it cost more money to collect than it raised. 

The 1909 Budget and the row that followed increased the power of the Treasury - it could not fail to do so as more of national income came under Government control while the power of the House of Lords to scrutinise bills was removed.

But it was about more than just money.

For the first time, Lloyd George expressed the intent to redistribute wealth among the British public - using tax and spending to deliver the Government’s social objectives in a way that we now take for granted.

He said of himself: “I am the only Chancellor who ever began by saying and meaning to spend money”.

Quantity of spending matters a lot to the Treasury.

So should quality.

In today’s Treasury, spending teams shadow each of the main Whitehall departments - so there is a Treasury health team, an education team, a defence team and so on, providing scrutiny and challenge to departments, and advice to the Chief Secretary and I on decisions requiring Treasury approval.

And as we’ve both discovered, we are constantly bombarded with requests for more money - with everyone arguing that their area should have a bigger slice of the pie - and everyone devising ingenious schemes that you’re told pay for themselves if only the Treasury would pay a little money upfront.

There is a never ending stream of vested interests, trade unions, pressure groups and politicians all defending every line item of government spending and asking for more.

But for every lobby group or trade union that appears on the Today programme, there are millions of normal hard working people who never appear on the radio, but have to pay for the demands of those who do.

So I am proud that the only vested interest that my Treasury defends is the taxpayer.

As Sir Thomas Heath, permanent secretary to the Treasury during World War One put it, someone must “stand between the country and national bankruptcy”.

You cannot talk these days about the modern Treasury and the public finances without a mention of the Office for Budget Responsibility.

I believe its creation can already be seen as a major milestone in the long evolution of the Treasury.

As Chancellor, I have renounced the power over the economic and public finance forecasts that all my predecessors held in one form or another over the centuries.

That power was ultimately illusory - Treasury forecasts and the temptation to fiddle them, doesn’t alter the economic reality the Chancellor has to confront.

Indeed, I would argue that because the OBR strengthens the credibility of the macro-economic framework - it in turn strengthens the credibility of the Treasury.

We may have lost the role of making forecasts - but the Treasury is very much in the business of improving the performance of the economy that stands behind them.

The final role I’d like to touch on is the Treasury’s role not just as a finance ministry, but as an economics ministry too. 

The Second World War changed everything in this respect.

Coordination of the economy had been vital to Britain’s military success, and the devastation of Britain’s economy meant there could be no return to business as usual once the war ended - direct control of imports, control of consumption and savings all remained in force for years to come.

It was by no means a foregone conclusion that this economics ministry job would fall to HMT.

During the war, the Cabinet Office had held the reins on central economic planning. 

It was only when Sir Stafford Cripps’, who had been Minister for Economic Affairs under Atlee, became Chancellor in 1947 and brought his portfolio with him that the Treasury gained this job.

Harold Wilson attempted to split the roles again in 1964, giving responsibility for economic planning and growth to a newly formed Department for Economic Affairs.

His rationale was primarily political - he had a George Brown problem- and was delighted with the opportunity to give his rival a post appropriate to his status, without actually giving him control of the nation’s finances. 

But it also partly reflected Wilson’s view that a commitment to controlling public spending was somehow antithetical to the promotion of economic growth.

Five years later, the new Department of Economic Affairs was abolished and I remember as a new backbench MP many a happy conversation with the last junior Minister in the department and then Father of the House, Alan Williams, about how it lost its fight for survival against the mighty Treasury of Jim Callaghan and Roy Jenkins. 

But the debate about whether to split economics and finances did not die with the Department of Economic Affairs.

But my experiences at the Treasury have made me even more convinced that Wilson was wrong to think that finance ministry objectives and economic growth are natural enemies.

The Treasury must be more than just a finance ministry - it must be the driver of economic reform across the government.

And that is my priority today.

I think the Chancellor before me who best understood that was Nigel Lawson.

He combined a finance ministry with a strong economics ministry, reforming taxation, reducing marginal tax rates and abolishing ineffective taxes not simply for reasons of revenue but to promote enterprise and economic performance.

Nigel made his Treasury the powerhouse of ideas in Margaret Thatcher’s government championing privatisation and economic deregulation.

Today, the Treasury is focussed on both the public finances and economic performance.

When I look back at the decisions I have taken, I ask myself. 

Would a finance ministry faced with a huge budget deficit have reduced corporation tax to boost growth?

Would a finance ministry looking for Whitehall budgets to cut have protected science spending, even though it’s one of the easiest taps to turn off?

I believe it would have been more, not less difficult to make these tradeoffs if there was an institutional split - and it’s right that the Chancellor of the Exchequer is accountable for getting that balance right.

In the Treasury today, we seek to integrate all the functions: whether on European policy and tax, or the supply side and spending, or banking and growth.

And when my excellent Permanent Secretary, Sir Nick Macpherson and I have found barriers between different parts of the Treasury, we have broken them down. 

We have reflected this in the organisation of the Treasury, abolishing baronial directorates of 200 or so staff and replacing them with more flexible groups of 70 or so officials, supported by a flexible team which can move resources to where they are most needed.

We have brought HMRC officials more closely into the policy making process - if tax policy is to be effective, it must be deliverable. 

The Treasury of the future needs to be sufficiently flexible to deal with the great issues of the day - the recovery from a banking crash, the global race in competition, the problems with the euro, the renewal of our nation’s infrastructure, even Scotland’s role in that nation. 

I want the Treasury to be the challenge to conventional wisdom in Whitehall and the source of new ideas.

And I want it to retain sufficient hard-headed expertise to fulfil its enduring role as the nation’s economics and finance ministry.

In the long history of the Treasury, there have seldom been more challenging times - as we recover from the greatest banking crisis, deal with the largest deficit in our peace time history and the continuing economic crisis across the globe.

I am proud to serve as Chancellor of the Exchequer, and of what the Treasury has achieved over the last two and a half years and I’ve been fortunate enough to hold this Great Office of State. 

But I’m just as proud to work alongside the brilliant Treasury officials who perform a vital role on behalf of our country - as they have done for a thousand years -and it is to them we all really owe a huge debt of gratitude.