Speech

Speech by the Permanent Secretary to the Treasury, Sir Nicholas Macpherson at Nuffield College, Oxford University

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

Speech by the Permanent Secretary to the Treasury.

The Treasury and the transition to the new Government

Changes in the political composition of governments have been infrequent in modern times.

Last year’s change in administration was only the second in thirty years.

And for an organisation like the Treasury with annual staff turnover of over 20 per cent and a median age of a little over 30, a transition poses a particular challenge. To put the size of folk memory into perspective, just 2.5 per cent of the Treasury’s workforce joined the department before 1979 and 15 per cent before 1997. 

Today, I would like to set out how the Treasury prepared for this challenge, against the background of an economy which was only just beginning to recover from a deep recession and a deficit which in 2009-10 reached a record in peacetime history, and offer some reflections on how the last year has gone.  In the years ahead, we will no doubt learn about how the main Opposition Parties prepared for Government.  But as Lord Burns said in a similar lecture1 in September 1997 “that is a story for others to tell”.

It is in the nature of the parliamentary cycle that the most difficult decisions tend to be taken in the early years of a parliament. And much of what the Treasury does is informed by a view of the medium term whether on fiscal policy or tax or financial services.

And so the bulk of the work the Treasury had to do in preparation for the outcome of the Election was neutral in terms of its result. 

This is consistent with a principle that is fundamental to the civil service’s credibility: that it serves the government of the day.

And so at the end of 2009 the Treasury’s Executive Management Board initiated a six month programme of strategic policy stocktakes, covering all the main policy areas of the department, enabling the senior leadership of the department to invest time as a group challenging the status quo and developing a clear Treasury view independent of political orthodoxy. This was actually quite a tight timetable, and would not have been possible had we not started preparations early.

Our assessment of the economy, tax sustainability and its implications for spending lay at the heart of these preparations.  The last Government had published spending plans - set in the spending review of 2007 - only up to 2010-11.

Whoever won the election would therefore have to have a spending review by October of last year.

And the planning assumptions for Alistair Darling’s last Budget suggested that it would be very challenging. That Budget assumed that total managed expenditure would remain broadly flat in real terms between 2010-11 and 2014-15. Since annually managed expenditure - largely demand led transfer payments - was set to grow by 12 per cent in real terms over that period on unchanged policies, it was clear that spending on services [i.e. DEL] would need to fall by 10 per cent in real terms. And obviously if you assumed that health spending and overseas aid spending were going to be protected, that pointed to even bigger falls in other spending programmes.

Because it was clear that the 2010 Spending Review was going to be challenging, the Treasury had been making contingency plans for some time. And those plans would have informed our advice whoever formed the new government.

In this respect, the Treasury was following a well established tradition: as  Peter Catterall records “it was clear to Ken Stowe at the Ministry of Pensions [in 1964] that there would have to be a change of policy ‘irrespective of who won the election’. Two working parties of civil servants were set up to look at the national assistance scales so that… they could say to an incoming government ‘look we’ve been doing all this work and this is the direction it points in’.”2

That does not mean the outcome of any post election budget or spending review would have been the same, regardless of who won the election, either in terms of the balance between spending and tax measures, or in the substance of the spending measures themselves. Those decisions can only be taken by Ministers with a democratic mandate. But the Treasury had to develop the analytical evidence base to inform those decisions, whether on generic trends in public spending or on specific pressures on individual programmes.  Spending reductions - like so many other areas of government - are all about the art of the possible.

Of course, not all the work necessary to inform advice to an incoming government was result neutral. Much has to be tailored to the political complexion of the Government.
Here, the rules are very clear, reflecting the convention established by Sir Alec Douglas-Home in the run up to the 1964 election.

Once the Prime Minister authorises pre-election contact, it is legitimate for civil servants to meet leading members of the Opposition parties “without Ministers having a right to be privy to the content of their discussions”. These meetings are an opportunity for the Opposition “to inform themselves about the factual questions of departmental organisation” and “to let senior departmental officials have some idea of their plans [for changes in machinery of government] so as to enable the changes to be made as smoothly as possible if the Election results in a change of Government”3.

Altogether, I had six meetings with the Shadow Chancellor and one meeting with the Treasury spokesman of the Liberal Democrats under this process during the course of 2009 and 2010, bringing in other senior officials as necessary.

In my view, it was important to observe the convention that a department should only consider organisational issues in the run up to the election.  And mindful that the Treasury exists to serve the Government of the day, I decided to allocate only limited resources to such work.

In the event, the main opposition party had quite extensive plans on organisational issues which would affect the Treasury; but had fewer machinery of government proposals elsewhere. (In this respect, the 2010 process had certain parallels with “discussions in 1964 between the Civil Service and the Opposition [which] were essentially confined to Treasury-related matters “.4

First, there was the plan for the creation of the Office for Budget Responsibility.

Secondly, their intention to create an office of tax simplification.

Thirdly, there was the question of whether tax credits would be transferred from HMRC to the Department of Work and Pensions. 

Fourthly, the proposal to abolish the FSA, restore prudential supervision of banks to the Bank of England, and create a new Financial Conduct Authority. 

And finally issues around the boundary between the Treasury and Cabinet Office.

Through these discussions, it also became clear that there would be an early Budget, just as there had been in 1979 and 1997, which would set the remit for a spending review to be completed by the autumn.

My meeting with the Treasury Spokesperson for the Liberal Democrats focused on their plans for a spending review and on the institutional implications for their plans for the banks.

Obviously, once an election is called it is legitimate to begin to work on the detail of policy, ranging widely across all the main political parties’ manifestos. This is inevitably an intensive period for government departments: from the day the election was called until polling day itself there were 21 working days. (In the event, since the Government was not formed until 5 days after the election there was the bonus of two working days to contemplate the implications of a coalition or minority government).

The Treasury used this period to review all the manifestos and map out the policy commitments of the main political parties; it prepared different lists of policy submissions and advice ready for different outcomes. The challenge was to ensure that sufficient thinking and advice was being prepared on the main elements, so we had something ‘in our back pocket’ should it be required. This could have been viewed as excessive. But its value was proved when the coalition negotiations between the Conservatives and the Liberal Democrats started and we already had a good understanding of the principal priorities in each manifesto.

Inevitably, the department focused on the main components of fiscal consolidation. The Shadow Chancellor had announced eight days before the election was called a proposal for in year spending cuts of £6 billion which would finance a cut in national insurance. This would clearly be a matter of urgency.  But we also decided to use this period to produce a revised forecast for the economy and public finances in preparation for an early Budget. This forecast was unconstrained by the trend growth assumptions of the March Budget, and revisited the demand side in the face of current financial conditions and the state of households’ balance sheet.  Alongside this, we prepared advice on the right fiscal path to put the public finances back in order; the mix of tax measures and spending choices to implement this consolidation;  and the detailed planning on individual spending areas in preparation for the autumn Spending Review. Coming up with a comprehensive spending package was going to be critical to the Treasury’s credibility with any new government - so we convened a number of long sessions of the Treasury Board - asking the non-executives to challenge our emerging proposals: in effect acting as a proxy for incoming ministers.

An abiding memory from 1997 was that the briefing provided by the department was excessive: a 300 page briefing pack is not the right way to go, however beautifully produced it may be. It is in its nature that such briefing rapidly becomes overtaken by events and so if it isn’t read in the first few days it will never be read at all. Ministers appointed the day after an election have generally been up most of the night, after a campaign of several weeks: if briefing is to get any traction, it needs to be short and to the point. 

And so we wrote a short and succinct (c.30 page) summary of the high level strategic advice for day one. This covered the core areas of Treasury’s business:

  • The economy
  • Fiscal Policy
  • Public Spending
  • Welfare
  • Taxation
  • Growth and Microeconomic reform
  • Environment and Energy
  • Financial Services and Banking
  • And European and International issues.

And it set the scene for the more detailed advice in the policy submissions that would follow in the first two weeks. To ensure it was readable, the director of communication spent the day before the election editing it. 

The brief was supplemented by a short covering note from myself outlining the early priorities, and a prioritised pack of submissions that was ready and with private offices to submit when the minister was ready. In addition, we provided the private offices (not ministers) with a more detailed factual briefing pack covering a whole host of areas - designed purely to help the private secretaries answer factual questions from their new ministers and to prevent a flood of nugatory work being commissioned in the first ten days.

But the transition to a new government is not just about policy change; it is also about cultural change.

The Treasury is not the most historical of departments, a reflection of high staff turnover5 but perhaps also a reflection of the low weight attached to economic history in modern economics courses.

And so it was important to prepare the department for change.

In the run up to the election, I had already laid on some seminars for the senior civil service who would have to lead the change. Peter Riddell and Catherine Haddon gave us the benefit of their analysis6 of previous transitions. And Sir Steve Robson, who had been working on public spending in 1979 and been Director of Finance, Regulation and Industry in 1997 gave us the benefit of his experience: Steve’s compelling thesis was that the Treasury was not sufficiently prepared for either transition - but for different reasons. 

In 1979, the failing was on policy. There was a sense that the Treasury was not ready to challenge its own interpretation of the “limits of the do-able”, and was not ready to break out of the constraints of inherited orthodoxy. As a result the department was “outflanked” on public expenditure and the size of the state. 

By contrast in 1997, there was extensive preparation on policy: as Terence Burns put it the Treasury developed a list of likely policy issues “most of which we would need to work on intensively during the election itself”, including “how far the emphasis on increasing the rate of sustainable economic growth required a reorganisation of the department; the implications of the creation of a Monetary Policy Committee in the Bank of England for the monetary policy process; the implications for the Budget timetable of greater external disclosure and how to provide for an audit of the forecasting conventions”. Writing eight years later, Robert Peston could conclude “the policy gap between the Treasury and the New Labour Government was certainly a fraction of what it had been 18 years before”.

In 1997 the failing was seen to be a cultural one. There was a sense that the Treasury - after a long period of one party being in power- was not ready to change the way it operated; it appeared resistant, and ultimately took too long, to adapt to the change. This was not through want of trying: Burns reports a discussion of working practices in advance of the election including “how we might build space into the timetable for consultation with special advisers.” As Riddell and Haddon conclude “there was a clash of personalities and styles.7”  My recollection of 1997 was that the Treasury was insufficiently prepared for the step change in the role of special advisers. And the department had not thought through how styles of working which operate successfully in opposition are likely to persist in Government. 

Culture change is important. Effective government depends on an effective channel of communications between Ministers and their wider political team on the one hand and the permanent officials in the department on the other. Any ministerial change will result in some change in style.  For example, Alistair Darling’s way of working was different from Gordon Brown’s. But a new Government - comprising a departmental team which has never held ministerial office as was the case in 1997 and 2010 in the Treasury - is always going to pose particular challenges. 

The trick for the civil service is not to take too much for granted, to show emotional intelligence, to be flexible and above all to listen not just to explicit instructions but to implicit signals. 

Communication is always critical at a time of change in a department. Information is by its nature limited.  One way we addressed this was to have daily meetings of senior civil servants to ensure all information was shared, and to enable a cascade across the department. The principal private secretary played a critical role here in ensuring the department understood the Chancellor’s and Chief Secretary’s priorities but also their preferred working styles. And underlining his own emphasis on direct communication, the Chancellor addressed the department within days of taking office: setting out the right expectations for staff on coalition handling, and on the relationship between ministers and staff. This was followed up by David Laws, and later Danny Alexander, addressing the public spending directorate. These addresses were important both for staff to feel they had a new political leader, and also for the Chancellor, and Chief Secretary, to understand they have a large team of staff dedicated to working in their interest. 

It was also important that the Treasury came across as professional and competent. First impressions would be important. We decided therefore to jettison - albeit temporarily - the usual Treasury rule of delegating attendance at Ministerial meetings to the (generally) junior staff who have written the advice. We took the view that experience mattered. 

In the year preceding the election, we put a lot of emphasis on ensuring that the right people remained in post. In the event, whether on tax or spending or financial services or the EU, the key people remained in post. Only the Director of Communication ended up moving post in the early days of the administration and that was to move to be the Prime Minister’s Official Spokesperson. 

And we even put aside some £6 million in our Budget to finance machinery of Government changes: in the event, we had to use most of this sum to finance the Treasury’s own contribution to the in year spending cuts, as well as to set the OBR on a sound financial footing.

Of course, whatever pretensions the Treasury had to a Rolls Royce transition were rather undermined by the result of the election. It turned out that we did not have a pre-prepared plan for a Conservative-Liberal Democrat coalition. We had made the judgement that it was best to understand the programmes of each of the main parties, rather than to think through combinations and permutations which would ultimately be determined by the will of the electorate, the vagaries of the electoral system and the negotiations of their democratically elected representatives.

But by 12 May, the new Cabinet had been appointed and the coalition  articulated in the Treasury through a Conservative Chancellor and a Liberal Democrat chief secretary.

I don’t plan to go over every detail of last summer: for the most part it is a matter of public record.

However, I would like briefly to look back on the main milestones.

The Government took office in the midst of a serious sovereign debt crisis. On Sunday, 9 May, Alistair Darling attended the emergency session of EcoFin which agreed the establishment of the Euro area support programmes. 

This created a degree of urgency. The incoming coalition was determined to establish credibility and therefore to insulate itself from the decline in bond prices which had swept through southern Europe. And this was given expression in the announcement five days after the new Chancellor’s entering the Treasury of the establishment of an Office of Budget Responsibility (in interim form) and the intention to deliver £6 billion of spending cuts, following advice from the Treasury and the Bank of England on the feasibility and advisability of acting quickly.  George Osborne and David Laws were able to announce the details of a £6 ¼ billion spending reduction a week later on 24 May.

The Office of Budget Responsibility under the interim leadership of Sir Alan Budd hit the ground running, drawing on internal Treasury analysis and resources. It published a pre Budget forecast on 15 June, less than a month after it had been created.

A day later, the Chancellor announced in his Mansion House speech the setting up of the Independent Banking Commission and the plan to abolish the Financial Services Authority, with the Bank of England taking on responsibility for prudential supervision of banks and the setting up of a new macro-prudential decision making body in the form of the Financial Policy Committee.

Six days later the Chancellor delivered his first Budget, tightening policy by a further £40 billion: informed by an OBR Budget forecast that confirmed the Government had more than a fifty per cent chance of achieving its fiscal mandate of a cyclically adjusted current balance by 2015-16. In fact, the OBR’s central forecast showed the mandate would be met a year early. Critically, the Budget set the remit for a Spending Review which was to be completed by 20 October.

During the course of late spring and early summer, the Chancellor also found time to visit Brussels three times, China, Korea and the G20 summit in Canada.

By any standards, this was a demanding agenda which would not have been possible if the Chancellor, Chief Secretary and their political teams had not been very clear about what they wanted to achieve; and if the Treasury had not done a fair amount of preparation.

In organisational terms, the creation of the Office for Budget Responsibility has probably been the greatest achievement - enhancing the credibility of fiscal policy. In one year, the OBR under first Alan Budd and then Robert Chote has produced four forecasts. Legislation to put the OBR on a statutory footing passed in March 2011. Next month, it will publish its first detailed fiscal sustainability report.

The OBR has given rise to considerable debate: debate which Treasury officials - perhaps constrained by their civil service status were slow to engage on prior to the election. As with monetary policy in 1997, that debate has largely focused on whether the OBR is sufficiently independent; few if anybody have argued that the principle of an independent economic and fiscal forecast is the wrong one. As with the Bank of England, much of the early focus of this debate was on the legislation; and that matters. But ultimately what will determine the perception of the OBR is the way it conducts itself; and under Alan Budd and Robert Chote, it has made a very promising start. From time to time, the OBR will get its forecast wrong: that’s inevitable. But the chances of the forecast being persistently biased have been substantially reduced. And you only have to look at the Treasury’s forecasting record over the last decade (see chart), when year in year out it under-forecast the size of the deficit, to see what cost an inaccurate forecast imposes.

And, from an institutional perspective, we have also managed to effect this change in a way that minimises the duplication of work between the Treasury and the OBR. The Treasury has retained sufficient macroeconomic capacity to remain effective in terms of providing analytical and policy advice.

In policy terms, the most important achievement for the Treasury has been the stabilisation of the public finances.  Borrowing has fallen from £157 billion in 2009-10, to £139 billion in 2010-11. The OBR are forecasting borrowing of £122 billion this year. There is still a long way to go in delivering consolidation: one lesson I have learnt in twenty five years at the Treasury is that the job of controlling public spending is never done. And it will only be 2014-15 that net debt begins to fall as a share of national income.  

We can all argue about cause and effect but a year or so on, it is striking that UK long rates are now at 3.2 per cent while those in Spain are at 5.6 per cent. 

At the beginning of 2010, they were the same at 4 per cent.

In my view, that is an important measure of success.

  1. Preparing the Treasury for the Election, The Frank Stacey Lecture, Sir Terence Burns (Public Policy and Administration Volume 13 No 1 Spring 1998) 
  2. Handling the Transfer of Power: A note on the 1964 Origins of the Douglas-Home Rules: P Catterall (Contemporary British History, Spring 1997)
    3. Directory of Civil Service Guidance, Volume 2 Collected Guidance, p18
  3. P Catterall, ibid
  4. This is not new. As Lord Burns (ibid) said of the 1997 transition “We also did some research into what had gone well or badly the last time there had been a change although there were few staff left in the department with relevant experience!”
    6. Transitions: preparing for changes of government (Peter Riddell and Catherine Haddon, Intitute for Government, 2009)
  5. ibid