From the TUC

Kerslake review of Treasury warns that austerity has failed

13 Feb 2017, by in Economics

Today Lord Kerslake (the head of the home civil service, 2012-2014) published his independent review of the Treasury, with launch events in London and Manchester. The report was commissioned by Shadow Chancellor John McDonnell; TUC General Secretary Frances O’Grady was on the panel amongst others (the report is available here).

The commentary so far has been focused mainly on the critique of the Treasury’s Brexit strategy. But the report is a cool-headed assessment of the wider role of the Treasury and perceived shortcomings of the present policy approach.

Kerslake focussed on two sides: economics and financial management. We are seemingly in the worst of both worlds. Macroeconomic imperatives (i.e. the need to fix the public finances) are governing the financial management of public sector activities, so that it is done primarily with a view to the bottom line rather than policy effectiveness. Treasury involvement in the detail, implementation and evaluation of policy is not well done. But at the same time there are serious reservations that the preoccupation with the public finances is harming the economy. Kerslake’s damning critique of the economy resonates with the TUC’s own:

  • The prolonged decline in investment as a share of national income
  • The UK’s current account imbalance with the rest of the world
  • The scale of income inequality in the UK (incomes of the richest 10% in the UK were eleven times those of the poorest 10%; this compares with seven times in France and Germany and five times in Denmark).
  • The ‘inexorable’ widening of the gap between London and the South east and the rest of the country, with most other regions among the poorest in Northern Europe.

The report observes:

If the Treasury could not and should not be blamed for all this, we can ask why it has not contributed more to the solution of the long-standing problems about economic underperformance, and how much of the answer is a consequence of the Treasury’s own thinking, or of a more general “intellectual crisis of economics”.

Responding to a question about the scale of the damage to the public services, Kerslake observed that austerity had been “counter-productive” – the ‘books’ were originally meant to be balanced in 2015, now at best it’s 2025 – as a policy failure, this was “quite extraordinary” / “among the best”.

This language from the launch event was a little stronger than in the report, but the key three key macro conclusions are still hard hitting (and NB “the Panel was unanimous in its verdict on three key points”):

First, on macro- economic management, the Treasury has since 2010 pressed fiscal austerity too hard and in an ill- judged way which has depressed growth and incidentally damaged local government services and capabilities. Active economic policy has been delegated to the Bank of England with its non- standard monetary policies of quantitative easing and ultra-low interest rates, which have boosted asset prices more than they have stimulated economic growth. The independent status of the Bank of England and the OBR are valuable gains but, in the context of macro- miscalculation, they have provided an excuse for the Treasury’s lack of independent macro expertise and judgement which would give it an overview of policy and a basis for corrective action.

Second, on re- balancing the economy, the Treasury after 2010 recognised the fundamentally unbalanced nature of the UK economy and saw the need to build a stronger economic base outside financial services and to redress the related problem of a growing imbalance between London and the rest of the economy where GVA per capita is often half or less that in London. But the development of industrial policy from 2010-15 owed much to one strong non Treasury minister (Vince Cable) and the coalition’s much vaunted March of the Makers came to nothing with no sustained growth in manufacturing output and investment.

Thirdly, the Treasury has curiously not engaged with the wider economic debates on fairness, underlying public disaffection and the failure of economic performance and theory. This may be a reflection of the available disciplinary perspectives (eg an absence of formal contributions from economic historians and social scientists) but is in marked contrast to others such as the IMF and the Bank of England and may partly explain the reluctance to believe Treasury forecasts in the run up to the Referendum.

Kerslake was clear at the launch that present economic model had failed and there was a need for something different. Recognition of a need for a new model is one thing, making it happen is another. In discussions on ‘culture, capability and capacity’, there are suggestions around the Treasury holding an annual open forum with associated regional events, “creating a two-way consultative process could help to mitigate concerns about groupthink”.

Beyond this, steps need to be taken to ensure that alternative economic views are regularly and actively considered by the Treasury. The Council of Economic Advisers could follow the example of its counterpart in the Scottish Government by publishing an Annual Report; other measures could include holding an Annual Conference designed to promote genuine discussion and debate.

The issue goes far beyond the Treasury, but the Treasury would be well placed to play a constructive and important role. Here’s hoping they rise to the challenge.

One Response to Kerslake review of Treasury warns that austerity has failed

  1. Budget blogs – we need a budget for public services
    Feb 16th 2017, 1:15 pm

    […] launching his review of HM Treasury, Lord Kerslake stated that austerity had proven to be “counterproductive” and a “quite extraordinary” […]