The Treasury and Quangocracy

The British state is in the grip of a tangled web of sectoral interests and ideological contestation within its technocracy. “Tensions have emerged between a liberal, managerialist civil service and a series of governments with a populist veneer in their legislative programmes”[1]. Inaction is winning out in these battles, as the stalemates over immigration, policing and economic policy show. The UK is homeostatic, its governing class content to rule over stagnation and mediocrity.

Sectorally and geographically imbalanced with a gamut of interest groups, lobbying organisations and ideological blocs vying for what little remains. “British institutions exert impressive amounts of soft power for a tiny island nation. One can think of it as playing the role of an Italian city-state in the fourteenth century: it capitalizes on historic cultural prestige, educates the children of elites from its former empire, and serves as a playground for wealth and status games while not really producing anything of hard value”[2]. The concentration on financial services and assets as the primary capital base for the country, alongside a large but diffuse public sector centred around health and social care services that provides majority employment for a majority of areas outside of the southeast, makes these “British institutions” ephemeral, in that their short-term existence is masked by the infallibility of their recommendations.

No wonder Michael Gove’s innocuous comment on experts has become almost mythical in its place in British politics. Expertise, not of subject but of process and experience, is the prized asset of educational and administrative institutions across the country. Actual knowledge or track record is unimportant. It is title and rank that count, perversely reengineering the British class system from landed categories to contingent pedagogical ones. The Civil Service and the wider NGO complex are full of this, the emplacement of degree-holders becoming the starting point from which contestation is carved out.

The Treasury view is an encapsulation of this political insularity. Nowhere has autonomy been more safeguarded from voter interests and government policy than here. The view is a wider portent of technocratic economic governance that “aims to depoliticize policy-making by delegating decisions to independent institutions. Such moves seek to bolster economic credibility, insulating economic policy from the pressures of popular politics”[3]. Baker describes this as the internationalisation of the state: “the state’s transformation since the 1970s has involved an abandonment of its role as a mediator between the interests of capital and labour, and national objectives and global order. The advanced capitalist state has become a ‘transmission belt’ from the global to the national”[4].

Thus the entrenchment of institutions that connect the national with international interests i.e. overseas investors, migrant groups, mobile capital flows and trade agreements/regulations. The state pivots its economic policies towards international deliverables in the service sector as nations become facilitators for international flows of goods, people and capital. Domestic manufacturing, agriculture and the national labour market are either afterthoughts or barriers to internationalisation. The skill base is changed toward more generalisable skills in administrative, managerial or retail roles, with modern organisations increasingly being middlemen consultants between a provider and consumer. This is the state’s primary role, particularly when looking at the fiscal burden of transfer and entitlement spending on the British state, which the Treasury has accepted wholesale as a matter of consumer maintenance. When setting fiscal targets, the natural assumption is increasing entitlement spending[5] rather than reform or long-term planning.

Assumptions are baked in as a result of this state-as-middleman perspective. It is naturally assumed that free trade is an automatising mechanism to regulate inputs and outputs rather than a politically constructed variable involving various interest groups and vast subsidisation and infrastructure provision. “A belief in free trade links seamlessly the Treasury of William Gladstone to that of George Osborne. The Treasury has always taken the view that the United Kingdom is a small country with few natural resources. Its prosperity rests on trade. And the fewer the impediments there are to trade, the more the economy will grow and the greater the prosperity of the nation”[6].

From this comes the assumption that the UK’s transformation toward a predominantly service sector economy is a natural shift. “Britain is a broad-based services economy, built on successful musicians and architects as well as bankers. We’re about ICT, culture, and marketing, as well as finance (whose fraction of total exports fell from 12 per cent to 9 per cent in the pre-pandemic decade). No one celebrates it, but the UK is the second largest exporter of services in the world. And our services specialism does not lie behind our recent underperformance: on average, services-led economies tend to be richer than manufacturing-driven ones”[7]. This is meaningless as the sectors it highlights, particularly culture and marketing, are either so diffuse as to be unmeasurable or so narrow that they have a minimal impact on living standards. And of course service sector economies are richer, as these economies tend to be ones that externalised their manufacturing capacity to cheaper bases in East Asia or Eastern Europe. That is hardly indicative of natural progression so much as restrictive interests capturing the policy-making apparatus so as to influence the direction of the economy in a manner that favoured them.

Fundamentally it fails to recognise the contingent nature of the global economy and free trade. These things are only good when they help maintain a high standard of living in the UK, and their necessity should be dictated by their capacity to provide meaningful employment, rising real wages, consistent productivity growth and sectoral diversification. The image painted by the Resolution Foundation and LSE’s Centre for Economic Performance, contrasting manufacturing with services, indicates a childish view of these sectors. Manufacturing is the moving of levers and cogs, while services are an intellectual enterprise. The reality is that an economy requires both in large measure to maintain resiliency and independence. Once a state becomes entirely reliant on global flows or is substantially imbalanced, it is no longer a nation but a transactional hub, a glorified hedge fund with a health service[8].

The notion of independent expertise is the shibboleth that underlies the wider quangocracy. “Institutions matter. The granting of operational independence to the Bank of England has done much to enhance the credibility of macro-economic policy. The Debt Management Office is much acclaimed internationally and has sold £1.35 trillion of debt since it came into existence. The independent UK Statistics Authority has enhanced the credibility of economic statistics, while the independent Office of Budget Responsibility has improved the quality of economic and fiscal projections. All these changes have strengthened the macroeconomic policy framework and therefore the Treasury. Thus, the Bank of England’s operational independence both over monetary and macro-prudential policy has enabled the Treasury to concentrate on its ‘principal role’, whether in setting the monetary policy remit, for example through the publication of the new monetary policy framework at last year’s Budget, or substantive changes to taxes and spending”[9]. The innate conservatism of this statement belies the lack of thinking in the Treasury. The wider speech is a compendium of celebrating the worst aspects of the UK currently, from its low capital formation and infrastructure investment through to its bloated, unreformable welfare state and stagnant productivity. It is tax-and-spend bean counting as its most basic level.

Such functional autonomy in the quangocracy finds its expression in fiscal rules, independent forecasts and rulebooks like the Green Book – “the Green Book process has been criticised mainly on the grounds that it assumes that a particular locality or industry’s productivity rate as fixed. Further investment may expand production, but the possibility that it has a transformative impact which increases productivity in a non-linear fashion – meaning investment may actually represent greater value for money in under-performing areas and industries – is overlooked, at least to some extent”[10]. The line between rules and administrative arbitrage is non-existent. The Treasury view on infrastructure spending, a scepticism of projects’ potential as fiscal multipliers and their relation to R&D spending or private investment, has historical continuity as Treasury officials raised objections to infrastructure projects in the 1930s not on theoretical but on political grounds of deliverability and administrative functionality. The view’s innate defeatism in believing in institution’s immutability was fully on show in Richard Hopkins’ testimony to the Macmillan Committee[11].

Ideological independence and a removal from public accountability breed sectoral interests, such that manufacturing and production can decline in a country with a strong industrial history, a varied geography of resources and skill bases, and a parliamentary structure that was previously capable of balancing competing classes. “This has resulted in all sorts of accounting ruses and trillions in state debt being quietly built up through Quantitative Easing, Private Finance Initiatives and other measures. Another has been to repeatedly support the UK’s financial and service sectors while also neglecting its manufacturing. Thus, the UK’s manufacturing base shrunk faster over the period than any of its rivals. Arguably, Britain’s low levels of productivity and research and development spending, are directly related to this decades-long sectoral imbalance”[12].

The arbitrary nature of fiscal targets and their relation to forecasting give the Treasury and its acolytes like the Office for Budget Responsibility substantial power to mould expectations and limit the potential for radical politico-economic change. Such is seen in the public sector borrowing measurements[13], the PSND, which calculates liabilities as saleable assets thus allowing for their privatisation and/or partnering into public-private partnerships. This limits long-term public investment in infrastructure and skill-development. Equally, the nonsense of the welfare cap shows not fiscal prudence but the bloated nature of the British welfare state and the Treasury’s belief in its maintenance, such that it easily integrates and ignores the long-term black hole of pension costs, tax credits and housing benefits into short-term costs which can elide their lack of sustainability. The treasury view and the OBR are then provisos for international finance capital and domestic consumer maintenance, while ignoring the lack of domestic capital formation and the spend on welfare benefits as a proportion of government spending.

They also allow for the extension of arbitrary viewpoints into expert opinion and fact. The OBR is the recent master of this game. Its independent verification and forecasting have served the purpose of jutting the Treasury view[14] of free trade, limited state investment (excluding welfare entitlements) and austerity (while maintaining a byzantine tax structure and high levels of pension provision) into the public domain unquestioned[15]. All the while, its actual forecasting and rules-based governance has been used to re-evaluate the output gap to produce a more favourable growth outlook for the UK economy (“the OBR altered the course of political debate by taking a decision that bolstered the government’s credibility by making the austerity agenda slightly more feasible – even though nothing in economic reality had actually changed, only the OBR’s interpretation of that reality”[16]), enable the Chancellor of the Exchequer and Treasury officials “to curtail departmental spending ambitions”[17] and produce an imaginary fiscal black hole[18] that helped discredit the Truss government.

The latter of these is demonstrative of what the Treasury view is and how the quangocracy can rail against reform. The Truss government’s growth plan[19] was superficial, promising sensible supply side reforms while remaining chained to the very things that limited such reforms (particularly the net zero commitments and the structure of tax breaks and temporary limitations). The investment zone proposals were themselves idiotic, as they were temporary abatements to legislative priorities (the Town and Country Planning Act as one example) that a government can already tackle. But planning is an area full of the forces of quangocracy and unaccountable stakeholders, and thus impossible to touch for a politician as weak as Truss.

While the potential for unfunded tax breaks combined with significant spending outlays for energy bills which were too long was at best fiscally precarious and at worst untenable, the principles underlying the plan were hardly earth-shattering. But even these were too much for the quangocracy, as the OBR produced an arbitrary figure detailing the gap between the 2021 (the year this rule was created) 3 year net debt rule and the current financial position based on Truss’s reforms. And this is the most ridiculous aspect of the debacle – the government had set the rule yet given it to an agency to monitor and, by extension, enforce it.

“Specific rules being followed are essentially arbitrary, either relying on special ‘magic numbers’ for debt or deficit levels (3% and 60% ring a bell for anyone?) or specific horizons over which certain objectives should be met. The UK’s current fiscal rules are new, having been announced in the 2021 budget”[20]. Yet through these arbitrary rules the market was spiked as the fiscal credibility of the UK government was destroyed, leading to the sales of government bonds by pension funds as they hedged their position and the potential for interest rates to increase again which caused mortgage rates to rise and products to be removed from the market. It must be remembered that this crisis was entirely manufactured and optical, based on media leaks from autonomous agencies and officials announcing things independently of the government. “Beyond these short-term stresses, the key substantive macroeconomic problem was that Truss and Kwarteng introduced a set of fiscal policies that would have stimulated the economy right at the time when the Bank of England was acting to cool the economy to bring inflation down”[21]. This is the heart of the matter – who truly governs Britain, the government or the independent agencies.

The issue left unstated is whether the independence of these entities from politics – the OBR, the Bank of England, the Civil Service – is tenable or even real. What purpose does it serve to have monetary policy independent of fiscal policy when the former is no more efficient nor rational. Why raise interest rates when inflation is supply-based? And why measure inflation through the CPI or RPI when neither factor in house nor land prices? If that had been done, we would see the 2010s as an inflationary decade.

The treasury view is that of a riskless economy, one that is effectively steady state. Thus its scepticism over infrastructure investment yet its light touch decisions regarding ballooning entitlements (particularly pensions). When Liz Truss’s so-called economic crisis came, the two most affected groups that the Treasury aimed to protect were mortgage-holders and pensioners. Private risk in these areas, related to pension fund gambling and taking out flexible-rate mortgages, were now publicly subsidised. A nation of old age homeowners and pensioners are the only constituency worth protecting as their inflated assets provide the capital base[22] for the British economy.

“The UK now has a fortified elite content to live on the rents of bygone ages. Its social order is constituted by the cultural legacy of the old aristocracy, underwritten by London financial brokers, and serviced by a shrinking middle class. Its administrative and political classes developed a culture of amateurism, uninterested in either the business of classically informed generalism or that of deep technical specialism. The modern result is a system that incentivizes speculative, consultative, and financial service work over manufacturing, research, and production”[23]. So long as the UK has governments unable or unwilling to tackle the vested interests of the quangocracy, this will not change.

[1] https://thelibertarianideal.com/2023/04/27/an-ideological-bloc-the-civil-service/

[2] https://www.palladiummag.com/2023/04/27/britains-elites-lost-the-industrial-revolution/

[3] https://ukandeu.ac.uk/trussonomics-and-the-obr/

[4] https://www.tandfonline.com/doi/abs/10.1080/096922999347353

[5] https://commonslibrary.parliament.uk/research-briefings/cbp-9329/

[6] https://www.gov.uk/government/speeches/speech-by-the-permanent-secretary-to-the-treasury-the-treasury-view-a-testament-of-experience

[7] https://blogs.lse.ac.uk/businessreview/2022/08/05/britain-a-services-superpower-sinking-into-stagnation/

[8] https://im1776.com/2022/08/15/a-hedge-fund-with-a-health-service/

[9] https://www.gov.uk/government/speeches/speech-by-the-permanent-secretary-to-the-treasury-the-treasury-view-a-testament-of-experience

[10] https://www.mmu.ac.uk/sites/default/files/2021-11/Understanding%20the%20Treasury.pdf

[11] https://onlinelibrary.wiley.com/doi/abs/10.1111/j.1468-0289.1984.tb00324.x

[12] https://ukandeu.ac.uk/time-to-take-on-the-treasury-orthodoxy/