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How the UK economy works, part 2: HM Treasury


In my previous article I described the remit and practical activities of the Bank of England, as they relate to the operation of the UK economy. Now it’s the turn of the Treasury (or HM Treasury, to be accurate), which is the part of the government that looks after the UK’s money – most of it raised through taxes – and, to a large extent, decides how and where it should be spent.

The first fallacy to blow out of the water here is the idea that taxes collected in a particular sector are also spent in that sector. For example, it would be nice if road tax revenue was spent on improving the transport system, wouldn’t it? Or if levies on the oil industry were used to promote renewable energy sources.

Well, they aren’t. Such so-called ‘hypothecation’ of taxes would be complex to administer, though arguably it would help people feel that their hard-earned cash was being used for something practical rather than, say, lining the pockets of MPs who fancy a second house in London. For example.

Instead, all revenue collected by the government goes into a large pot which is then doled out in accordance with plans drawn up by the Chancellor of the Exchequer (currently old badger-brows, Alistair Darling, and previously Gordon ‘Prudence’ Brown).

Obviously the budget is the main public event where such divisions of the swag are made, but in fact the allocation of money goes on throughout the year. There are hundreds of government departments and agencies, not to mention Quangos (quasi-autonomous non-government organisations), local councils and so on and so forth, all of them requiring funding to a greater or lesser extent from the Treasury’s coffers.

You can think of HM Treasury as being like the finance department of a large corporation, where the Chancellor’s role is one of Finance Director. Each of the organisation’s various departments will put in a request for money and the Chancellor/FD then decides – with input from others – who gets what, while trying to make sure that the books are balanced at the end of the financial year.

However, there’s more to the Treasury’s role than simply collecting and dividing up the loot. In fact HM Treasury has numerous declared aims and objectives, as follows [with my comments in square brackets afterwards]:

1. Demonstrate by 2008 progress on the Government’s long-term objective of raising the trend rate of growth over the economic cycle by at least meeting the Budget 2004 projection.

[That seems rather unlikely to be achieved, given that the growth rate trend is now heading downwards by most accounts; and inflation doesn’t count as growth.]

2. Inflation to be kept at the target as specified in the remit sent by the Chancellor of the Exchequer to the Governor of the Bank of England (currently 2% as measured by the 12-month increase in the Consumer Prices Index).

[Failed, though this goal is shared with the Bank of England. CPI has been above 2% for most of the last year or more, and Mervyn King, Governor of the Bank, believes it could reach 4% this year. The inflationary cat isn’t quite out of the bag yet, but it’s spitting furiously and its claws are being sharpened.]

3. Over the economic cycle, maintain:
public sector net debt below 40% of GDP; and
the current budget in balance or surplus.

[This rather depends on how you calculate public sector net debt – i.e. if you include PFI, Northern Rock’s liabilities, etc. – but even with less inclusive accounting, the picture isn’t a rosy one.]

4. Demonstrate further progress by 2008 on the Government’s long-term objective of raising the rate of UK productivity growth over the economic cycle, improving competitiveness and narrowing the gap with our major industrial competitors. Joint with the Department of Trade and Industry.

[It was looking good for a while, but perhaps unsurprisingly, an economy based on financial services and selling ever-more-expensive houses to each other is failing to worry the economic power-houses of Germany, China, Russia and others.]

5. As part of the wider objective of full employment in every region, over the three years to spring 2008, and taking account of the economic cycle, demonstrate progress on increasing the employment rate. Joint with the Department for Work and Pensions.

[This, again, is a tricky one to measure. How do you count part-time work, or people out of work but not claiming benefit, or people on disability benefits? The official picture has been pretty good until recently, but most observers believe that unemployment is now rising, and will continue to do so for several years to come.]

6. Make sustainable improvements in the economic performance of all English regions by 2008, and over the long term reduce the persistent gap in growth rates between the regions, demonstrating progress by 2006. Joint with the Office of the Deputy Prime Minister and the Department of Trade and Industry.

[I’ve found it hard to prove or disprove progress on this point. Anecdotally the North-South divide is still present, but perhaps less wide than it was.]

7. Halve the number of children in relative low-income households between 1998-99 and 2010-11, on the way to eradicating child poverty by 2020. Joint with the Department for Work and Pensions.

[A laudable aim, though one that appears tricky to meet. To be fair to the Treasury, though, we’re talking about ‘relative’ poverty rather than actual poverty. In other words, this is about narrowing the gap between rich and poor (oops, failed again), but if the rich get much richer and the gap only widens a little, that still means actual child poverty has reduced.]

8. Promote increased global prosperity and social justice by [amongst other methods] demonstrating progress towards the Lisbon Goals by 2008.

[Again a laudable goal, but the less said about the Lisbon Treaty the better.]

9. Improve public services by working with departments to help them meet their:
PSA targets, joint with the Cabinet Office; and
efficiency targets amounting to £20 billion a year by 2007-08, consistently with the fiscal rules.

[From the outside, government departments can appear to be a huge waste of money. From the inside, that’s sometimes true, but there are some efficiently-run departments too. Public perception would appear to favour a wide-spread cull of middle-management consultants to improve cost-efficiency. The NHS is by far the most visible PR failure here.]

10. Deliver a further £3 billion saving by 2007-08 in central government civil procurement, through improvements in the success rate of programmes and projects and through other commercial initiatives.

[This might have been achievable were it not for the dramatic and costly failures of large government IT projects.]

So, with all that in mind, is the Treasury doing a good job? If you believe its own somewhat high forecasts for UK growth over the next year, it appears so. However, the disgraces – real or imagined – of PFI, the collapse of Northern Rock and the ongoing fragility of the banking system, the profligacy of some government departments and the increasing gap between the super-rich and the rest of us are all concerns that can be laid, even if only in part, at the door of the Treasury.

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