The Chancellors. Howard Davies

through the period and Chapter 10 includes an account of the key individuals, both ministers and officials, who have led and shaped the department over the last quarter of a century.

      Chapter 11 concludes with some reflections on the period as a whole, and the challenges the Treasury now faces. My thesis is that the troubles ahead will be more menacing to the institution, and more challenging to its traditional philosophy and ways of working than were the crises of the recent past. The whole basis of the ‘Treasury view’ needs to be rethought and, if it is to navigate the twin challenges of Covid recovery and climate change, it will need different skills and more people.

Notes

      1 1. The Chancellors’ Tales, ed. Howard Davies. Polity, 2006.

      2 2. Lionel Barber, The Treasury today: A devalued currency? Prospect, January/February 2021. https://www.prospectmagazine.co.uk/magazine/the-treasury-today-a-devalued-currency-lionel-barber-rishi-sunak.

1 Economic Performance

      Gus O’Donnell, Permanent Secretary to the Treasury from 2002 to 2005, has declared that ‘the era of GDP being the unique measure is now over’. He quotes Robert F. Kennedy, who said: ‘GDP measures neither our wit nor our courage, neither our wisdom nor our learning, neither our compassion nor our devotion to our country, it measures everything, in short, except that which makes life worthwhile.’¹ And he points out more prosaically that gross domestic product (GDP) as conventionally defined is not well suited for modern service-based economies with larger government sectors. That describes the UK quite well, indeed increasingly so. But even O’Donnell acknowledges that GDP measures ‘have a long history and are very useful for making comparisons over time and between countries’.

      Using that imperfect methodology, how well did the British economy perform under the five Chancellors whose periods of stewardship we are considering, both in absolute and relative terms? And what can we confidently say about the influence of the government’s economic policy on that performance?

The period, like Gaul, divides into three parts. The Labour government was in office from 1997 to 2010, which is a long enough interval to use for comparisons forward and back. The figures are distorted somewhat by including the years of the financial crisis and its immediate aftermath, but if we allow Labour the pre-crisis boom, it is not unreasonable that they should also accept the bust. Brown famously declared that he had put an end to boom and bust, so it would be hard for him to complain. The second period runs from 2010 to 2016. That encompasses the full term of the Coalition government, and the first year of a majority Conservative administration. Osborne was Chancellor throughout. The third period begins with the EU referendum, which marked the beginning of a significant change of trend. The end of that third period is dominated, and distorted, by the Covid crisis, but the four-year stretch from the launch of the referendum campaign to the first Covid lockdown is long enough to have its own distinct characteristics.

1997–2010: The Brown years

      The early 1990s had been a turbulent period in economic policy terms, with the chaotic withdrawal from the European Exchange Rate Mechanism (ERM) in 1992. However, underlying economic performance during the long Conservative hegemony, from 1979 to 1997, was relatively good. GDP per capita had fallen relative to the US, Germany and France from 1870 to 1979, if we ignore the war periods, but the trend began to reverse at the end of the 1970s. UK GDP per head was about 23% above the US in 1870. By 1979 the US was 43% ahead of the UK. In 2007 the UK was still behind, but the gap had narrowed to 33%: still a significant discount, but reflecting a steady improvement in productivity throughout the period.

The extent to which this change in trend can be attributed to the policies of the Thatcher and Major governments remains in dispute, and is outside the scope of this book, though most economists would acknowledge that the labour market reforms, privatization (at least in its early stages), a tougher approach to failing firms, and lower marginal tax rates all contributed. The period was also the first in which we began to see the implications of membership of the European Community, as it then was. Nicholas Crafts shows that larger trade volumes have had a positive impact on productivity. He argues: ‘In the case of the United Kingdom the gain from joining the EU was probably around 10 per cent of GDP … [arising from] a significant increase in competition as protectionism was abandoned.’²

      There was no sign that the relative productivity improvement was running out of steam in 1997, so in that sense Labour’s inheritance was a good one. The economy was expanding, and for some time had been the fastest growing in the G7.

      That record was sustained over the whole period from 1997 to 2010. Even though there was a sharp recession precipitated by the financial crisis, as Dan Corry et al. conclude, ‘relative to other major industrialised countries, the UK’s performance was good after 1997’.³ Growth in GDP per head averaged what might by historical standards appear a fairly modest 1.42% a year over the thirteen-year period. But that was faster than in any of the other comparable large economies. Germany grew by 1.26% a year, the US by 1.22%, France by 1.04%, Japan by 0.52% and Italy by a remarkably weak 0.22%.

With the exception of Italy and Japan, the differentials are not great, but sustained over more than a decade they become significant. There was certainly an element of catch-up at work. Poor economic governance leading to high inflation, an underperforming education sector, weak industrial management and bad industrial relations resulted in the UK slipping back against comparable countries during the 1950s, 1960s and 1970s. The German Wirtschaftswunder and the Trente Glorieuses in France passed us by. So once the shackles of poor labour relations and weak competitive dynamics were thrown off, some convergence was to be expected. But Corry et al. reject the argument that growth in the Brown and Darling years was driven mainly by the momentum created by their predecessors.

      Some maintain that much of this outperformance was in a sense illusory, and that the productivity improvement was driven by unsustainable bubbles in the financial and property sectors in particular. But the financial sector contributed only 0.4% of the 2.8% annual growth in the market economy and productivity improvements were primarily driven by business services and distribution, through the utilization of new skills and technologies. Financial intermediation accounted for around 6% of gross value added (GVA) throughout the period from 1979 to 2010, only slightly higher than the French figure (5%). Property activity did grow, but from 5 to 8% of GVA. The biggest improvements in productivity are traceable to changes in the composition of the labour force, in other words a higher proportion of workers with higher-level skills, and greater use of information and communication technologies (ICT), which was an important differentiating factor for both the UK and the US vis-à-vis the large European economies. The UK was also more successful than others in attracting inward investment, and foreign-owned firms have long shown higher productivity than their domestic counterparts.

      How much credit can the Blair and Brown governments take for this outperformance?

A neutral to negative interpretation might be that they did not reverse the earlier Conservative labour market reforms, and did not revert to a policy of nationalization and support for ailing industries. But there are also positive points. Labour support for ‘neoclassical endogenous growth theory’, which earned Brown ridicule when he included it in a political speech (in Michael Heseltine’s words ‘it wasn’t Brown, it was Balls’), did carry through into government. They overhauled competition policy through the 1998 Competition Act and the Enterprise Act of 2002, which gave the Competition Commission stronger powers. International comparisons of competition enforcement now typically score the UK highly.

      Labour also prioritized expansion of university education. The proportion of the workforce with a university degree