The Chancellors. Howard Davies

it began with Healey’s attempt to establish budget discipline and control inflation, after the International Monetary Fund (IMF) visitation in 1976. Healey introduced the monetary framework which Howe made the centre of his policy. The period ended with the 1997 election, immediately after which Brown handed control of interest rates to an independent Bank of England.

Since 1997, five more Chancellors have passed through the Treasury, with a sixth (as I write) now in office. So it seemed timely to assemble their reflections on the role. But, partly because the Covid pandemic ruled out another series of lectures, I have adopted a different technique. Gordon Brown, Alistair Darling, George Osborne and Philip Hammond, who cover the period from 1997 to 2019, were kind enough to agree to be interviewed. I am very grateful to them, and to the senior officials, special advisers and ministers who also agreed to answer my questions. Where they were happy to be quoted, they are identified in the text and the notes. I have taken the story up to late 2021, though without the benefit of oral evidence from Sajid Javid or Rishi Sunak.

      Three pieces of conventional wisdom are often recycled by the Treasury’s critics. First, that by international standards it is far more powerful than its counterparts: in most other major developed countries there is typically an economic ministry alongside the finance ministry, and there is often a stronger central policy function around the President or Prime Minister. Second, that the Treasury’s ‘dead hand’, masquerading as public expenditure control, constrains government policy unreasonably and damages investment and innovation. Third, that after a series of missteps, the Treasury’s authority is not what it was, and it is riding for a fall.

      There may be some truth in the first argument, though a little less since Bank of England independence and the creation of the Office for Budget Responsibility (OBR). But it is not obvious that a single ministry of finance and economy delivers worse policy outcomes. There were several attempts during this period to cut the Treasury down to size, usually driven by the Prime Minister’s staff. In a political system where a Prime Minister with a large majority in Parliament has a remarkable degree of power, the existence of a strong alternative centre is a valuable check on ‘elective dictatorship’.

The second, the ‘dead hand’ argument, includes two subvariants, one micro, one macro. The micro case is that the Treasury is ‘the bank that likes to say no’, always sceptical about new ideas unless they are generated by its own people, and especially suspicious of local initiatives. As one former Permanent Secretary acknowledged, officials are far readier to explain why new initiatives may not work than to generate new thoughts of their own. The Treasury defence is that if it does not train a sceptical eye on wizard ideas for spending other people’s money, no one else will, and that, in the long-running Whitehall drama, it is inevitably cast in the role of Scrooge. To mix Dickensian metaphors, Scrooge may not be popular, but where all the other characters are Oliver Twists with their bowls out asking for more, some with bowls already quite full, his spirit is required.

      The macro critique is more serious and has gained force during the period under review. In a world where there is a chronic surplus of saving over investment, the Treasury has maintained a version of Mrs Thatcher’s household economics, urging successive Chancellors (though Osborne needed little urging) to work towards balancing the books, even when the economy was operating below capacity and real interest rates were very low or negative. So the charge is that UK recovery from the 2008/9 financial crisis was slower than it need have been, and that a similar mistake is in the course of being made as we exit from the pandemic. I review those arguments in Chapters 2 and 3, and again at the end.

      The third argument is that, partly because the Treasury has been on the wrong side of history on the second critique, its authority has declined within government and it is a shadow of its former self. Lionel Barber, former Financial Times editor, summarized the case in an article in Prospect magazine titled ‘The Treasury Today: A Devalued Currency?’.²

That view, as I hope to show, is misconceived. The Treasury has successfully fought off attempts to diminish its status over the past two decades, continues to attract high-quality staff (if perhaps too few of them) and is as powerful as ever. Successive Prime Ministers have found that fighting the Treasury in the end makes them weaker, and they come to rely on its support. Boris Johnson has followed exactly that trajectory. In macroeconomic policy, the Treasury must now share centre stage with the Bank of England, but that has in some ways strengthened its hand: ‘We would love to help with your spending plans, but the bank manager will not allow it.’

      This is, nonetheless, a story of downs and ups for the Treasury as an institution. It took a knock in 1997 when the Bank was set free, but rolled with that punch. It was floored briefly by the financial crisis, but not counted out, performed well at the most difficult time, and reasserted its authority in the recovery phase. It triumphed in the 2014 Scottish wars, but suffered another heavy blow in the 2016 EU referendum, and was then side-lined in the Brexit negotiations. For a time, that looked fatal, and its enemies marshalled their resources for a final assault, but Covid, paradoxically, came to the rescue. It was no time to begin reshuffling the economic deckchairs, and Treasury ministers and officials showed resilience and imagination in devising rescue schemes to keep the productive economy afloat in the storm. So reports of its death proved greatly exaggerated.

      In what follows, my aim has been to allow ministers and officials to tell the story themselves, as far as possible, though I am sure they, and readers, will consider that I have at times led the witnesses. Others will consider that, as an intermittent insider, I have delivered a conventional reading, too favourable to the ‘Treasury view’. As the saying goes: ‘You can take the man out of the Treasury, but you can’t take the Treasury out of the man.’

      Chapter 1 sets the scene, with a brief review of the UK’s economic performance during the period.

      Chapter 2 discusses macroeconomic policy, which was defined rather differently in a period when interest rates were set by the central bank.

      In Chapter 3, I review the approach taken by successive governments to the control of public expenditure and in Chapter 4, I assess the performance of the Treasury in setting tax policy.

Chapter 5 changes gear and considers the Treasury’s unusually public role in the 2014 referendum campaign on Scottish independence, where its intervention was arguably decisive in determining the outcome. Chapter 6 examines the department’s far less successful interventions in the EU referendum campaign – dubbed Project Fear – and explores the Treasury’s changing attitude to the European Union, and specifically to Economic and Monetary Union (EMU), through the period. I review the economic implications of Brexit and the Treasury’s role in the negotiations leading to the Trade and Cooperation Agreement.

      Chapter 7 explores the Treasury’s responsibilities for financial regulation and the City of London generally. Those responsibilities were broadened in 1997 after the creation of the Financial Services Authority (FSA). The way the department responded to the 2008/9 Global Financial Crisis (GFC) is evaluated, as is the subsequent second reform of the regulatory bodies carried out under Osborne. The specific issues raised by Brexit for the UK financial sector and its access to EU markets are considered.

      Chapter 8 reviews the Treasury’s attitude to climate change and its economic implications, from initial scepticism, through the Stern Review to the embrace of a net zero target in 2021.

      In Chapter 9, I describe the