Ever wonder why we have potholes, crumbling infrastructure, schools in need of refurbishment, and no money for upgrades or repairs? The answer lies in self-imposed Treasury rules.
I recently had the chance to speak at a business event in the City. It took place in a shiny building belonging to a “Big 5” accounting and consulting firm and, during the Q&A session, I was asked if I felt if there would be much difference between Rachel Reeves and my own government. I have to admit that the answer was “little”.
Reeves, after all, entered politics after working for the Bank of England and the retail arm of HSBC and shows every sign of being about as imaginative and innovative as a lamp post. I predict that, if Labour wins the election, she will prove to be their weakest link in the new administration.
There are few governments willing or able to master and control the Treasury. They rarely feel confident to re-write politically fabricated rules and challenge orthodoxy. Nowadays, with the Office for Budget Responsibility and a never-ending bunch of economic organisations only too willing to make, often wrong, predictions, a chancellor has to be prepared to be strong.
Over the next few years, we are going to require a chancellor who is more than an android, controlled by officials. We will need one who is prepared to grab the Treasury by the scruff of the neck and drag it into modernity. For all his faults Gordon Brown was master of the Treasury. The problem was that the rules he crafted were the wrong ones.
Take, for example, how spending commitments and departments are funded. For the past 20-plus years we have divided public spending between “CDEL” (capital spending) and “RDEL” (what commentators call “day-to-day spending”). Gordon Brown’s “golden rule” said that we should only borrow for capital spending but not for day-to-day government. While the fiscal rules have been rewritten many times, this remains the strong bias of the Treasury to this day.
Sounds plausible, doesn’t it? But in this day and age, running costs don’t just include pensions and pay. They include refurbishments, maintenance, software upgrades and a range of bizarrely-defined spending. In Defence, the Treasury defines buying shells and bullets as day-to-day spending.
The outcome? Ministers get dollops of capital – from underspends or borrowing – but nothing for running costs five years down the line. And every minister and admiral loves a new hospital or ship. So they spend what is put in front of them and let someone else worry about the consequences. It is why there is plenty of money for new roads, hospitals or flood defences, but bugger all to maintain it.
All this needs major reform. It drives perverse behaviours and, as wages and pensions rise, it traps departments in a cycle of spending that sees capital grow and available money for maintenance decline.
But how did Gordon Brown survive this, you ask? Surely he too was frustrated. Well not surprisingly, he had a trick up his sleeve. Three little letters that allowed him to effectively cheat his own rules. PFI – small bundles of revenue and capital in a neat, off-balance sheet package with a very expensive ribbon wrapped around it.
Everything got PFI’d. In Defence, air-to-air refuelling got PFI’d and taken off the balance sheet. The same was true of accommodation, tank storage, even head office management. The pipeline never stopped. It was accompanied by the mantra “it’s the only game in town”. But all we did was store up huge costs in the future and cover up the flaws in the Treasury rules.
Perhaps Tony Blair’s secret 2005 plan to split the Treasury was correct. He wanted a finance department and a beefed up ministry for economic development. Other countries like Denmark do this. We need an enabler and innovator in government, not a blocker making up arbitrary and largely undefined controls – “golden rule”, “value for money”, “international accounting rules”. None of them ever stood up to scrutiny when I would ask for the definitions. They melted away.
We must change this orthodoxy if we are to have any hope of wealth creation in this country. The first challenge for whoever is the next chancellor must be to break out of the Brown straightjacket and bring enterprise, growth and investment back to the economy. Not this two dimensional nonsense we have been suffocated by for so long. Could Labour deliver such institutional change with Reeves in charge? I doubt it. There is more chance of excitement from a concrete road-calming measure.
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