# 12: The UK Treasury: Servant or Master?

“Whichever party is in office, the Treasury is in power”- Harold Wilson (UK Prime Minister 1964-1970, 1974-1976)

Why is the Treasury, actually a government department, so powerful and prestigious? How much influence does it have on the policies of UK governments? And, has its influence been beneficial, or highly damaging in recent decades? Let’s have a look at this.

The Treasury is a department of UK government, but one which asserts control over the budgets of all other departments. In political terms, it’s the tail that wags the dog – because it has the prestige and expertise to influence decisions about what policies elected governments carry out, or their extent. It even does its own briefing to the media, who rarely challenge or ignore it.

““Within Government, the elite institution is HM Treasury….As such,  it is the great magnet for the brightest and best in the public sector. Which means that it has been consistently  arrogant and over-confident.” (Robert Peston)

Michael Cockerell’s 2012 documentary film “The Secret Treasury”, for the BBC series, “The Great Offices of State” (watch it on YouTube here), shows his ability to get access to important public servants and former Ministers of State, and hear them speak in remarkably clear and frank terms, is outstanding. I am grateful to him for much of the material in this post, although I do not necessarily agree with his conclusions.

What has been said about the Treasury?

Michael Cockerell: “In Whitehall, knowledge is power. And the great office which claims to know most of all is the Treasury”.

Ken Clark (former Chancellor) : “ …[the Treasury] it’s like an Oxbridge college, you know, brilliant minds, …and completely detached from the real world”.

Nigel Lawson (former Chancellor): “The core of the Treasury is its hostility to public spending”

A former Permanent Secretary: “all governments have to be restricted in what they can do, because there are only a limited number of resources available” (I suspect that he meant, by “resources”, money, Pounds Sterling, which in the orthodox economic dogma, is limited or constrained, under the household-budget narrative. Not, as we now know, actual resources of labour, materials, expertise, buildings, etc, which are the only real constraints for a sovereign-currency nation).

Or was he being deliberately ambiguous, leaving people to conclude that he meant money but secretly he knew the real constraint is real resources?

Later in the film, Cockerell refers to “eye-wateringly large sums of taxpayers money”, referring to the re-capitalisation of the banks after the GFC. We now know that “taxpayers money” is a fallacy, a myth politically very useful to Thatcher and her successors. To be fair to Cockerell, very few people understood the true nature of government finance in 2012 – I certainly didn’t. It is only since about 2017 that the MMT understanding of the reality of macroeconomics has gained substantial traction. Stephanie Kelton’s seminal 2019 book, “The Deficit Myth”, has been massively influential in the spreading of understanding beyond the inner circle of progressive economists and writers.

How influential has the Treasury been since, say, 1960? Prime Minister Harold Wilson found the Treasury obstructive, and set up the DEA (Dept of Economic Affairs, headed by George Brown, to counter-balance it.

The idea behind Harold Wilson’s creation of the Department of Economic Affairs (DEA) in 1964 was to drive the economy towards sustainable growth amid the early signs of industrial decline, and much was made of the benefits of its ‘creative tension’ with the Treasury. The growth strategy was shattered by the adherence to the parity of sterling by Wilson and Jim Callaghan as Chancellor, and by the resultant Treasury-led cuts which were brought in to defend sterling.”

“The second episode occurred during the post-1974 government when Tony Benn led an attempt to develop the alternative economic strategy through the Department for Trade and Industry (DTI). This foundered partly due to the Treasury’s dominance of the economics agenda (and in particular, its central role in negotiating the IMF

 (University of Sheffield Political Economy Research Unit, Nov 2018)

The IMF (International Monetary Fund) “bailout” was actually an utterly un-necessary nonsense, which was driven by the Treasury’s obsession with defending the Sterling exchange rate, and the Treasury were able to browbeat the Government into it. Now, we know that the UK currency needs to be free-floating, as it has been since the debacle of the ERM Black Wednesday. (More on this later). For good or ill, (often ill) the Treasury has been able to dominate government policy in economic terms. The Treasury’s website, in a graduate recruitment drive, says:

Our specific priorities are:

  • Reducing the deficit and rebalancing the economy
  • Spending taxpayers’ money responsibly and ensuring value for money
  • Creating a simpler, fairer tax system – alongside a well-functioning welfare system”


HM Treasury is the government’s economic and finance ministry. We maintain control over public spending, decide how money is raised from taxpayers, set the direction of the UK’s economic policy and work to achieve strong and sustainable economic growth.”

So, the Treasury’s belief in its own power and superiority is demonstrated, along with its adherence to the false narratives of “taxpayers money”, and “reducing the deficit”. Both severely harmful to the UK economy, and society, from the perspective of the modern understanding of Government finance. (Modern Monetary Theory).

Let’s look at some events in the decades from 1979 to 2008, to examine what the role of the Treasury has been.

In addition to the IMF loan referred to earlier, there have often been tensions between Governments, and The Chancellor and Treasury; sometimes between the Chancellor and his Treasury. When the Conservatives won power in 1979 “Margaret Thatcher came to power determined to do battle with the Treasury. She was a passionate believer in Monetarism, and the power of the market. She saw the Treasury as stuffed full of Keynesians, who believed in the power of the State to run the economy” (Cockerell). Her devotion to Monetarist dogma, which we now realise was both fraudulent, and politically convenient (for governments run by, and favouring the establishment), became the dominant economic orthodoxy, and is still very powerful today. She promoted the two fallacies/myths of “taxpayers’ money” and the “household budget” (that governments must balance their books, like that of a household) very effectively. I suspect that she truly believed the myth. If you listen to her speeches and interviews of the time, her vehement conviction is clear, and noticeably expressed in a superior, condescending, and contemptuous manner: “Money’s just the same, if you print too much of it, its value will fall … bringing down the growth in the supply of money, steadily closer to the supply of goods and services…{Monetarism] is as essential as the Theory of Gravity, and you can’t avoid it, if you want to tackle inflation.

To this end, as Michael Cockerell says: “She appointed…Geoffrey Howe as her first chancellor, to lead a team of Monetarists. “(1979-81)

Lord Kerr, a former Treasury Permanent Secretary: “{the Treasury] was basically a Keynesian institution”. (How ironic that sounds now).

What followed? Sir Steve Robson, 2nd Permanent secretary to the Treasury: “Geoffrey Howe came in and said, ‘I want to have an early cut in public spending’” The cuts to public spending followed, with the highly damaging results we would now expect, from our modern perspective. As Michael Cockerell says, “Howe’s first Monetarist Budget was so restrictive, it plunged the ailing economy into recession, And two years later, he further alienated Keynesians in the Treasury, by slashing public spending in the teeth of a recession”

“in 1981 there were riots across the country as Mrs Thatcher’s Monetarist medicine took effect. The economy imploded. 15% of manufacturing industry disappeared, as bankruptcies and unemployment reached record levels. It was only when Mrs Thatcher … by demolishing the Argentinian invaders of the Falklands, that her fortunes changed. As Britain came out of the recession, she won a landslide victory. She was determined to continue with her transformation of the Treasury [to Monetarism] and brought in another true Monetarist disciple, Nigel Lawson. At the Treasury, Monetarist mandarins were beginning to replace the Keynesians. But soon things began to go wrong between the Treasury and Number 10.”

Despite being a Monetarist, Lawson became uncomfortable. Cockerell: [slight paraphrase] Alan Walters was Mrs Thatcher’s economic advisor. Nigel Lawson felt he undermined the City’s trust in the Chancellor and demanded Thatcher sack Walters. She accused him (Lawson) via the Press of having created the inflation.” Thatcher refused to sack Walters, and Lawson resigned.

Gus O’Donnell, the distinguished former Cabinet Secretary, takes up the story: “when you get big policy differences between a chancellor and the Prime Minister, it’s very dangerous for Governments [which led to] a change of Prime Minister to John Major … who [appointed] Norman Lamont. Major accepted the Treasury’s argument that Britain should join the ERM.”

This takes us to another huge event for the UK economy, and the Treasury: the ERM debacle, and Black Wednesday. As in the IMF loan episode, false understanding of the reality of a fiat-currency economy and the need for floating exchange rates, led to a disastrous event, and some disgrace for the Treasury. (See also Note 1.)

Cockerell: “the govt had to convince the markets that it would resolutely defend the value of the pound … Black Wednesday [followed], interest rates raised to 15% in an attempt to defend parity”.

Peter Hennessey, London University: “the Treasury have often looked abroad to impose discipline of unruly spending departments … a nation that has an appetite for consuming more than it earns”.

Cockerell: “… the Treasury was very battered. Very battered after the IMF deal was scrapped.” The IMF Loan madness (a sovereign currency nation should never need a loan from any international body, as it can issue its own currency as much as needed), and the ERM debacle, have two things in common: The Treasury’s wrong-headed belief in the importance of the currency’s exchange rate. Today, a floating exchange rate is now accepted as normal and natural.

We can now move on to the third major economic event of the period since 1964, the 2008 Global Financial Crash (GFC). Before this, in 1997, George Brown took over as Chancellor of the Exchequer, and the “economy had grown healthier after Black Wednesday” (Cockerell, ibid). His economic advisor was a youthful Ed Balls. Their obsession was to convince that the Labour Govt was “financially responsible”, and to that end Brown gave operational responsibility for interest rate setting to the Bank of England. (To this day, many people are still convinced that the Bank of England is actually an independent body, not a wholly owned subsidiary of the UK State). Brown and (PM) Blair’s relationship deteriorated over the next several years, Brown operated with just a small team of close advisors, and if Treasury officials disagreed, they were sidelined or “shunted out”. Brown steadily built up the Treasury’s already dominant position in Whitehall, seeking to be dominant in social policy, as well as economics. Brown regarded Blair as very prone to leaking to the Press, so kept his policy operations/ budget plans secret from Number 10. At one point, Blair by-passed Brown and the Treasury to announce on TV a decision to increase heavily health service spending. Brown was furious.

Brown took a “hands-off” approach to financial sector regulation- huge tax receipts were coming in from it. Also, “Brown took the brakes off public spending, as Britain shared in a global economic boom.” (Cockerell).

When Brown succeeded Blair as PM, he chose a successor, close ally Alastair Darling, so that the antagonism between Number 10 under Blair, and Number 11, did not recur. But the consequences of deregulation of the financial sector soon caused storm clouds to gather. In August 2008, Darling announced a “60-year low” for the economy. The banking bubble had burst. Northern Rock had collapsed, followed by Lehman Bros. “RBS had lent billions against toxic assets” (Cockerell). Darling said the Treasury were not prepared, did not foresee it.

“Treasury and Number 10 put together a plan to bail-out the banks” (Cockerell), “treasury officials didn’t go home for days” (Darling). The Tories, following the Thatcher “handbag economics” model, portrayed a huge burden of debt, the “greatest debt burden in our history”, claiming falsely that “The Treasury would now have to balance the books”. Sir Steve Robson regarded it as a failure, with “debt getting too big”. Brown, to his credit, understood the power of the Bank of England, on the order of the Treasury, to re-finance the banks, and issue credit-swaps (called “quantitative easing”), to stabilise the economy. Which had the unwelcome side-effect of inflating capital assets for the owners of wealth.

To return to my questions at the start of this piece: “How much influence does [the Treasury] have on the policies of UK governments? The influence of the Treasury was significant over the IMF loan of 1974, and the ERM catastrophe, both involving an unwise adherence to maintaining a desired exchange rate. In both cases, the governments involved were persuaded to take a disastrous course of action. But it seems that Margaret Thatcher’s push to cut public spending was against Treasury (Keynesian) instincts and led to the Treasury being dominated by Monetarists. This must have helped the pressure to restrict spending on public services, which caused much harm over the following decades, and reached its nadir in the Austerity policies which dominated post-2010.

And, has its influence been beneficial, or highly damaging in recent decades?

Although the Treasury was regarded by Thatcher as “Keynesian”, too keen to spend public funds, it has been mainly Monetarist in doctrine since then, and resistant to spending on public services generally. Its influence in restricting spending by departments on public services has been harmful, to the economy and society. Thatcher’s Monetarist dogma: cut-public-spending, devotion to “the market” (which ignores the essentially rigged nature of markets), and the pretence that taxes fund spending,is still very strong today, both in political discourse and the mainstream media. (Even, sadly, in the more left-leaning policy offerings).

Surely, following the enormous level of spending necessitated by the Covid response, the reality of currency-issuance by the Bank of England, unrelated to taxation, should be obvious? Despite the usual misleading dressing-up as “borrowing”, I find it hard to believe that the top layer of Treasury officials do not understand this reality, so it follows that their department doesn’t want to rock the boat, so continues to mislead.

In his thoughtful book ‘WTF?’ (Hodder & Stoughton, 2017), highly-experienced journalist Robert Peston says “The propensity of the of the British economy to swing from relatively extreme boom to bust, is equally down to the Treasury’s obsession with prioritising the control of inflation…and its rejection of taxing and spending as active levers of employment creation and growth management.”

He goes on to describe (very fairly, in light of what this article has described above, the Treasury as “an elite institution both too big for its boots, and too powerful for the country’s needs; too closed to arguments on the questions that determine our prosperity.”

Any future Government committed to seriously progressive economic and social policies, will certainly have to be prepared to impose their will on a Department which is powerful because of its expertise in the details, the nuts and bolts, of state financial management. Peston (ibid) recommends that the Cabinet Office be restructured and empowered to to take control of economic policy away from the Treasury (rather reminiscent of George Brown’s DEA in 1964?), andshould make its priority restoring dignity, security and rising living standards for those on average and lower incomes.

Note 1. re The ERM/Black Wednesday: Professor Bill Mitchell has written this explanation here:

The problem then was that the British government had foolishly joined the ERM (a fixed exchange rate system with European nations) and the structural differences between the different nations meant that the system was unsustainable.

The financial markets surmised (correctly) that the system would eventually be unsustainable and Britain would have to leave and float.

They also guessed correctly that the British government would stubbornly try to stay in the ERM as a result of ideological biases within the top echelons of the Cabinet.

Germany was also causally implicated because the Bundesbank refused to help its currency partners through interest rate settings and foreign exchange market interventions.

So the currency was ripe for financial market trades (short selling) and ultimately as long as the Government tried to defend the indefensible (the fixed exchange rate membership of the ERM), these trades would be successful and the currency would fall significantly in value.

The currency stability ended when Britain left the ERM, which is what MMT would have predicted.

Then, the problem was the fixed exchange rate obsession, which was never sustainable and that vulnerability was exploited.”

All material quoted from the BBC film “The Secret Treasury” 2012 is copyright BBC UK, and is reproduced by kind permission.

I am grateful to Malcolm Reavell, Nigel Hargreaves, for their help in preparing this article; and to David Vigar for advice on copyright. It is intended as a discussion piece, and comments are welcome.

Published by adeibanez

My eyes were opened to the modern understanding of how governments and money work a few years ago, and since then I have been taking every opportunity to learn more. This includes what is usually known as Modern Monetary Theory (MMT), but relates to the tradition of Political Economy, which considers the effect of political policy on wealth distribution. And, what history has to tell us. In short, why some in society get the least. I do not claim to be any kind of qualified economist, but my blog is an attempt to explain this modern understanding to non-economists, and there are links to very well qualified writers, for those who want to learn more. I hope you will too. I am retired, and this blog is entirely non-commercial and non-profit-making. It is for educational and campaigning purposes only.

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