Anthony Browne is MP for South Cambridgeshire, the Chair of the Conservative backbench Treasury Committee and a member of the Treasury Select Committee.
Both candidates agree: there is a “Treasury orthodoxy” that damages economic growth. Coming from a former Chancellor and a former Chief Secretary to the Treasury, that is a powerful accusation.
But what is Treasury orthodoxy?, How can ministers overcome it? I have spent 20 years dealing with the Treasury on policy matters, and have often come up against the walls of orthodoxy.
There are actually lots of Treasury orthodoxies, about many policies: a presumed position by officials. For example, the Government should aim to live within its means, and should not generally borrow to cover day to day spending. Some are sound, some are not.
One reason for orthodoxies is that the economy is incredibly complex, and evidence often unclear. It is easier for officials to agree with those around them, rather than challenging from first principles. Academic papers written decades earlier can form thinking. A paper by economist Stephen Gibbons in 2010 saying there was no evidence that road transport improvements increase productivity still fuels Treasury scepticism about the levelling up agenda.
One of the fundamental challenges is that the Treasury is both a finance ministry and economics ministry, one responsible for raising money, and the other promoting economic growth. Often the two conflict, in which case the finance ministry role wins out because of the responsibility of being responsible for the nation’s finances. But it permeates the Treasury’s approach to growth.
I was tangentially involved in George Osborne’s attempts to introduce tax incentives for businesses in enterprise zones, but they were hampered by HMT concern about losing tax revenue. The tax breaks given were small, temporary, and so restricted they had limited impact on any business decisions.
HMT are obsessed about “dead weight” costs, where they give away tax revenue for something that would happen anyway. So the enterprise zone tax reliefs only apply to businesses which move to an enterprise zone rather than ones already there. That means the policy is about getting businesses to move to the enterprise zone, rather than helping those already there to grow faster. Not surprisingly, the results are underwhelming.
In discussions I had with HMT over a minor reform to stamp duty to facilitate shared home ownership, officials showed no interest in helping first time homebuyers. But they were obsessed with potential leakage of tax, so they blocked it. A decade ago I championed introducing a higher rate of stamp duty for people buying properties that weren’t going to be their homes (for investment, or second homes). Treasury officials focussed on tax revenues rather than helping homebuyers, mangling the policy so it can impose costs on someone buying their first home but give breaks to international property investors.
The Treasury has to rely on modelling to predict the impact of public spending and tax changes, but those models can be flawed. Because few understand the models, they become gospel.
When analysing transport projects, HMT relies on modelling that looks at the impact on existing travellers – how much time will they save – rather than that a transport scheme that can totally change the way people travel, and how areas develop. HMT campaigned to kill off the Jubilee Line extension, which fuelled the regeneration of the docklands, one of the most successful regeneration schemes ever. HMT campaigned hard against the M25, because there were no people trying to drive around London, so they argued there was no reason to build a ringroad.
The Treasury is rightly the guardian against wishful thinking, but it can be totally unreasonable. When I worked for Boris Johnson whilst he was Mayor of London, HMT refused to pay nearly £1bn for the Northern Line Extension to Battersea Power Station, on the grounds that no one was going there. But developers wouldn’t regenerate the area because people couldn’t get there. I initiated and chaired negotiations with HMT officials to get them to agree to tax increment financing, where increases in tax revenues could be hypothecated to pay for the new infrastructure (a common form of financing in the US). We ripped apart HMT’s arguments one by one until they accepted they were defending the indefensible, and agreed to our proposal. We now have a new transport link at little cost to the public, enabling astonishing regeneration in Battersea. You can beat the orthodoxy.
When the Treasury analyses the impacts of tax changes, it does so superficially. It overwhelmingly looks at first order effects, and much less at anything else. It does sometimes consider behavioural impacts – when it puts up tax on tobacco it takes account of people smoking less – but usually doesn’t. It virtually never looks at wider impacts, such as on general economic growth or income from other taxes. When it puts up stamp duty, it does not fully consider that reduced property transactions leads to less tax revenues such as VAT on building work, furniture, legal, or estate agency fees, or the impact of reduced labour mobility.
The policy costings papers published with Budgets are eye-opening. Often officials don’t take into account of the intended impact of a policy. In 2013 the annual investment allowance for businesses was doubled to £500k, but costings made no estimate for the intended increase in investment. When HMT increased research and development tax credits, they did estimate an increase in R&D spending (which would have a direct impact on HMT), but not on any wider growth.
The 2013 costing of the Tax Free Childcare scheme estimated the direct cost to HMT, but not of the benefit of having more parents in work. In 2015, when it reduced the lifetime limit of pensions from £1.25m to £1m, they looked at the impact on public sector workers contributing less (which directly affects HMT) but not on pensions saving generally, nor on work incentives. This is how you end up with absurd pension rules requiring doctors to pay the Government to work, and so retire early.
One of the economic insights of Conservativism is that incentives really matter. But the Treasury is largely oblivious to incentives. It does sometimes do behavioural impact analysis, but often ignores it. Most of its policy costings admits there is no estimated impact on behaviour. When it looked at the IR35 regime, which increased tax on self-employed people, it did not take account of the profound impact on behaviour in the freelance sector. The disregard of incentives means that, across the income spectrum, you end up with marginal rates of taxation of over 50 percent – whether it is people on universal credit, higher rate taxpayers getting child benefit, or people on over £100k paying over 60 percent marginal tax.
The Treasury doesn’t take sufficient account of the burden of complying with tax regulations. When I chaired the Government’s Regulatory Policy Committee, we were explicitly banned from looking at the cost on businesses of obeying HMRC rules. This is one reason we end up with about the most complex tax rules in the world. It is also why the Office of Tax Simplification is systematically ignored by its sponsor department, the Treasury.
It is easy to point to the problems, but what are the solutions? That, I am afraid, will have to wait until my next column.