31 December 2017

When will the Treasury be called to account?


Over the Christmas week, CapX is republishing its favourite pieces from the past year. This was first published on October 12.

The role of civil servants is to serve their political masters: to put into successful effect the policies of their ministers and government. Their task is to be impartial, knowledgeable, helpful and above all provably right when it comes to giving advice.

For over 30 years, the Treasury has almost universally failed in these objectives. It is time, therefore, that somebody demanded, and received, an audit of those who offered such poor advice, gave such demonstrably wrong forecasts, and showed such ideological stupidity as we have seen pour forth from the Treasury over the past 30 years –and what if anything has been done to set this hapless crew aright.

If we exclude the strange reign of Gordon Brown, the last prime minister to establish mastery over the Treasury and bend it to her will was Margaret Thatcher – and then only for the first half of her reign.  In the early 1980s, her (to most economists of that time startling) concepts of Monetarism and fiscal caution were condemned – by hundreds of economists writing to The Times: deliciously, this happened just as her policies started to bear fruit.

However, the presence of economists such as Terry Burns and (more surprisingly) the Balliol Man(darin) David Hancock in the Treasury, and the support of her surrounding phalanx of senior and junior ministers such as Geoffrey Howe, Nigel Lawson, Leon Brittan and others, ensured that Thatcher’s economic policies were implemented, and that there was no turning when (because monetary decisions take months and years to work) at first there was no sign of movement.

The Thatcher boom  – with the occasional hiccup – lasted essentially until 2007.  Subsequent Prime Ministers mostly followed her prescriptions for the economy, until Gordon Brown’s aberration into incontinent spending which led to the depth and length of the 2007-12 financial crisis.

After those early Thatcher years, the Treasury became remarkably effective at capturing its chancellors and subverting sensible policy. From then on, all the way through to George Osborne and Philip Hammond, drivel has been issued in justification for a series of political decisions and policies that have been proved definitively wrong.

The Treasury can claim 50 per cent of the credit for bringing down Margaret Thatcher (the Poll Tax shares equal billing): she resisted Geoffrey Howe’s call to join the European Monetary System, and he resigned; Nigel Lawson resigned mostly for different reasons; having lost two, she was then, in consequence, no longer able to resist the demands of a third Chancellor, John Major (captured as he had been by the Treasury). So, in October 1990, we joined the European Monetary System, with the calamitous consequences that we are, in many ways, still living with.

Throughout the 1980s, forecasts from the Treasury purported to show how essential it was that we join the EMS. We joined it. It was a disaster for the UK. Who were the officials who produced these forecasts and policy papers, and who captured Howe and Major (lacking as they did the intellectual firepower to resist the Treasury’s arguments)? Were these Treasury officials ever outed and blamed for the million and more people who were put out of work as a result (not to mention the loss of credibility on economic policy that the Conservatives still struggle to regain)?

We move on to the next Chancellor, the irrepressible Norman Lamont. For a couple of years under John Major’s premiership, he was forced to live with the position that we were in the European Monetary System. In the generally agreed account, he was dead against this policy, but the deed was done, the Treasury and Major supported the policy (“It’s Politics”, a senior Treasury official is recorded as saying to Lamont) and he had to make the best of it.

Along came Black Wednesday, and the position was no longer tenable – we crashed out of the EMS and Lamont sang in the bath. Lamont has recorded: “When I came to the Treasury, they predicted to me that I would become the most unpopular man in Britain. This was the only correct forecast that the Treasury made in the several years that I was Chancellor.”

Those wrong forecasts: who made them? Was there ever a review of why they were so wrong, and what to do to make Treasury forecasts better? Of course not. We lost billions of pounds in trying to preserve our position within the EMS; Lamont was fired; the caravan (yes, that’s the Treasury) moved on.

Enter the new Chancellor, Ken Clarke. Who among the more elderly of us can forget the misery of the Major government, 1992-97? In its final stages, there would be an almost weekly front-page article in the Financial Times, with a large picture of Chancellor Clarke, and a headline in which he threatened Major with resignation and worse if Major did not agree to the policies that he and his Treasury were pursuing.

The result? The Labour campaign accusation, a true one, that the Conservatives had “raised taxes” 20 times during the period of that government, leading to a majority for Tony Blair that was no doubt far larger than if a more optimistic and unified government approach to the economy had been possible.

Why was Clarke so insistent on raising taxes? Because the Treasury was, in turn, insisting that we had a sickly economy and needed to shore up our finances. John Major has complained subsequently that the forecasts he was getting from Treasury were consistently wrong during that period, and that he was getting better (and contradictory) advice from his business advisory group than from his Treasury.

In 1997, his government bequeathed the best-performing economy in the whole of Europe to Tony Blair and Gordon Brown (who were therefore in a position, eventually, to spend wildly and irresponsibly, precipitating the 2007/8 crash). Has Ken Clarke ever apologised for so thoroughly trashing the Conservatives’ chances in the 1997 election? Has any reviewof the performance of Treasury forecasts during the period 1990-97 ever been carried out? Of course not. The Treasury moves on, the Chancellors come and go.

The Blair and Brown years are more complicated. Gordon Brown did, for whatever involved reason, drown at birth any attempt by the Treasury (and Tony Blair) to drift us into the Euro. Brown did have mastery over his Treasury, but that was because they were mostly in sync with each other and their forecasts of what was going on and what the future would bring.

Remember “No more boom and bust”? This fatuous claim from Brown was never challenged by the Treasury, who acted as Brown’s (and Darling’s) handmaiden through to the general election of 2010. They utterly failed to forecast the deep recession of 2008-2010. The policies and failed forecasts brought ruin to our country, which we are still recovering from, but has there ever been a review of that? Has anybody gone back, with full access to the papers, and done a proper audit of Treasury forecasts, particularly in the years say 2004-2007, and sought to draw any lessons from what is almost certainly an aspect of, as the Queen put it: “Why did nobody see it coming?”.

The Hayekians and devotees of other Austrian economists did in fact see it coming, and had published models warning of it.  However, the uber-Keynesians of the Treasury and Gordon Brown saw the Austrians as the devil’s foot soldiers and – as one after another Oxford economists have told me – “not really economists”.  (Well, what are they then, if they were able to forecast the 2007-2012 calamity, when all those good Keynesian economists at LSE and Oxbridge weren’t able to?)

Fast forward to George Osborne. Let’s note in passing that, as has been pointed so often, the primary path to being hired by the Treasury (or indeed into the Bank of England, the FT, The Economist, BBC’s economics team, senior positions in academia in Oxbridge and the LSE, not to mention the IMF and the OECD), is Oxford’s PPE course of Politics, Philosophy, and Economics. When taking their finals for that course, students are advised by their teachers that any non-Keynesian response to the question will be marked down.

There is a monoculture in terms of what is right in how to do economic forecasting and policy. Yet, it is not a particularly deep level of education that the PPE graduates get, split as their studies are between three topics, and confined in Economics to just one (increasingly discredited) explanatory branch.

Nonetheless, in the Treasury – the majority of whose officials are, startlingly, still in their twenties – their belief in their superior intelligence and knowledge is unbounded. It helps, of course, to have a passing array of Chancellors who themselves have little formal education in economics. With Osborne, settled as he was into the comfortable grip of the IMF, the Bilderberg Group, the Bank of England, and his Treasury officials, there was never any doubt as to what would be seen as the right policies.

So monoculturalist was the environment that, when the Treasury issued a forecast during the Referendum in April 2016, almost all of these Remain-oriented entities contemptuously ignored the fact that it was written as if by economics students still studying for their undergraduate degree. Some quite astonishing remarks were made in it, such as that each family would be £4,300 a year worse off; that no economic benefit in the UK could be gained from our leaving the EU because none of the EU’s red tape could be got rid of; that we would have no increased trade benefits from deals with other countries because the EU would be so much better at concluding trade deals than we would be.

A second Treasury forecast in May 2016, which focused “on the immediate economic impact of a vote to leave and the two years that follow”, asserted (in the foreword, p.3): “A vote to leave would represent an immediate and profound shock to our economy. That shock would push our economy into a recession and lead to an increase in unemployment of around 500,000. GDP would be 3.6% smaller. Average real wages would be lower, inflation higher, sterling weaker, house prices would be hit and public borrowing would rise”. And then (p.45): “The analysis shows that immediately following a vote to leave the EU, the economy would be pushed into a recession, with four quarters of negative growth.” 

Osborne followed this up with the threat of a “punishment” budget in which interest rates would immediately be increased. All these calamities were supposed to happen on the day that we leave, 24 June 2016.  None of the forecast came to pass (apart from the exchange rate, aided by a drop in interest rates three days after the Leave vote). We are already 16 months into that 24-month forecast period: the economy has grown in a healthy way, unemployment is at a record low, house prices are up, real wages are up.

Has there been a review of that Treasury forecast and its authors? Are they still present at the Treasury? Have any lessons been learned from this fiasco?  Appallingly, my information is that the Treasury actually pats itself on the back regarding this forecasts during the referendum, and complacently states that in fact, all of this Armageddon would have occurred had they not, on the Monday after the Referendum result, lowered interest rates by a quarter of a point.

Even beyond the fact that since Milton Friedman many years ago, it has been universally accepted that changes in interest rates have only a gradualist effect on the economy, with results that are usually seen a year to two years later, the Treasury’s self-congratulatory view, if that is the case, is pathetic and alarming in equal measure.

And now, today, we have the Treasury in full-blown stubborn Remoan mode. Bizarrely, their and the Chancellor’s position seems to be that a “bad deal is better than no deal”. What does that bad deal consist of? Becoming a Rule Taker from the European Union (that is having no say in what rules we will have to follow); not being allowed to diverge from European law without permission from the European Court of Justice (lots of luck with that); and not being allowed to have any free trade deals of our own (which was one of the chief points, apart from re-assumption of our sovereignty, of why Brexiteers voted to Leave in the first place).

Really? They wish to claim that such a deal (equivalent to “Let’s say we Left, and Not”) is better than No Deal, when the latter would usher in WTO rules and a relatively benign WTO organisation in Geneva protecting our interests, just as it does all the other non-EU WTO countries? What stupidity is this? How are such “bad deal is better than no deal” statements from the Treasury being allowed to stand unchallenged, and instead are supported by the Bank of England, The FT, the Economist, the Times, the BBC and uncle tom IMF and all?

Why does there seem to be a concerted effort to crash the economy, with threats to raise interest rates and a squeeze on consumer bank credit to across the board? Is it so that those earlier predictions of a crash by Remoaners can be “proved” correct when (if such policies are continued and pursued aggressively) the inevitable happens, and there is a downturn?

Let’s be clear: the monoculture allows the Treasury to believe they are earnestly working for the good. They don’t see themselves as malign and have no view that their work has been damaging. Like any monopoly, they have no pressure to audit themselves, no Doubting Thomas to demand review. But they have been consistently and provably wrong, and they should be challenged and discredited.

Our civil servants are in many ways magnificent. Although in the lower echelons they are overpaid and have impossibly rich pension schemes that could ultimately ruin the nation, in the higher echelons they have bright hardworking mandarins who earn less than they could in the private sector – and who fervently believe in their view.

But in the Treasury, that brightest of civil service departments, their view has been wrong, over and over and over again. They have been wrong about the EMS.  They have been wrong on what drives economic growth (in particular in how they have suppressed entrepreneurs in various ways). They have been wrong about the euro. They have been wrong about giving Gordon Brown such broad discretion in overspending, thus eventually tanking the economy.

They were wrong in not predicting the crash. They have been appallingly wrong (as many analyses, such as those performed by Civitas, have shown) about the alleged benefits of being in the Single Market and about the alleged disasters that would befall us if we voted to leave.

Somebody needs to call a halt on this. Somebody needs to demand that an audit be done on the Treasury’s failures in forecasting over the decades; on the arrogance of inexperienced bright young things from Oxford thinking that they understand the world; on the willingness of chancellors to be captured by them in a cosy folie à deux that leads to such bad policy mistakes and such ruin for the country. It is time good sense took back control.

Jon Moynihan is Chairman of Ipex Capital, the Technology-focused Venture Capital company