Treasury Rules

HM Treasury

As Keir Starmer's government settles down to business, one change that would make a difference would be to loosen the tentacles of Treasury rules and control that have been such a strait jacket on innovation and growth over the last few decades. 

Undoubtedly, the new government's inherited financial situation did not augur well for setting their first budget as the Institute for Fiscal Studies Paul Johnson's article on the black-hole explains. Funding was not set aside for many of the inquiries into serial mistakes by the government and its agencies, including the post office horizon scandal, the infected blood scandal, and Grenfell Tower. Other commitments of the outgoing government such as the pay review body recommendations were not funded even though they are normally accepted by the government. The conservative opposition and mainstream press have wasted no time trying to lay the blame on the new government castigating them for making payments to the trade unions when pay settlements had been held down for years by austerity. This was the reason behind the rail, nurse and doctor's strikes. This must be seen in the context of public sector awards falling well behind inflation over the past 13 years because of their fundamental disdain for public services,  These have continued since COVID-19 as shown in the graph below.

This means that Rachel Reeves was left with the requirement to make significant savings from existing budgets or from finding new forms of taxation. This is where the treasury began to dominate the proposals put forward. She has swallowed many of the treasury maxims that have not translated well into her budget. They are macro-level solutions that fit with the Treasury's tendency to distrust ministerial departments and local democratic bodies. They tend to operate through centralised diktat rather than evidence-based collaborative thinking. 

The outcome is entirely predictable. Rachel Reeves and Keir Starmer are no longer shiny happy people and not just because their wardrobes have had to be handed back. They are macro proposals of the type that take no recognisance of the detailed ramifications of the budget changes to those services, businesses and people that are most affected. 

The cutback of winter fuel allowances for the elderly and disabled would have been more acceptable had it been limited to those paying tax. This could have been refined by allowing the Department of Work and Pensions to find ways of safeguarding the most vulnerable from the impact of this measure. Anyone not paying any tax at all should automatically continue to receive it. This would have given a lesser saving but would have avoided the understandable indignation of pensioners and damaging the most vulnerable population in the UK. The electorate rightly expected more progressive budgetary decisions from a Labour government.

The introduction of additional national insurance payments by businesses was ill-thought-out and presumably taken because the Labour Party had ruled out NI increases for employees. Reversing Jeremy Humt's reductions in NI employee contributions would have been a better way of dealing with this if growth was the prime mission of the new government. Switching the savings to employers affects not only businesses but also public services and charities and will further impinge on their ability to deliver improved public services after years of decline. This is having a major impact on many of the very services that are required to improve the quality of life of many of the most vulnerable. Additional NI contributions by health authorities, councils, charities organisations and housing associations will stall improvements in services that are responsible for the majority of public services and Rachel Reeves is now having to construct a narrative to counter this unintended consequence.

The inheritance tax on farmers has not played well but there is some merit in taxing the super-rich who have utilised this loophole in inheritance tax to secure their assets by becoming land owners. It simply requires some strategic thinking about the purpose and the consequences of introducing willy-nilly proposals that could generate a tranche of funding to cover the black holes but have been made to sound petty.

Some of these black holes relate to the scatter of government failures that have been channelled into the long grass of expensive inquiries by the government. The Post Office paid £250m to its lawyers and the post office inquiry has cost £50m. Compensation to the victims has been far less so far and Rachel Reeves has had to find £540m for the expected compensation..

The infected blood scandal goes back to the 1970s when over 30,000 people were given contaminated blood products, 10% of whom died. The findings of the inquiry did not materialise until earlier this year leaving Rachel Reeves with the the responsibility for finding £11.8bn of compensation for victims in the budget.

Grenfell Tower Inquiry has cost £173m so far and £340m has been promised for a memorial. The victims have received £42m to date as the word cloud of those responsible bustles each other to shift the blame.

The previous government had made finagling responsibility for government mistakes and compensation for victims an art form of time management. Jeremy Hunt's hasty pre-election budget sought to offer reductions in employee National Insurance payments but never identified where the consequent savings would be made other than the usual trope of departmental efficiency savings.

So Rachel Reeves was given a poor hand but has played it badly because she has fallen for the Treasury cocktail of savings that lacks a detailed understanding of how things work in the real world. She had 3 months to finesse the budget but cobbled together more of the stale menu of savings that the Treasury and Chancellors have been serving for decades. What has been particularly disturbing is that Rachel Reeves claims that she has never heard of any alternatives to her budget proposals. She has either a deaf ear or lacks the imagination or willingness to engage with ideas other than the sterile top-down solutions of the Treasury that has made central government the monopoly recipient of taxation and broken the umbilical cord of accountability between councils and their citizens and businesses. In my humble view one of the fundamental mistakes of the past 50 years.

The Treasury is dominant in the development of the budget that by its very nature is developed at the macro level.  They do not take into account the nuances that ministerial or effective political deliberation should deliver. And there is no attempt to take cognisance of regional or local knowledge where practical experience would identify less disruptive or damaging options.

At a time when the impact of climate change is accelerating and causing havoc in communities and the switch to electric vehicles is stalling, surely it would be appropriate to use the fuel price escalator which has been frozen since 2011. Yes, it would be an extra charge for households and logistics companies but our roads are overly congested and there is an imperative to generate better use of buses and trains. Electric cars are no longer selling at the rate required to meet climate change targets, so raising the cost of fuel for diesel and petrol vehicles when fuel costs have diminished would be a doubly beneficial measure. At the same time, a tax on short-haul air travel in the UK would raise income and/or reduce the need for airport expansion.

The Labour Party sold the pass on raising income tax in their manifesto but a higher taxation could kick in at a level beyond, say, £150,000 per annum. This might also be linked to one of Rachel Reeves's intentions about pensions. It could be used to pay for a government investment bond instead of her proposal to centralise local government pension schemes which have been well managed and guaranteed pensions by strong local accountability and competition between financial advisers. Shifting the control to mega pension funds serviced by the usual coterie of finance companies will penalise SME financial companies and make investment in local companies less likely.

An area that has not been considered since the 1960s is some form of land taxation. This should apply particularly to the development of land. At the moment land is bought cheaply by residential developers in particular and once the planning permission is gained the valuation of that land rises significantly. Any uplift in land values should be taxed for the benefit of the local community. Equally many landowners including farmers are reaping significant income streams from wind farms and arrays of solar panels or micro hydro schemes on their land. This could be a source of funding for local councils that have seen their funding reduced and capped over the past decade.

The UK should be following the example of other European countries who have not tied electricity prices to the cost of gas which is dictated largely by Putin's export of gas. Given that the UK has a higher percentage of electricity generated from renewables and other sources, including the remnants of nuclear, it might save considerable costs to consumers of electricity.  It would diminish the rates paid to the electricity providers who currently use gas primarily and more sustainable sources are turned off in periods of low demand. So despite the UK having the highest capacity of renewables, we are paying the highest prices in Europe because prices are pegged to the price of gas. 

Another option would be for the government to introduce an online sales tax. Many city centre town centre businesses have been badly damaged by competition from online retailers who do not have to pay town centre business rates. It would benefit existing town centres that have been severely damaged by online sales by Amazon and other retailers, out-of-town retail parks and the loss of footfall following Covid and the significant shift to working from home.  The vitality of our town and city centres could be greatly enhanced by such measures.

These are just a few of the policy options for generating more tax and rebuilding public services at the same time addressing some of the other missions that the new government made the centrepiece of their manifesto. Rachel Reeves has shown no indication that she will break the treasury rules and her reputation is one of another bean counter, whose only advantage over Jeremy Hunt is that she can count.