The Treasury will be pleased with how the Spending Review has been received in Whitehall. But longer term issues will still worry it
Treasury officials were partying hard at a Westminster pub on Budget night (according to the Resolution Foundation, who were studying the Budget in their nearby offices). Few would begrudge them a drink after several weeks of really hard work. But will they be partying in the longer term? And if so, is that because some old Treasury orthodoxies have been set aside, or not?
So-called Treasury orthodoxies and instincts are often over-simplified, in my experience. Certainly, part of the job is to protect the interests of the taxpayer – nobody else in government has that locus. But that doesn’t mean saying “no” to everything: it means ensuring value for money, and that, over time, spending is financed honestly. Good Treasury officials also care about the real world impact of what they are advising on. Outside crises, it’s exciting to play a part in shaping well-founded change. And you know that if you get it wrong, you will have to sort out the financial consequences.
So how would I feel about this Budget and Spending Review if I was back in the Treasury?
I’d be pleased that some fiscal disciplines had been established after the pandemic, with tax increases preceding spending increases, and fiscal rules for the future, and I’d be pleased at the way the economy has come through the pandemic. The Office for Budget Responsibility has reduced its estimate of the scarring effect, with the furlough scheme having made a big difference. The Treasury can be proud of that.
On the spending side, I’d be pleased that there was enough room within the fiscal rules to address a number of issues that could have got worse, to help the courts to recover from the impact of the pandemic, and I’d be pleased that the priority outcomes for each department had been developed further, with better evaluation in place. As the chair of the What Works Centre for Homelessness Impact now, I’m even more pleased, including that there is more to tackle rough sleeping, hopefully for prevention as well as relief.
But the Treasury wouldn’t be doing its job if it didn’t look ahead, assess where the risks lie, and prepare for different scenarios.
With that in mind, I’d be worried about inflation. That’s deeply ingrained for me, having spent my formative years living with the very high inflation of the 1970s, and quite a bit of my early career wrestling to eradicate that. Inflation damages living standards for many, and if it goes too far and big interest rate rises are needed to control it, it carries a serious cost to the government’s finances.
I’d be worried that the projected tax revenues may not materialise. My former boss, (Lord) Nick Macpherson, argues that the tax take this century has been between 31.5% and 33.6% of GDP, and won’t reach the 36.2% planned for 2026. Spending programmes will be hard to rein back once under way.
I’d be worried about the medium term pressures on some programmes driven by demography and social change, such as social care. The recent reforms have addressed the question of who pays for care, but leave a lot of questions about the level of provision, and how social care can help prevent more serious – and costly – ill health down the line. Local government generally continues to face some of the toughest challenges.
Finally, even if the uncertainties have reduced a bit, there remain big questions over the path of Covid, over supply chain issues, and over inflation, before getting into geopolitics.
As the partying finishes, the hard work starts on making a reality of these decisions. While the Treasury can feel relieved at the way the last six months have turned out, they will be acutely aware that there is absolutely no room for complacency.
Andrew Hudson is a former Director General of Public Services at HM Treasury. He now chairs the Centre for Homelessness Impact