UK: TIME THE CITADEL FELL - THE TREASURY.

UK: TIME THE CITADEL FELL - THE TREASURY. - 'Out of touch' and 'driven by an anti-business culture' are just two of the charges aimed at the Treasury. So has it taken on the need for radical reform?

by David Smith.
Last Updated: 31 Aug 2010

'Out of touch' and 'driven by an anti-business culture' are just two of the charges aimed at the Treasury. So has it taken on the need for radical reform?

It is the Whitehall department that businessmen love to hate. Aloof, superior and traditionally incapable of connecting with the real world, it is mildly surprising that they did not build an ivory tower for it in the heart of Westminster. Instead, it occupies an impractical building across Parliament Square from the House of Commons, its stonework discoloured by decades of traffic dust, and best known to the outside world for the brass plate against which TV cameramen like to pose the Chancellor of the Exchequer.

For some, the Treasury is beyond redemption. John Banham, the former Confederation of British Industry director general, set out the case for its abolition in his recent book, The Anatomy of Change. 'Enter the hallowed portals of the Treasury,' Banham writes. 'Ask to see the Chancellor. The waiting room is dim and gloomy, the chairs are uncomfortable, a massive and musty portrait of some long-forgotten mandarin glowers down at you. The portrait sums up the place. It seems to disapprove of anything and everything that might be in the remotest bit unorthodox. Here, change is the enemy, not an ally, still less a friend.'

I think the Treasury is a terminal case,' he says. 'I am not saying they are stupid people but they are clever without being wise.' Banham quotes approvingly Lord Beloff's description of Treasury officials as 'a bunch of bank clerks who think they are mandarins' and insists that most business leaders who have dealt directly with the Treasury privately agree. Certainly, the level of criticism is high; 'out-of-touch', 'fundamentally misguided' and 'driven by a deep anti-business culture' were three of the printable criticisms.

There is a fashionable view that favours handing over its monetary policy responsibilities to an independent Bank of England, giving the Department of Trade and Industry control over all supply-side policies, and limiting the Treasury's role to controlling public spending (not that its recent record offers much reassurance in this area) and setting tax rates. Banham would not even allow the Treasury this reduced role, preferring to give the Cabinet Office the responsibility for restraining spending.

Apart from the specific criticism that the Treasury has failed to listen to, let alone understand, the concerns of the industrial and commercial community, it has manifestly failed to deliver what any businessman would regard as essential: macroeconomic stability. Instead, the Treasury has run with the latest economic fashion, whether it be monetarism or membership of the European exchange rate mechanism (ERM), with disastrous results. The 1980-81 recession, the most savage since the 1930s, can be largely put down to the former, the length and depth of the 1990-92 recession to the latter.

Says Banham: 'If anybody else had presided over the shambles they have presided over: the fact that it was the public sector that stoked up inflation in the late 1980s; the failure, despite the warnings, to see that the economy was heading into recession; the fact that we have had a public sector borrowing requirement equivalent to 20% of tax revenues; if anybody else had presided over that, let alone disasters such as the ERM, we would have shot them long ago. They spend their time on trivialities and always miss the big picture.'

Winning friends and trying to influence business people in the face of such criticism is an uphill task. But that is what the Treasury is trying to do. Under Sir Terry Burns, its Permanent Secretary (and therefore the civil servant in charge of the official machine), a deliberate strategy is being followed of improving the links between Treasury officials and companies, particularly those in manufacturing industry. That unfamiliar, grey-suited figure wandering around your shop-floor may well be a Treasury official out sampling the real world of business on an 'awayday'. If he or she is still around the following week, then a longer secondment, increasingly popular among younger officials, is under way. Awaydays are new, secondments have been around for longer. But the change of emphasis is that, whereas they used to be almost exclusive to banks and city firms, now they are largely to manufacturing and non-financial services.

'There is a step-change in the size and type of secondments,' says Steve Robson, the senior official in charge of the Treasury's industrial division. 'If you talk to the bright young twentysomethings in the Treasury they are saying they want secondments, and they are also saying they want them to be in industry rather than the City.'

Burns, who arrived at the Treasury from London Business School as recently as 1980, and has been in the top job for three years, recognised that it was of little use to have all those Rolls-Royce minds in the Treasury if they never left the garage. The awayday programme, in which Howard Davies, then of the Audit Commission, now Banham's successor at the CBI, acted as midwife, got going after the April 1992 general election.

A random sample of recent excursions by Treasury officials shows awaydays to Vauxhall, UMECO, Wimpey, Wellcome, Kenwood, Marshalls of Cambridge, Unipart, Scotch whisky distillers in Edinburgh, Redland, Hydron, Star Aluminium, Cincinnati Milacron, Jasmin, United Merchant Bar, AG Walde Bros., Dry Drayton, North British Newsprint, the Falcon Group, Philips, and Ulpec Industries.

Burns, an economist by background, knows only too well the analogy of the supertanker, usually applied to management of the economy, whose direction can be changed only slowly. But the Treasury, he insists, has to change. And, while it would be wrong to place too much emphasis on it, his use of the language of management is a symptom of a changing Treasury. 'There is part of our business which is inevitably contracting,' he says. 'The Treasury has to rethink its role. It was consistent with the command and control method of running things. When you go through a process of decentralisation, you have to ask what it means for the head-office function. We have quite a lot of head-office functions.'

He has also broken with Whitehall tradition by appointing an outsider from the world of business, chairman of Thorn EMI and PowerGen Sir Colin Southgate, to oversee a 'fundamental review' of the Treasury and its functions. Southgate is not commenting on how he sees the Treasury until his review is completed later this year, although he is on record as saying that, as an institution, the Treasury spends too much of its time second-guessing others.

A vital ingredient of the Treasury's changing approach, says Burns, is a better understanding of what makes businesses tick, and an understanding, by business, of the constraints the Treasury operates under. 'The Treasury did not have a lot of contact with the outside world, and when you've spent your life in the Civil Service there is quite a lot of suspicion of what goes on out there, as well as a lack of understanding. We're trying to develop an understanding here of what goes into building up and running a successful business.

'I think we've made progress in improving our relations. It is essential that all the arguments are conducted openly. The first thing is to make sure you've heard their arguments and that they know you've heard them. The second is going out and explaining it.'

Burns gives the example of the long dispute between the Government and the brewers over the loss of business they are experiencing as a result of cross-channel shopping. In the old days the Treasury would probably not even have got to listen directly to the brewing industry's call for big reductions in excise duties on beer sold in Britain, to reduce the price advantage enjoyed by hypermarkets in Calais and Boulogne. Instead, the brewers would have been stonewalled by Customs and Excise. But now, the Treasury has gone out of its way to analyse the industry's claims that there would be a net gain to the Exchequer if duties were cut (because more beer would be sold in Britain) by producing its own figures showing there would still be a substantial revenue loss. The brewers will continue to press their case and are far from satisfied. But at least a dialogue is taking place. 'It is extremely important that there are no misunderstandings,' says Burns. 'People should not be left in the position of believing that you have taken a decision without having heard them.'

He concedes that relations between the Treasury and business vary according to the state of the economy, and that part of the improvement he detects is due to the recovery. He also accepts that merely listening to industry's problems will not ensure harmony. 'The Treasury is a central part of the allocation mechanism within the government and any allocation mechanism is going to leave some people dissatisfied,' he says.

Change at the Treasury requires political impetus. And here, Burns has been fortunate in the way the political dice have fallen. Kenneth Clarke, who has been known to boast of coming from the real world of industry and commerce, and who declares it his ambition to make like easier for those who inhabit that world, not only approves of the Burns strategy but he has also given it an additional push.

'One of the things I want to use the fundamental review for is to make it clearer that the Treasury is not just a ministry of finance but also an economic department,' he told Management Today. 'I would like to be a Chancellor in a Treasury that is an economic department which, alongside the Departments of Trade and Employment, sees itself as interested in supporting the real economy, interested in making a positive contribution to improvements in the supply side in this country. The real acid test of the economic policy of the Government is: how do you create a combination of circumstances that enables British industry to become more competitive and to become more prosperous?

'I do tend to judge the impact of what I am doing by thinking, what is this doing to help those people responsible for managing British industry, selling British goods and services and creating jobs in this country? Most people in the Treasury are concerned with the control of public expenditure. This is a time when they've got to be good at their job. But no good business is run solely by its finance director. This department should be concerned with economic affairs generally.'

Steve Robson, who is at the sharp end of the contacts between the Treasury and industry, has no pretensions about the kind of hostility he and other officials have to overcome when on excursions into companies. 'The initial impression many have is negative, he says. 'They think, here are a load of pointy heads from their ivory tower, who are responsible for most of the things that have gone wrong with the economy, let's get a chance to sort these guys out. But by the end of the day, we hope for the kind of reaction someone wrote to me recently: It's amazing how many myths about the Treasury can be destroyed over one lunch.'

He stresses, however, that the company visits are much more than a public relations exercise. 'It is easy for outside observers to be cynical about these awaydays,' he says. 'I am not going to deny that the Treasury was an isolated place. There was a definite tendency to sit here and devise policies in an intellectual sense and run with them. That was a crazy thing to do by any standard. Most of the policies we are concerned with are partly trying to influence the behaviour of other players in the economy. If you don't understand what motivates them you can't win.

'The Treasury has got to be more knowledgeable, more expert in all the areas in which it operates, whether it be industrial matters or dealing with the Department of Education. Awaydays start to create the networks so you get into a position where people in the Treasury feel confident of picking up the phone and talking to people in business about their ideas. Equally, we want these networks to work in the other direction so that people in business can tell us if there is a particular problem in their area. 'Part of the plan is also that the Treasury should explain itself and the policies. If we can go out and put our policies across, people will hopefully see some sense in them. If not, we need to think again.' Another strand in the Treasury's attempt to bring business into the decision-making process is its panel of industrial advisers, which meets three times a year under the chairmanship of Alan Budd, the current Chief Economic Adviser. Its membership includes representatives from big companies, including ICI, British Gas, BP, BAT, Ford, IBM UK, RTZ and GKN, but also smaller companies such as Caradon Everest and Interconnection Systems of South Shields.

Ivan Bradbury, chairman of Interconnection Systems, knows the Treasury well. Not only is he a member of the industrial advisers' panel but he also provided a secondment for Treasury official Andrew Hudson, who is currently the Chancellor's Press Secretary. Knowledge of the way the organisation works adds weight to Bradbury's criticisms. 'My assessment of the Treasury's main problem is that it doesn't have a clear goal,' he says. 'I am not a great fan of company mission statements but at least they encourage you to think clearly about your goal. If the Treasury tried to write a mission statement it would be at least 40 pages long. The stock answer to this from officials is that the Treasury is too complex for a straightforward mission statement. But this merely leads to the situation where the Treasury has no clear idea of when it is succeeding and when it has failed.'

Leslie Gunde, corporate strategist at GKN, is another member of the panel. He sees two particular benefits from the closer business contacts the Treasury is developing. 'Things are changing in two ways,' he says. 'We are able to provide the Treasury with some sort of background to its forecasting process, based on what is actually happening in industry. It sets their desk-based forecasts in some sort of context. The other benefit is that it has brought home to the Treasury more of a sense of what goes on in industry in terms of restructuring and cost-cutting, and perhaps gives officials a greater incentive to push for similar action in the public sector.' Suspicion and cynicism about the Treasury and its motives persist among businessman, however. When Stephen Dorrell, Financial Secretary to the Treasury, suggested earlier this year that one reason industrial investment was not higher in Britain was that companies paid out too much in dividends, he was accused by Lord Hanson of 'sounding like a socialist'. Dorrell has since been promoted to the Cabinet as Heritage Secretary and Treasury watchers believe that changes to the tax treatment of dividends is unlikely.

And arch-critic Banham is unconvinced by the Treasury's attempts to reform itself. 'This is all just window dressing,' he says. 'The problem does not lie at the door of Treasury ministers. The termites have eaten away at the place for too long. Before I would accept that a revolution has dawned I would want to see the Treasury adopting a strategy to ensure that expenditure is permanently within revenues, much more delegation to other government departments, and far less second-guessing, and a commitment to saving at least £10 billion by cutting public sector waste.'

Andrew Sentance, who sat on the panel of industrial advisers when he was economics director of the CBI, also notes that for many businessmen there is an unbridgeable cultural gap between them and the Treasury officials they meet. 'Businessmen welcome any contact with the Treasury,' says Sentance, who is now at London Business School. 'But there is a world of difference between someone who has been running a company all his life, and a civil servant who has been in the Treasury since he or she left university.'

Indeed, such cultural differences may be reinforced by the Civil Service tradition of political neutrality, and by the fact that officials are often faced with the task of putting into practice policies that they do not agree with. This is alien to many businessmen, who have a clear idea of what they want to achieve, and will not easily be sidetracked. 'I've always felt that the people in the Treasury are very smart and are very fast learners, capable of picking up a brief quickly,' says an industrialist who has observed the Treasury at close hand. 'But they take pride in being able to argue both sides of an argument equally plausibly. They're not actually that good at working out what is going on in the world and what makes people tick.' It is views such as this that the Clarke-Burns Treasury is trying to change. The hope is that the interchange between the Treasury and industry can develop in such a way that senior people from each spend more time in each other's world. One of the criticisms of the British system is that people are streamed into Civil Service or business careers at an early stage, with little natural overlap between the two.

One change that would assist the Treasury in its endeavours would be a relocation. Unlike the DTI's Victoria Street HQ, which is modern, open-plan and has a reception area that makes visitors feel there is business to be done there, the Treasury is stuck in an Edwardian time-warp. Business visitors are escorted along labyrinthine corridors to large, old-fashioned offices, often occupied by one official. Computer screens look out of place. The white-heat of technology struggles to permeate its walls.

Fortunately this, too, could change. The Treasury building is in need of repair. Water is seeping into its basement from the lake in St James's Park and contractors have advised that extensive structural and rewiring work is required. Burns is eyeing up modern premises, which would take the organisation into the 21st century. That might be an easier change to bring about than that of overcoming decades of business mistrust of the Treasury. Only time will tell whether the Treasury's modest attempts to introduce a new business orientation into its way of doing things are a significant step forward.

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