There is only one man who has ever made the Treasury do what it didn’t want to do. That was Lloyd George. There will never be another.” That is what James Grigg, Winston Churchill’s private secretary, told Bob Boothby, then a junior Treasury minister, back in 1926.
Some would say that observation still rings true today. British economist Douglas McWilliams has blogged: “The top Treasury civil servants are extremely bright, though not quite as bright as they think they are, but they have a sense of being a sort of high priesthood and are suspicious of outsiders.”
In his view, senior mandarins act in pursuit of a vague, institutionalised and historic notion of national interest, regardless of the government of the day’s specific objectives.
Boothby was even more scathing about the officials. His advice to chancellors of the exchequer was simple and succinct: “The Treasury is always wrong.”
This truth, he argued, is obscured by the fact that, while chancellors come and go, the Treasury goes on forever. That is one reason why it is so hard to judge the effectiveness of the respective occupants of 11 Downing Street.
William Gladstone, a four-time chancellor before (and while) he was a four-time prime minister, observed in 1858: “Finance is, as it were, the stomach of the country, from which all the other organs take their tone.”
Unfortunately, diagnosing economic ills – and the most effective remedies – is more complicated than discovering an ulcer and deciding which antibiotics to give the patient.
Since 1955, when the first reliable statistics were published, the highest average quarterly growth in UK GDP has been achieved by two Conservative chancellors: 1.27 per cent for Reginald Maudling (1962–1964) and 1.02 per cent for Nigel Lawson (1983–1989).
Is this proof that, as many Conservatives insist, theirs is the only party that can be trusted to manage the British economy? Not quite. Maudling’s chancellorship was marred by a belated, politically motivated ‘dash for growth’.
His tax cuts and spending increases over-stimulated the economy, swelled the balance of payments deficit and drove up interest rates. While clearing his desk at 11 Downing Street, Maudling said to his friend and successor, Labour’s Jim Callaghan: “Sorry, old cock, to leave it in this shape.”
Maudling’s errors were repeated by subsequent chancellors. In 1972, Tory Anthony Barber’s ‘dash for growth’ achieved its headline aim – UK GDP expanded by an unprecedented 5.3 per cent in the first quarter of 1973 – but led to, in the words of historian Edmund Dell, “a total breakdown of economic management”.
Tasked with clearing up the mess, Labour’s Denis Healey made it worse in 1974, with a redistributive budget that fuelled inflation. In 1978/79, his own ill-advised ‘dash for growth’ was designed to win the election but didn’t. Often damned as Britain’s worst post-war chancellor, Healey did at least instil a fiscal discipline that helped his Conservative successor, Geoffrey Howe.
In 1987 and 1988, Lawson’s budgets were designed to position the Tories as the party that cut taxes. Unfortunately, the information he was given – that the country’s economic growth was slowing to sustainable levels – was wrong. Within months, inflation was soaring, interest rates had doubled and the UK was running its largest-ever balance-of-payments deficit. Lawson’s departure is now widely seen as the beginning of the end for Margaret Thatcher.
Maudling, Barber, Healey and Lawson may all have been misguided but they were also unlucky. As the Bank of England estimates that it takes two years for government policy to impact the economy, they were all making decisions based on misleading, out-of-date information.
Despite substantial improvements in economic modelling, given the increasing complexity of the global economy, it is possible that Treasury mandarins are not much better informed today. Even many economic think tanks struggle to make judgement calls – hence the famous observation by John Kenneth Galbraith that: “The only function of economic forecasting is to make astrology respectable.”
Even so, many politicians and economists present their findings with scientific certainty (despite being unsure of their predictions), a tendency which Friedrich Hayek, the Nobel Prize-winning doyen of monetarism, admitted “may have deplorable effects”. In economics, as in many other disciplines, being an outlier can be rewarding but also risky – which might explain why, according to an IMF study in 2017, economists had failed to predict 148 out of the past 150 recessions.
Scientific laws do not determine economic policies. Churchill discovered that to his cost as chancellor in 1924 when Treasury controller of finance Otto Niemeyer and Bank of England governor Montagu Norman persuaded him it was economically essential for Britain to return to the gold standard monetary system. The ensuing deflation and unemployment led directly to the 1926 general strike.
He wasn’t the only former politician to fall for the mandarins’ groupthink – Labour chancellor Philip Snowden endorsed the decision – but Churchill regretted the mistake for the rest of his life, vetoing Niemeyer’s nomination as Bank of England governor in 1944.
In 1930, when Churchill had vacated 11 Downing Street, he admitted to the historian AL Rowse over dinner: “Everyone said I was the worst chancellor of the exchequer there ever was. Now I’m inclined to agree with them. So the world is unanimous.”
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