Theodore Agnew: An Office for Economic Growth could help revitalise our government and economy

Britain’s economic growth over the last 10 years has been poor. It has been a problem shared by most major western economies. But we could do so much better. The combination of our universal language, entrepreneurial culture, mature financial and capital sector, and esteemed legal system all provide the foundations to increase our prosperity.

In Whitehall, unique amongst other major economies, the Treasury exerts an overbearing view across Government departments and their spending. Notionally, it is responsible for economic growth, yet its culture is firmly embedded in raising revenue and doling money out to departments on short-term horizons.

To quote economists Stian Westlake and Giles Wilkes, ‘…the Treasury’s powerful short-term budgetary control manifests itself in distortionary rules and procedures, and in an inability or unwillingness to use tax measures to raise revenues. This leads to a lopsided focus on spending cuts as the only means of dealing with the public sector deficit.”

There is a skewed relationship between public expenditure and policy outcomes. The Treasury’s relationship with departments centres around establishing budgets for programmes and ensuring that those budgets are not exceeded, rather than the programme’s overall performance. The department, not the Treasury, is held accountable for failures, creating a culture skewed towards poor outcomes. There is also a history of Treasury holding back economic data from No 10.

Various attempts have been made to correct this over the last 50 years.

• Harold Wilson established a new Department of Economic Affairs to counteract the Treasury’s alleged short-termism. The new department sat alongside a Ministry of Technology to harness scientific expertise to industry more effectively.

• The Blair Government Commissioned John Birt to look at the organisation of the centre of government. The plan, entitled “Project Teddy Bear”, was ultimately abandoned. However, the centrepiece of the plan was to split the Treasury into two parts and establish: a Ministry of Finance (overseeing macroeconomic issues, taxation, and financial services) and an Office of the Budget and Delivery (to manage departmental spending).

• Most recently, at the recommendation of Sir Michael Barber, a Public Value Unit was created inside the Treasury. However, it been inert against the more ingrained culture of monitoring short-term expenditure. It is not properly embedded with Treasury Departmental spending teams who monitor individual departments’ spending. The shift to judging outcomes has proved too much for the prevailing orthodoxy to adjust to.

The problem with big Machinery of Government changes is that they generate turf wars. Secretaries of State are usually captured by their ministries, fighting to maintain the status quo against any possible loss of authority. They can also take years to implement.

The solution should be something far more agile: creating a unit called the Office for Economic Growth. Modelled after the Office of Budget Responsibility, the Office for Economic Growth should have a streamlined structure and comprise no more than 40 FTE staff.

This will not be costly or disruptive, nor add additional civil servants. The best in the Treasury’s Public Value unit supported by economic growth specialists and a small handful of private sector commercial experts will provide everything needed.

They should be able to draw upon and call for evidence where needed or to commission specific pieces of work if OEG needs to challenge material legislative, spending, or taxation plans emanating from any Whitehall dept.

• The Office for Economic Growth should have the authority vested in it to review every Whitehall business case above an agreed value. It will determine the impact of public spending on economic growth. The Office should analyse economic announcements and budgets. We need to move away from big, set-piece economic statements. What currently happens is that announcements get held up and economic data is bunched up and released in indigestible lumps, rather than being produced immediately.

• It should evaluate all of the models used by Government departments in their impact assessment and rate them on their accuracy as they relate to economic growth. These models should be published as open source. This would allow outsiders to examine how good they are.

• It should publish the economic growth projections made by the relevant department arising from the proposed legislative or fiscal interventions. The data should be regularly refreshed once outcomes are known to ensure rigour.

• Alongside this, it should be granted discretion to test and iterate novel methods of procurement/public spending. For example, when government wants to procure an innovative solution that doesn’t yet exist it should be able to recommend the use of Advance Purchase Agreements for a solution that delivers certain outcomes.

• It should be given the authority to set the Green Book rules. At the moment, HMT both sets the rules and follows them, meaning it is the final arbiter of best value in public spending. HMT signs off spending it wants to do, even when it falls below the cost/bene fit threshold it would apply to other departments. The OEG should set the rules and force HMT to follow them. This would give No10 more control over the framework by which public spending decisions are made, whilst simultaneously strengthening the enforcement of that framework.

• The OEG should be much more transparent about the Benefit Cost Ratios (BCRs) of public spending projects and then examine them after construction to see if they met the estimates.

• It should report directly to the Prime Minister as the First Secretary of the Treasury with this unit being given advance notice of any major spending decisions before they are locked in or publicised.

• The Prime Minister or their nominee should continue to chair the powerful Domestic and Economic Strategy Cabinet sub committee. However, its terms of reference should be adjusted to provide more focus on economic growth rather than the current remit.

• The Economic Strategy subcommittee should be clearly delineated from the Domestic and Economic Implementation subcommittee so that there is no overlap or conflict.

If the Office of Economic Growth had been in place in the way set out above over the last 3 years we could have seen, by way of examples, the following benefits :

1. A sharper focus on the post Brexit procurement bill ensuring that economic growth was integral in its design. This bill will cover some £300billion/year of public expenditure.

2. An early warning as to the unintended consequences of bringing housebuilding to a halt in parts of England because of new powers invested in Natural England through the Environment bill. One estimate puts the number of dwellings delayed at over 100,000. What cost to economic growth?

3. Less piecemeal allocation of capital to DfE, meaning schools are being repaired and then demolished because there is no pipeline to show their rebuilding date. This would have accelerated the development of the modern methods of construction industry where we have the potential to be a European leader (a technology on which the DfE leads across Whitehall).

4. Innovative public / private partnerships would have a greater chance of making progress as their economic impact would receive a wider airing in Government and innovation given a greater chance to break through.

All this would help reach that holy grail for all politicians: to find the key to long run economic growth. To grow the pie so that all in society can benefit.

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