How is Liz Truss’s government challenging ‘Treasury orthodoxy’?
Sir Tom Scholar’s removal as the Treasury’s top mandarin was a brutal statement of intent by Liz Truss’s new government. The message was clear: the days when Britain’s economic strategy would be determined by bean counters were over. From now on, growth rather than balancing the books would be the priority.
That is the theory. In practice, removing what Truss sees as the “dead hand” of Treasury orthodoxy from the running of the economy is likely to prove difficult. The fact that all four deputy governors of the Bank of England are Treasury old boys is an example of its influence on the economic policy-making machinery. There have been attempts in the past to cut Whitehall’s most powerful department down to size. Sooner or later, all have failed.
It was Sir Winston Churchill who first defined the Treasury view of the world. In his 1929 budget speech, Churchill said budget deficits came at a price, because the state has to pay interest on the money it borrows and the more it borrows the higher the interest rate.
As the cost of borrowing rises, businesses postpone expansion plans, so any boost from higher public spending is offset by the “crowding out” of private investment. In the classic Treasury view of the world, expansionary fiscal policy (tax cuts or spending increases) has no impact on growth or employment.
Attacks on “Treasury orthodoxy” are nothing new. John Maynard Keynes argued in the inter-war years that spending on job creation schemes would pay for itself because shorter dole queues would mean higher taxes and a smaller welfare bill.
More recently, the supposed link between big budget deficits and higher market interest rates has been broken. The UK borrowed huge sums of money in both the financial crisis of
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