THE TREASURY AND THE SUPPLY SIDE

John Kingman

Sagging productivity is the economic challenge of our age.

If we were able to ascend Mount Olympus, or at least go to Basel or Jackson Hole, and
eavesdrop on any gathering of the central banking elite, very likely what we would witness is the
wringing of hands. The central bank drugs successfully saved the patient in 2008. But they are
not bringing the patient back to health. So what we need, everyone says, is concerted supplyside reform.
All true. My topic here this evening is specifically institutional what, if any, is the right role for
the Treasury in meeting this challenge?
For most of its life, that is to say hundreds of years, really the Treasurys sole purpose was to
manage the public finances.
During the twentieth century, macroeconomic management became important as well.
More recently for around 30 years - the Treasury has slowly grown a third limb. It has
developed what has proved a sustained interest in microeconomics and the supply-side.
I want to home in on this third mission. What has really been achieved? And should the
Treasury have this third purpose at all?
These questions are not uncontested.

I dont want to shock anyone, but there is a view held by

some Treasury colleagues in private, that all this supply-side stuff is at best a waste of time lots
of gimmicks or at worst actively damaging, corrupting of the Treasurys fundamental
responsibility to grip the public finances.
Then there is a directly opposite challenge which holds that actually this supply-side stuff is
very important, in fact too important to leave to the Treasury. The Treasury is, this rival group
holds, inherently conflicted. Its responsibility for the public finances means it will always selfcensor. It will never be sufficiently radical when it comes to what is needed to fix the economy.

This group would like to see a separate Economics Ministry, perhaps a beefed-up Business
Department, to take the Treasury on.
This is the hypothesis being examined, we are told, by Lord Kerslake in the review of the
Treasury he is undertaking for Jeremy Corbyn.
Spoiler alert: I think both critics are wrong.
But before we get to that, Id like to start with some history.
History
Department of Economic Affairs
[SLIDE]
A reasonable place to begin is 1964 with the creation by Harold Wilson of the Department of
Economic Affairs a deliberate counterweight to, and implicit critique of, the institutional power of
the Treasury.
The slogan was expansion rather than counting candle ends.
The context was ambitious: the Conservative party had promised 4% growth, a rate that had not
actually been achieved since mid-Victorian times. Labour, for their part, ridiculed 4% as too timid.
They were both whistling in the wind. The DEA clearly failed. George Brown, the erratic
Secretary of State around whom the Department was originally built, was moved to the Foreign
Office. And the DEA lacked levers. The Treasury systematically clawed back its position over
time and the DEA become moribund well before it was wound up in 1969.
There are some clear institutional lessons here. Though I actually dont think we should overdo
them. The DEA wasnt really about supply-side policy in the way we would currently interpret it.
It was more intended to be a rival pole of macroeconomic power, which is why it represented
such a profound institutional threat to the Treasury.
Lawson
It was under Nigel Lawson that the Treasury started to evolve its own third mission.

As a matter of intellectual history, I suggest this moment can be dated quite precisely to 18 June
1984 when Lawson gave his famous Mais lecture.
Lawson argued that, for the whole post-War period, economic policy had been governed by a
massive intellectual mistake. This was to think that macroeconomic policy was all about the
pursuit of growth. And that microeconomic policy should be the tool to control inflation.
Lawson argued that this whole way of thinking had had to be turned on its head.
[SLIDE]
Lawsons proposition has proved impressively intellectually resilient. It describes pretty well an
orthodoxy which still broadly holds, 30 years on.
Lawsons overall record in office was of course mixed. But he and more generally, the
Thatcher Government as a whole still remains the poster-child for those who believe in the
importance of supply-side reform.
The abolition of all sorts of regulatory controls (in his speech Lawson listed pay controls, price
controls, dividend controls, exchange controls, bank lending controls, hire purchase controls,
industrial building controls); a massive privatisation programme including the dismantling of
several large monopolies; a systematic assault on the power of the trade unions; Big Bang in the
City these were landmark achievements.
Clarke
After Lawson the story goes a bit dead; Major and Lamont as Chancellors were understandably
distracted. But Ken Clarke as Chancellor was interested and actually created within the
Treasury a Supply Side Unit.

I remember this well as I happened to be Private Secretary to the

then Financial Secretary, Stephen Dorrell, who took a close interest [SLIDE]. The unit was
theoretically given a licence to roam and it tried to across big issues like education, welfare,
corporate tax and housing.
The then official Treasury, I think it is fair to say, did not really buy in to this.

If memory serves,

the supply side unit consisted of two relatively junior policy officials, Bill Guy and Donald Franklin.
I remember them as creative and energetic; but they got no traction.

In retrospect, I am afraid it seems slightly extraordinary bordering on absurd that anyone

could ever have thought a unit staffed and equipped in this way could ever have made much
impact.
Brown
Needless to say the Gordon Brown Treasury was an altogether different matter.
From before he became Chancellor, Gordon Brown was telling us all about neo-endogenous
growth theory.
One of his early acts was to create a decently-resourced Enterprise and Growth Unit under the
Directorship of my friend and former boss, the brilliant Harry Bush.
I joined Harry in 1998 when we set up the so-called Productivity team, affectionately (or not)
known around the building as PROD, which I ran until I took over Harrys job as Director of the
Unit in 2003.
One way and another, I held responsibility for these areas of policy, for all my Treasury time since
then.
So at this point in the story - health warning - I lose all objectivity.
The Brown era had its hubris. At one point (2004) the Brown Treasury got into the vanity
publishing business, releasing a 400 page volume - the so-called Gold Book - [SLIDE], with the
gushing sub-title Delivering Opportunities for All. The editors were Ed Balls, by then Chief
Economic Adviser to the Treasury, though still of course a political adviser, standing shoulder to
shoulder not just with my Treasury economist colleague Joe Grice but also Gus, now Lord,
ODonnell.
The coalition and the Conservatives
Then we come to George Osborne.
People sometimes forget that Osborne in opposition was a fierce critic of the way Brown had
extended the role of the Treasury beyond its traditional remit [SLIDE]; in Government, Osborne
proclaimed, the micromanagement and empire building would stop the era of the expanding
Treasury empire is over.

In practice, of course, it didnt work out quite like that.

Hammond
Finally, Philip Hammond. [SLIDE]
The Hammond Treasury has not yet really showed its hand on the supply side - which makes this
an interesting inflection point to reflect on where we are though it is already clear, from what the
new Chancellor has said, that he is a believer in the third limb in some form.
Resources and culture
Meanwhile, if we take a snapshot of the Treasury I left in June, it is worth getting a sense of the
split of resources.
When I left, the Treasury had roughly 1,100 staff. Of these, about 80 work in the Treasurys
Enterprise and Growth Unit. Maybe 20-30 or so work directly on supply side issues in other,
mainly spending teams. So at a rough estimate, slightly fewer than 10% of staff in the Osborne
Treasury at its height worked on supply-side policy.
Perhaps as important, I would say that as an institution the Treasury over my time slowly found a
way to accommodate the third limb in a way that gave rise to steadily less internal friction.
This has not always been straightforward. From a growth point of view, the country does need a
good education system, good infrastructure and so on; these things cost money; and whilst we
can all agree on the potential for greater efficiency, in the end there will always be some tension
between the supply-side-ists and those who need to make the spending numbers add up.
When I first worked on these issues in the late 1990s, managing this sort of issue was generally
difficult. Arguments were often escalated to the Chancellor and his advisers; and it was all quite
wearing.
But over the years, with the passage of time and the sustained interest of a number of
Chancellors, the Treasury has gradually worked out how to take these debates in its stride, and
even to internalise them within teams. Teams like (say) the Treasurys housing team now do a
superb and apparently effortless job of straddling their spending and growth objectives.
In short, the institution has slowly but successfully learned how to walk and chew gum at the
same time.

What has been achieved

So what has and hasnt been achieved?
I want to focus particularly on the the post-Thatcher years those in which I had some
involvement. What does the score sheet look like?
Fighting bad ideas
The first and most important point is that in my experience the Treasurys biggest contributions to
good supply-side policy are negative, and very often completely invisible to the outside world.
What do I mean by this? It is generally understood that the Treasurys main contribution to
public spending control is to stop things happening. It is less well understood that exactly the
same is true of growth policy. This is because it is far, far easier for a Government to harm
growth than to promote it. At any one time there is never any shortage of policy ideas and
proposals which, however well-intentioned, would do some damage to the economy.
For a start, all Governments actively limit growth the whole time. They operate complex systems
whose purpose is to do that. The planning system a system of development control is
precisely that. So is the migration regime.
Meanwhile. all sorts of regulation can easily inhibit competition and innovation, either because
regulation is badly designed, or because stopping competition and innovation is actually what the
regulation is intended to do.
Moreover, we know that the single best way to undermine productivity is to prop up failing and
unproductive businesses yet I have never known a Government of any complexion which
wasnt frequently struggling with pressure to do just that.
(I have occasionally wondered quite what Margaret Thatcher, whose portrait Sajid Javid made a
point of keeping on his wall as Business Secretary, would have made of the endless meetings he
had to hold under instructions from David Cameron to do whatever it takes to save one of the
worlds least productive steel plants in a massively oversupplied global market.)
Then there is openness to foreign ownership. There is overwhelming evidence that openness to
international ownership is good for economic performance and productivity. And the UKs
consistent track record on this point has been second to none internationally over many years.

Nevertheless, protecting this crucial openness, in which the Treasury has always been the firmest
institutional believer, is hard work. Every year in my experience, there are cases where, for one
reason or another, powerful people in Government are susceptible to, and have to be persuaded
off, some sort of supposed case for protecting one usually underperforming British corporate
treasure or another.
The late, great Treasury Second Permanent Secretary Leo Pliatzky once famously compared
dealing with spending departments in the Treasury to animals herding around a waterhole: You
beat them off, and beat them off, and in the evening, back they come.
In my experience exactly the same is true of policies which would harm the economy.
Fighting these arguments, and winning a decent share of them, is the Treasurys most important
but often invisible - contribution to the health of the supply-side.
Labour markets
The second major point relates to the vigour and flexibility of the UK labour market. I dont
propose to talk at length on this; it is a big subject and I do not personally pretend to be expert in
it. Nevertheless it is the clearest single success story of sustained British microeconomic policy.
[SLIDE]
The best testament to this achievement was the shape of post-crisis recession the drop in
output was both longer and deeper than the recession of the 1930s, but with unemployment on
nothing like such a horrific scale.
Competition
The third area is competition. The fight for the cause of competition, like the fight for free trade,
is always a struggle. There is a constant tension between the interests of millions of consumers,
highly dispersed and generally passive and disengaged, against the interests of well-resourced
incumbent vested interests.
The Treasury is not strictly responsible for competition the Business department is. But I hope
my friends in that department will not too much mind my asserting that in reality the Treasury is,
and has for a long time been, the most powerful and consistent champion of competition in
Government not least because the Business department is always at least to some extent
institutionally conflicted by its natural role as the advocate for big business incumbents.

This matters. We know for instance that the biggest productivity gains from decades of
privatisation did not come not from moving businesses to the private sector per se though this
did have some benefits. The big gains came from the (often subsequent) break-up of
monopolies and the introduction of competition.
Or take a reform like Big Bang blowing apart a sleepy oligopoly a conscious and brilliantly
successful act of Government policy, probably the single most successful piece of British
industrial policy ever.
I am proud that the 2002 Enterprise Act was designed in this building. The Enterprise Act took
the UK competition regime from international laggard to one generally recognised as among the
best in the world. Gordon Brown and Ed Balls took two big decisions: to introduce criminal
penalties for cartels; and, critically, a self-denying ordinance to take Ministers out of almost all
merger and market-shaping decisions.
Without this latter change, I very much doubt that the OFT and Competition Commission would
have been successful in cracking the London airports monopoly - something that Ministers,
particularly in a captured transport department, had long shied away from.
To be fair, the Treasury has itself been known to fail. In a classic case of successful industry
capture, we allowed 15 years of persistent lobbying, obfuscation and procrastination to stave off
Don Cruickshanks proposals to take on the oligopoly payment networks, the vital plumbing of the
banking system, before they were belatedly but quite rightly implemented by George Osborne.
Despite countless studies, no-one in the Treasury or anywhere else has yet found any way of
cracking the retail and SME banking oligopoly - if anything a frightened Treasury made the
problem worse by permitting the disastrous Lloyds/HBOS merger in 2008. In other markets, the
fundamental conflicts embedded in BTs corporate structure remain an unresolved challenge;
there are big public service markets where competition could play far more of a role; and as we
increasingly see with disruptive businesses like Uber, there is a constant need to ensure that
regulation is not allowed (deliberately or otherwise) to ossify inefficient market structures. So I
am afraid there remains plenty to do.
Science, innovation and the universities
My next topic is science and innovation. You need to aim off here; I speak now as chair of UK
Research and Innovation, which will oversee the 6bn annual research budget. So I am deeply
conflicted.

Nevertheless, it is a fact that after the US by any measure Britain has the best science on
earth and the best research universities on earth.
[SLIDE]
There are at least three different ways of judging the worlds top academic institutions (academics
do love methodological debate). On all these lists, the US (in green on the slide) has the lions
share of the top 25. But the UK (in red) then comes indisputably next. Far more, on any
measure, than the whole of Continental Europe. And far more for the moment at least than
the whole of Asia.
These institutions are extraordinary factories twenty-first century factories, whose products are
skilled people, knowledge and ideas.
Any other country in the world besides the US would kill to have what we have.
If you ask yourself what, honestly and objectively, are the truly world-class economic assets
that Britain has? It is a short list. Our strong science base would self-evidently be on it.
This is why the Treasury has invested in this agenda, consistently now over a long period as
well as constantly pushing for, and achieving, real progress on improving commercialisation.
[SLIDE]
That is on top of brave decisions taken on student fees with, in the round, a transforming effect
on the finances of Britains universities.
This is all, I would argue, smart microeconomic policy.
Finance for growing business
Slightly more speculatively, I believe something is now finally going right in an area that long
proved intractable the supply of venture capital for new and growing business.
This British problem is as old as the hills, going back at least to the so-called Macmillan gap of
the 1930s. It is an odd paradox that an economy which specialises in financial services, has
plenty of long-term risk capital (from a funded pension system) and hosts the worlds leading
international financial centre, has long been so weak in this area.
An awful lot of Government money has been wasted in flawed attempts to fix this problem.

But the evidence is finally showing positive signs. The best data suggests that provision of
external equity finance to SMEs has been growing quite sharply in recent years more than
doubling since 2011.
And just as important, the infamous valley of death between start-up finance and a stock market
listing is finally attracting smart money - for the first time in my career we are seeing quite big
patient capital funds, particularly in technology, focussed on this area. For the first time we are
seeing significant successful fund raisings particularly by UK life sciences firms of real size,
without their having to leave for the US.
This funding ecology matters; it is hugely shaped by Government policy, especially tax policy; we
are still miles behind the US and there is a lot further to go; but we are finally seeing at least
some apparently green shoots.
City devolution
A late entrant in the potential success list, and a tentative but intriguing one, is City devolution.
To some, the Treasurys belated conversion to the cause of devolution and the so-called Northern
Powerhouse was (to put it mildly) quite surprising. I had some entertaining meetings with
Michael Heseltine as he sought to come to terms with this bewildering late twist in his
extraordinary crusading career.
Leaving aside whatever political objectives George Osborne may have had - if you care about the
growth potential of the British economy, there is hard logic in what he sought to do.
The underlying point is that the gap in productivity and output between the London penumbra and
other second-tier British cities is very large by international standards. [SLIDE]
In one sense we should celebrate this.

London and the wider South East are of course a set of

exceptionally successful clusters, set within a country whose overall economic performance is at
best mediocre. Clearly we should nurture this great success story as much as possible, and we
do the rest of the country no favours to the extent that we choose to suppress it.
Equally, though, it is perhaps hard to imagine a transformation in Britains overall growth potential
which could rely solely on yet further leaps forward in London. Almost as an arithmetic fact, if we

want a further step-change in the UKs growth performance, we simply have to make progress in
our underperforming secondary cities.
The question for the Treasurys growth theorists is: what, if anything, could policymakers do which
could make such a shift more likely?
To be clear, no-one really knows the answer.

But it is at least plausible that handing these cities

greater control of their own destinies is worth a try.

It may not work. At best, some cities are bound to make more progress than others.
But I do draw some comfort from London. Before Sadiq Khan, London has now had two longserving Mayors who are about as different from each other, politically and personally, as it is
possible to imagine. Yet it is striking that they have both been in their different ways
exceptionally pro-growth, particularly in their crucial planning decisions. I very much doubt
anyone could become Mayor of London who did not have a strongly pro-growth vision for the city.
Maybe just maybe it is not a complete coincidence that their collective terms in office have
coincided with an extraordinarily gilded phase in Londons economic life.
Business tax
Finally, I cannot finish the successes list without a nod to the microeconomic policy measure of
which I suspect George Osborne is proudest: his determined and relentless cutting of the
corporate tax rate.
[SLIDE]
A remarkable, even astonishing set of decisions, particularly given the wider fiscal environment.
As Osborne likes to say, this does grab peoples attention in boardrooms in Los Angeles or
Shanghai.
What hasnt been achieved
So thats, as it were, the good stuff.
But there are also some big areas where we have achieved much less, or simply failed.

I offer this personal failure list, if nothing else, as a to do list for my outstanding Treasury
successors.
Planning and housing
The first critical outstanding supply-side challenge for the British economy relates to land-use and
housing.
For this audience, I dont need to rehearse the grisly facts.
[SLIDE]
Real house prices have increased five-fold since 1955, much faster than any other OECD country
over the past 40 years.
This reflects an extreme imbalance of supply and demand.
Residential investment as a share of GDP in the UK has averaged around one-third lower than
other advanced economies over the long run.
With a similar population, France builds on average 200,000 more houses each year than
England.
The UK builds 30% fewer houses per person than the similarly densely-populated Netherlands.
British houses are the smallest in Europe - almost 40% smaller than in the Netherlands.
This all represents a colossal failure of political economy, which harms millions of people.
But under successive Governments the Treasury has simply failed to win the argument, that the
British people and the British economy would be better off, both in living standards and
economically, with a marginally different approach to land use.
Ill leave you with a nice picture [SLIDE] of a bit of our totemic Green Belt, which incidentally
covers 1.5 times as much land as all of Englands towns and cities put together and which has
also been remorselessly growing since the War.

Education and skills

The second big area of failure relates to education and skills.

The UK spends more on education than the OECD average, but despite this we only secure
mediocre educational outcomes.
Our education system is not by any means all bad but it works far better for the slice of the
population which goes on to Higher Education than the slice that does not; and of course a childs
chances of getting into that higher slice are still depressingly closely correlated with social
background.
We have particular weaknesses in so-called STEM subjects (science, technology, engineering
and mathematics), due to continuing appalling shortages of qualified teachers in these subjects in
state schools.
And our education system is uniquely specialised; the A level is a weird international outlier, and
we are the only country in the developed world which thinks it is a great idea to let students give
up maths at 16.
Moreover, these facts all relate to the flow of skills out of the education system into the workforce.
But even if we magically transformed the performance of schools, it would still take a very long
time for that improved flow of skills to reshape the stock of skills in the population a population
in which 49% of working-age adults have numeracy levels at or below those supposedly
expected of an 11 year old. Yet the only arm of the state which reaches into, and is supposed to
do something about, adult skills the Further Education sector has been chronically neglected
under successive Governments, Conservative and Labour.
These are self-evidently not easy problems to crack. And any approach which could make a
difference requires a degree of consistency over time which has always been elusive in education
and skills policy.
Nevertheless, I do question whether it is right that the Treasury, at least in my time (which is to
say, since the early 1990s) has never developed any meaningful agenda in this area. Of course,
I should take as much of the blame for this as anyone else. But even from a narrow finance
ministry perspective, let alone an economics ministry one, getting more value out of our
education and skills spend is self-evidently desirable.

It would be one thing if the Treasury had tried and failed my self-critical observation is that,
perhaps daunted by the scale of the challenge, it has not really even seriously tried.

Infrastructure
Then there is infrastructure.
This was of course a huge personal focus for George Osborne, rarely seen in public without his
hi-vis jacket. It was also a big personal focus for me as Second Permanent Secretary.
We did make some steps forward particularly the priority we rightly placed on ambitious growth
in the roads programme.
But the list of failures is all too depressing.
All credit to Theresa May if speculation is correct that we may finally get a decision on Heathrow.
But it has been an excruciating and surely inexcuseable saga.
Our broadband and telecoms infrastructure is resolutely second-rate.
We got nowhere on addressing the absurd cost of building any kind of infrastructure in Britain.
We have made only very limited progress on simplifying and speeding up decision making and
planning.
Our approach to compulsory purchase is timid, meaning that it is impossible to capture any
meaningful slug of the large land-value uplifts that flow to private developers from big projects like
Crossrail.
And we got nowhere on road pricing.
We did create the new National Infrastructure Commission, with a view to trying to introduce
more of a long-term focus on big infrastructure decisions. But the May Government has decided
not to legislate to establish the Commissions independence; so whilst the Commission remains,
and remains an offshoot of the Treasury, its standing is rather unclear at this point.
Meanwhile there is a crucial unresolved policy question about what infrastructure we need.

[SLIDE]
This is from Rod Eddingtons review, commissioned by Gordon Brown a decade ago. Small is
beautiful; many of the very high-return schemes are small projects returns drop off sharply
beyond the 1bn point do not be seduced by grands projets with speculative returns.
This was not George Osbornes view. If you dared mention Eddington to Osborne (I wouldnt
particularly have recommended it as a career-enhancing move) he would tell you - with relish that the Treasury just wanted to plaster the country with hundreds of roundabouts.
Osborne was right that the Treasury is instinctively Eddingtonite, and I do think much of the
evidence is on Eddingtons side.
Equally, it must be acknowledged the Eddington philosophy is not always and everywhere right
I dont know whether Osborne was right to taunt me the whole time that the Treasury opposed the
M25, though he probably was. I do know that the Treasury strenuously opposed the Jubilee Line
Extension (this was my second job in the Treasury, in 1992) every time I use it I reflect that with
hindsight we were surely wrong; without the new line we could never have had the extraordinary
success that is todays Canary Wharf.
But Eddingtons challenge cannot just be swept under the carpet. What we need is some really
clear, balanced and convincing thinking in this area. How should one think about big projects vs
small? How should they be evaluated against one another? What does differentiate a good
grand projet from a turkey?
To come up with truly convincing answers to these questions is an obvious task and test for
the Infrastructure Commission.
Migration
Finally on the big failure list, migration. Self-evidently, this is a huge issue for the British people
and British politics.
Probably on no subject, including the green belt, does the instinct of technocrats diverge more
fundamentally from the views of many British people.

I have heard it forcefully argued that if a more cautious policy course had been charted on
migration, particularly through the Blair/Brown years, we would not have subsequently reaped the
whirlwind.
Actually though, I am not sure this is really correct at least from the narrow perspective of a
critique of the Treasury. In my experience, the Treasury has always been mainly focussed on
high-skill migration. And I do not personally believe that high-skill migrant flows have been the
main drivers of public opinion on this issue.
If anything, the big fear and frustration for Treasury technocrats in recent years has really been
around the danger that an undifferentiated focus on reduction of overall net migration numbers
could lead to perverse decisions. It is not clear that public anger around migration which is all
too vividly real will be remotely sated, or in any way affected, however many brilliant Indian PhD
students we manage to exclude or deter.
Brexit
This is also a policy area is already being profoundly reframed by Brexit.
The challenge is entirely one of political economy (emphasis on the political).

We plainly need a

new migration policy which is sustainable and commands public acceptance, and which
nevertheless maximises that potential for the right people to come and work and study here.
Devising such a policy will require subtlety, imagination and canniness. But it really ought not to
be impossible, and if Treasury brains can help construct a sensible and balanced answer, so
much the better.
But these Treasury brains are going to be awfully busy because the list of policy areas which
must necessarily now be rethought as a consequence of Brexit is very long.
In fact, Brexit is going to throw up many big policy questions which may in themselves have very
little to do with Brexit.
Take just one example: competition policy. There is no great outcry for a fundamental revamp of
UK competition policy. But much current UK competition law derives from and mirrors EU law.
Clearly that must now change; and that change will inevitably prompt a set of choices around
what we want a future UK competition regime to be. Do Ministers (to take just one instance)
want to take the opportunity, as they have hinted, to reverse the Enterprise Act and put
politicians, not competition technocrats working to clear criteria, back into the driving-seat on

individual merger decisions? Do we really want every major M&A deal to become an uncertain
political bunfight, and to provide the protectionists with the great opportunity that presents? Do
we really want to add yet more time and uncertainty onto what is already one of the slowest
decision-making processes in the world? This is a big decision about what kind of economy we
want to be. It is really not directly Brexit-related. But it is a decision which the fact of Brexit puts
onto the table.
The wider point is that there will be a huge number of these choices to be made in the coming
months and years. Questions like these will be replicated across huge swathes of policy and
legislative terrain and these are all over and above the first-order Brexit questions around
market access, free movement and so on.
These will all in turn present innumerable threats and opportunities for the Treasurys growth
gurus to tussle with.
I emphasise threats and opportunities, because there really are both.
It is not obvious that Britain, once freed of the EU, will necessarily naturally embrace some
imagined libertarian economic utopia. It is not just the EU which wants to protect wetland birds or
clean beaches. In fact in our new liberated mode we already seem to be paradoxically using our
new-found sovereignty voluntarily to adopt some distinctly Continental practices, like workers on
boards.
But there are some real potential prizes to be had. In my post-Treasury life I have two roles
chairing UK Research and Innovation, and in due course chairing Legal and General. It is
interesting that in both these worlds, as it happens, I can see some post-Brexit opportunities. In
the world of science, whilst there are serious and real concerns about movement of people and
access to EU research funding, there may also be a genuine opportunity from reframing a more
UK-focussed regulatory regime on topics potentially ranging from clinical trials, stem cell research
to GM crops. Or with my L&G hat on, that companys ability to invest in infrastructure and other
opportunities is profoundly shaped by an EU regulation, Solvency 2; post-Brexit, the British
authorities should now be able to consider in a less constrained way what prudential regime they
believe is most appropriate.

Challenges of political economy

So these are the challenges. Two general observations about them strike me.

First, if one compares the list with Lawsons reforms, the challenges of today do take the
Treasury into areas which are much further outside its formal responsibilities and its natural
province areas like land use, transport, skills or migration. And these policy areas are
generally longer-burn, and much less susceptible to binary black-and-white decisions, than (say)
getting rid of exchange controls. This makes change, and the campaign for change, an
intrinsically longer-term proposition.
Second, the challenges we face now divide sharply into two distinct types: some are essentially
policy challenges; some are essentially political.
This is an important distinction because the two different kinds of problem require very different
kinds of solution.
In areas like: how to turn around underperforming cities, or how to upskill the stock of the
population, it is really not at all obvious what is the right policy approach that will work. That of
course makes for the sort of policy debate and analysis which Treasury technocrats revel in.
But in areas like: building a new runway for the South East, or road pricing, or skilled migration, or
developing the Green Belt, we do know precisely what should be done, and what the benefits
would be what we dont know is how to sell it. As Jean-Claude Juncker supposedly once
remarked about Ministers discussing structural reform in Europe: we know exactly what needs to
be done; we just dont know how to get elected once weve done it.
That is an altogether different kind of challenge, one which probably plays less to the Treasurys
strengths but which the Treasury nevertheless simply cannot avoid.
Implications for the Treasury
Finally, to come back to my initial question: do we want the Treasury involved in these questions,
or not?
I hope I have made the case that there are more than enough substantial supply-side battles to
be fought, for 100 or so people in the Treasury to earn their keep.
But that does still leave my two groups of critics.

First, the insiders complaint that the growth function corrupts what should be the Treasurys core
role of being sceptical about all forms of public expenditure.
And second, those who argue that the job would be done better by some sort of separate
Economics Ministry.
Taking the first objection, I do think one must concede that there have been some gimmicks over
the years, including some that have been expensive and wasteful. It is also true that the nature
of the Budget and Autumn Statement/Pre-Budget Report processes creates pressure for these.
But as I always used to say to the Treasury teams: gimmicks are our failure. Gimmicks are what
we get if we fail to come up with and find ways to sell - better, more substantive ideas. I dont
believe politicians like gimmicks per se; they resort to them when the Treasury fails to produce
something better and more substantive.
As to the charge that the growth agenda is fundamentally at odds with the Treasurys public
finance responsibilities, I just dont think the numbers stack up. It is true that the Treasurys
growth side would probably generally be sympathetic to the case for more public spending on
science and innovation (total spend 6bn a year) and roads (total spend 3bn a year). That is, in
total, just over 1% of public spending.
The growth side also ought to be more focussed than it generally has been on education and
skills spending (55bn a year, or roughly 7% of public spending) though it has never, I think,
argued for more spending in this area and I am not at all sure it should.
I cannot think of any other areas where any meaningful tension arises between the Treasurys
supply-side and public spending objectives.
The Treasury should, and in my experience can, easily take this not very challenging level of
internal debate in its stride.
But what of the other challenge: would we not be better to separate out a separate Economics
Ministry from the Finance Ministry? Each would each have a clearer mission and focus, so the
theory goes, and to the extent that there is tension between them, this can be better argued out
properly and openly, in Cabinet if necessary.

Plainly this could be done. Plenty of other countries organise themselves this way, though I am
not aware that there is any convincing evidence that they have a stronger track record of supply
side reform than we do.
But there are three downsides, all I think serious.
First of all, the supply-side mission is take it from me hard work. It makes a huge difference
to have a very senior Minister on your side. It is striking that in the past, the Business department
has made an impact on the occasions when it has had a Secretary of State with real political heft
Heseltine and Mandelsons two spells are the obvious cases in point. But these are the
historical exception. Whereas the Chancellor is almost aways a Big Beast. Losing his (or one
day, her) voice would be a big loss.
Second, having financial control is important. It is not so much that there are lots of areas we
need to splurge money on - more that holding the purse-strings gives the Treasury a direct
institutional locus on all sorts of policy issues. An Economics Ministry would have to give this
power up and rely solely on persuasion. The big risk is that it becomes a sort of impotent Think
Tank bleating from the sidelines.
Third, I do not think the Business Department can be the right answer. If the Treasury has its
conflicts, so does the Business Department because whatever its name (I think it has had five
names in my time) the reality is that pretty much every Secretary of State it has ever had has
expected it to be the voice of business in Government, which I am afraid does tend to mean the
voice of incumbent business. In practice this does make it very hard to be the natural voice of
the disruptive innovator.
For me the thought experiment goes as follows: had British governments over 30 years
embraced the philosophy of Lawsons Mais lecture but created an Economics Ministry to do the
job instead of the Treasury, do we think the track record would have been stronger? I am
personally certain the answer is no.
Conclusion
I said at the beginning that the Hammond Treasury has not yet shown its hand.
I hope it is evident from what I have said that I hope very much that the new Chancellor does
decide that the Treasury should have another very serious burst of energy on the supply-side
particularly as we define our economic future post-Brexit and, working with Greg Clarks

Department, shaping the new industrial strategy Theresa May has called for. It is precisely
because the stakes are high now that the Treasury and its heft, rigour and creativity are needed.
As I have described, there is much for my former colleagues to do:

To seize what are some genuine opportunities presented by Brexit

To make a fresh and persuasive case for openness and competition
To achieve far more than I ever could on infrastructure, planning, housing, skills and

migration
And to continue the real Gods work - stopping bad things happening.

I wish them heartfelt good luck and every good wish.

Thank you very much.