Treasury Control and the prospects for green industrial strategy in Britain

The Treasury’s powers and priorities impinge upon environmental, energy and industrial policies. Understanding and reforming them is a vital step for creating a green industrial strategy

Martin CraigThe recent consolidation of the industry and energy portfolios in the new Department for Business, Energy and Industrial Strategy (BEIS) has sparked considerable speculation among environmentalists and policy analysts, especially given the removal of an explicit reference to climate change from the new department’s name and the addition of ‘industrial strategy’. Is this a downgrading of environmental policy objectives, they ask, or a logical consolidation of related functions?  And does it signal prime ministerial support for an ‘entrepreneurial state’ and an end to the residual and reactive industrial policies that have prevailed in Britain throughout the neoliberal ascendency?

Those who fully acknowledge the ecological crisis afflicting the world’s economies are often uneasy about the preoccupation with economic growth in these conversations. Yet for the optimistic among them, the changes to Britain’s governmental machinery raise the possibility (however slim) that British policymakers might embrace and build the institutional capacities necessary for a green industrial strategy – a set of coordinated policies at the intersection of environmental and economic policy with which to bring about a green transformation of the British growth model.

It is of course too early to judge the significance of BEIS, yet it is perhaps timely to consider some of the political barriers facing would-be green industrial strategists. Speculation frequently centres on the appetite of Theresa May when considering the scope for new approaches to economic policy.  Yet historically speaking it is not the Prime Minister but H.M. Treasury that has proven the most formidable barrier faced by past advocates of a more substantive and strategic approach to industrial policy.  In my new SPERI paper I argue that a better understanding of the relationship between the Treasury and other departments is imperative to understanding how a green industrial strategy could be articulated in Britain.

The influence of the Treasury features prominently in histories of British industrial policy and the related imbalance that exists between Britain’s financial and productive sectors. At times of economic crisis, the Treasury tends to pursue macroeconomic policy priorities that undermine government support for industry, instead prioritising the repair of the existing finance-dominated economic model.  Historically, these often took the form of deflationary budgets intended to maintain exchange rate commitments.  Yet the post-2008 economic strategy of ‘recovery through regressive redistribution’ can also be seen in these terms where it has entailed smaller budgets for industrial policy, the concerted defence of asset prices and the revival of debt-led growth.

The Treasury is an unusually powerful department, and utilises its pervasive influence (known colloquially among officials as ‘Treasury Control’) to neutralise threats to its policy priorities. It is able to do so because of (amongst other things) its control of departmental expenditure limits, its oversight and veto of departmental spending priorities and its stipulation of the terms of public sector cost/benefit analyses.  This grants it an unparalleled position within government to monitor, bargain over and constrain the direction of policy made in other departments so that they fit its priorities.

There are a number of themes that have historically framed the Treasury’s priorities (we might call them the ‘Treasury view’). It tends to be sceptical of the ability of other departments to control costs, leading to a preoccupation with cost minimisation.  It tends to be sceptical about the ability of selective industrial policies to yield superior outcomes to the market, leading to a generally uncritical attitude to market allocations of investment within its preferred macroeconomic policy framework.  Finally, and relatedly, it tends to fixate on a narrow range of macroeconomic policy indicators and the assumed short-term relationships between them, rather than a considering the relative long-term merits of different possible development paths.

At times of economic crisis such as post-2008, these themes prioritise the repair of the existing growth model with as few adaptations as possible, a stance that runs counter to the kind of transformative change and extensive long-term investment implied by green industrial strategy.  Treasury Control thus has rather serious implications for the development of such a policy agenda in Britain today.

Climate change does not register as a serious threat to future growth on the Treasury’s radar, and nor does it perceive its mitigation as an economic opportunity. This much is shown by the preferential tax treatment it offers fossil fuel extractors and industrial energy consumers, as well as recent reforms to carbon taxes that mitigate their potential to incentivise emissions reductions.  In these respects, the Treasury can be seen as running parallel energy and environmental policies in support of its macroeconomic priorities.  Concomitantly, the Treasury is also acting to contain the ability of other departments and agencies to articulate alternative trajectories.  In the process, the nascent green industrial strategy capacities which Britain has developed to date are sacrificed to the goal of growth model repair.

One example of this is the imposition by the Treasury of caps on the scale of renewable energy subsidies that BEIS can raise through levies on consumer bills through the ‘levy control framework’. A projected overspend identified by the Treasury led to a significant reduction in solar energy tariffs.  Subsequent analysis has shown there to be little basis to the Treasury’s claim that this action was necessary to protect economic recovery.  Yet the move did serve to cushion the likely unpopular impact of renewables subsidies on household disposable incomes at a moment when Treasury priorities were elsewhere eroding them, bolstering the legitimacy of its preferred macroeconomic policy.

Another example is the disappointing story of the Green Investment Bank (GIB), a public financial institution with a statutory mandate to invest in green infrastructure projects that is now facing privatisation. The GIB was the closest Britain has yet come to establishing an institution able to make the kind of long-term investments in the productive economy implied by an industrial strategy.  Yet the institution was hamstrung from the outset by the Treasury’s refusal to allow it access to the capital markets.  Doing so would have added the institution’s liabilities to those of the government, and would therefore have conflicted with the Treasury’s aim of reducing national debt.  Privatisation will allow for capital market access, but it far from clear that the privatised institution will be able to access credit as cheaply or have sufficient incentive to make long-term green investments.

All of this raises the question of why the Treasury pursues the priorities that it does in relation to environmental policy.  On this, there is little consensus in the academic and policy literatures.  Some analysts highlight the design of the organisation itself, some its intellectual and administrative culture and tools, and some to the attitudes and personality of the Chancellor of the Exchequer of the day and other senior personnel.  There is likely to be truth in all of these perspectives – the challenge lies in disentangling the various factors.  Research currently being undertaken at SPERI aims to do precisely this. It is on this basis that appropriate reforms could be specified, and the barriers to a much-needed green industrial strategy addressed.