Penny wise and pound foolish

David Henderson and David Sawers warn against cost-cutting at the Treas ury

The Chancellor of the Exchequer has decided that he can do without 25 out of 100 existing senior management posts in the Treasury. In doing so, he has adopted most of the proposals of the recent "Fundamental Review" of the Treasury's costs, despit e the reservations expressed by the Treasury Committee of the House of Commons. The committee feared the changes would reduce the Treasury's effectiveness and weaken its control over public expenditure.

These fears are well founded. Reducing the Treasury's staff is bound to weaken its ability to influence economic policy and the control of public expenditure. This ability has to be based on knowledge: and such knowledge can be acquired only if the Treasury is adequately staffed.

The importance of the Treasury in the government machine is that it is much more than the department that produces an annual budget: it is the only department that can examine all aspects of economic policy, and it should be concerned with the effectiveness as well as the level of the main areas of public expenditure. These tasks have not been performed so effectively in the past as to suggest that less effort needs to be devoted to them in the future.

The "Fundamental Review" of the Treasury - and the earlier White Paper on the Civil Service - were less concerned with the effectiveness of policy-making than with administrative tidiness, and with the scope for eliminating overlapping tasks. They therefore argued that there was scope for saving staff in the Treasury by reducing its efforts to "second-guess" other departments, by concerning itself less with details, and by worrying less about reducing public expenditure in the short term.

This misses the main point: in judging the effectiveness of the government machine, and of the Treasury in particular, it is the quality of decisions that matters most. The success of economic policy, and the value for money provided by public expenditure, can have far more effect on the welfare of the community than can the number of senior civil servants involved.

Effective policy-making requires that competing ideas be generated and then put to the test. Britain needs to increase, not reduce, the extent to which policies and major expenditure decisions are subject to scrutiny - by experts outside as well as inside the government machine. There should be more discussion of policies, more "second-guessing" of government departments' proposals.

The Treasury, as the central economic department, has a unique role in these discussions. Its effectiveness in this role depends on its staff knowing what they are talking about, and they can gain this expertise only if they have been involved in the issues from the start. The immersion in detail needed to obtain this expertise should not be begrudged; and the "second-guessing" of other departments that it will permit should be regarded as the essential basis for the Treasury's role - not as wasteful duplication of effort. Just as second opinions are regarded as good practice in medicine, so the development of policies should not be left to the departments that are directly responsible. To constrain possibilities in this way, for no better reason than to save a few staff positions, is not only unimaginative, but dangerous.

Policy issues in which the Treasury should be fully involved include all major expenditure programmes. But it should also be concerned with economic policies that do not involve public expenditure, such as competition policy and trade policy, for the effectiveness with which these policies are applied will affect the economy's performance. Responsibility for them cannot therefore be left solely to the department directly responsible - the Department of Trade and Industry.

The Treasury's position as the central economic deparment means that it ought to take the lead in developing and co-ordinating government policy. To do this effectively, it must be adequately staffed with industrial economists as well as with the macroeconomists who produce its forecasts. Expertise is especially important to the Treasury if it is to control public expenditure effectively. The Treasury has, historically, exercised detailed control over the expenditure of each department, which had to agree the content as well as the total of its expenditure with the Treasury every year.

The philosophy behind the announced cuts is that the Treasury should adopt a more strategic, less short-term and less detailed approach to the control of public expenditure. Government departments will be given more freedom to decide the content of theirexpenditure programmes so long as their total expenditure meets the Treasury's objectives.

This approach is naive. Delegating responsibility for the components of expenditure to departments will weaken control over the total of expenditure unless the government is willing to let departments bear the consequences of over-runs. If these consequences would be harmful for government policies, it is unlikely the Government would refuse to accommodate such over-runs in a department's budget. It is thus an illusion to believe that controls over the total expenditure of government departments can be a substitute for well-informed scrutiny The potential danger in relaxing control over public expenditure is shown by the experience of the recent past. Major programmes, such as military aircraft and missiles, civil aircraft, nuclear power and industrialpolicies, have involved a waste of public money on a scale that could not generally be accommodated within the budgets of the departments concerned. The scope for such waste has been reduced by privatisation, but the Government remains responsible for defence procurement; it stil l provides launching aid for civil aircraft; it finances the road programme, and subsidises public transport; it supports large projects in areas of high unemployment; it maintains huge spending programmes on the health service, education, pensions and s ocial welfare.

In all these areas, the Treasury needs the expertise that can be obtained only by familiarity with details if it is to ensure effective control over the totals. The Treasury should be competent to act as the informed critic of such programmes, and so improve their effectiveness. Obtaining better value for money from public expenditure should be a conscious and accepted aim, besides controlling its total amount.

The decision to cut the Treasury's staff, and the review on which this decision is based, have precisely the weaknesses traditionally attributed to the Treasury itself: they are concerned with candle-ends. This preoccupation with cost-saving in the shortterm threatens to weaken the Treasury's ability to develop ideas of its own and reduce its ability to ensure that public money is used to good purpose. For a government said to be running out of ideas to reduce its sources of ideas is surely misguided.

David Henderson is a former chief economist of the OECD and David Sawers is a former government economist.