Whitehall drama between prime minister and chancellor continues

Posted on November 25, 2016

It is hard to tell who had the upper hand: the mild-mannered man at the despatch box discoursing on “traffic pinch points” and a “step change in [railway] reliability”; or the stoic, occasionally smiling woman sitting at his side.

Yet, despite affable appearances, Philip Hammond and Theresa May are the latest protagonists in a repeated Whitehall drama: the contest between chancellor and prime minister.

Only four months into its latest run, it is too soon to judge whether the Autumn Statement — with its profligate increase in public borrowing — amounts to a populist bid for political support by a new but insecure prime minister; or a deft tactical retreat by her chancellor, that despite appearances leaves Treasury orthodoxy more or less intact.

At the heart of the conundrum is the ever-evolving nature of the most important relationship in government. By the middle of the 20th century, the chancellor had supplanted the foreign secretary as the second most important member of the cabinet. William Gladstone did the spadework when he held the office 100 years earlier, creating the theatre of the annual Budget statement, strengthening Treasury control and the institution itself, and imbuing it with a deep commitment to sound money and free trade that lasts to this day.

In a Whitehall dominated by producer interests endlessly lobbying for a special tax break here, a new subsidy there, the Treasury became the department that however imperfectly represented the interests of the consumer, the taxpayer and future generations.

David Lloyd George, author of the People’s Budget of 1909, harnessed the emerging welfare state to strengthen the power base of the office further. And the post-second world war consensus that the government should manage employment levels brought the role closer to centre stage.

Physical proximity to the prime minister is all-important. The foreign secretary has a seven-minute walk to 10 Downing Street from the official residence at Carlton Gardens. Since Tony Blair took over the Number 11 flat vacated by Kenneth Clarke in 1997, it has been impossible for prime ministers to reach their office in Number 10 without passing the chancellor’s study.

The chancellor’s position was further reinforced by the operational independence granted to the Bank of England by Gordon Brown. So has George Osborne’s creation of an independent Office for Budget Responsibility. No longer can the prime minister tell the chancellor to cut interest rates or seek to fix a widening deficit by arguing for a more optimistic economic forecast.

The rhythm and regularity of British economic crises created by the country’s chronic tendency to overconsume has given chancellors a special role. Their hold on the purse strings means they are the only politicians who can call time on an emerging bubble and pull the country back from the abyss.

But just as the chancellor has grown more important in recent decades, so has the prime minister. The authority of the office has been enhanced by the de­cline of cabinet government and a move to a more presidential system. The power to hire and fire helps manage colleagues, and there is the ultimate sanction: changing the machinery of government. Harold Wilson tried that with the Department of Economic Affairs but it failed. Subsequent prime ministers, spurred by frustrated advisers, have toyed with clipping the Treasury’s wings. But in the end they have backed off, largely because a strong prime minister needs a strong chancellor.

Mr Blair and David Cameron understood this, though Mr Brown and Mr Osborne adopted diametrically different approaches to handling their respective prime ministers. Mr Brown kept his cards forever close to his chest: it is alleged that Mr Blair was reduced to pleading “give me a hint, Gordon” about the contents of the 1998 Budget. Mr Osborne exploited his personal and physical proximity to the prime minister, playing a leading role at Mr Cameron’s morning and afternoon meetings and benefiting from Mr Cameron’s deep commitment to Treasury orthodoxy.

A strong chancellor will value the prime minister’s prerogative to advise and warn but will not take instruction. As we mark the 40th anniversary of Britain’s loan from the International Monetary Fund, we should be grateful to James Callaghan for his masterful orchestration of the cabinet in support of Denis Healey’s cuts package. Similarly the partnership between Margaret Thatcher and Nigel Lawson, until 1987, and that between John Major and Mr Clarke, were based on mutual respect and a recognition the chancellor was in the lead when it came to economic decisions. In each of these cases, the prime minister had previously been either chancellor, a Treasury special adviser or an opposition Treasury spokesperson.

Mrs May is unusual in having no Treasury experience, though she is the first prime minister to have worked at the Bank of England. If she feels she has had to concede a little too much to the Treasury, she has the consolation that a focus on the medium term is likely to work to her advantage. And if it does not, she can always relaunch her government in a year or two with a chancellor more to her liking.

Equally, if Mr Hammond feels a little bruised by the prime minister’s determination that he provide more support for those who are “just about managing”, he should reflect that the Budget is a long and oft-repeated game.

Alistair Darling came through some difficult encounters with Mr Brown with his authority enhanced. And prime ministers who fall out with their chancellors rarely last long.

The writer is a former permanent secretary to the Treasury and is now visiting professor at King’s College London

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