Treasury orthodoxy has triumphed – but it is what the people want

As Jeremy Hunt prepares to announce a reality-based Budget, there is no escape from hard choices

Welcome to Jerenomics. The prime minister coined a groanworthy new word in an interview yesterday, trying to make a doctrine out of the chancellor’s name. He asked: “Is that better than Huntonomics?”

Not really, but what he meant is that Treasury orthodoxy has triumphed, and the terms of the victory will be set out by Jeremy Hunt in the autumn statement on 17 November. Liz Truss tried to defy something she called “failed Treasury orthodoxy”, but now it is back – “with a vengeance”, as Nick Macpherson, the former Treasury permanent secretary, put it in a lecture on Tuesday.

Given that it is back, we ought to find out what it is, and Lord Macpherson is well qualified to tell us. His lecture, to the Strand Group in Edinburgh, brilliantly teased out the contradictions in thinking about the Treasury that created the conditions for Truss’s failure.

He pointed out that, at different times, the “Treasury view” had defended attempts to maintain the value of the pound against other currencies, then advocated a floating exchange rate. It supported public spending restraint in the 1930s depression, then promoted Keynesian demand management after the war, until it went wrong in the IMF crisis of 1976. More recently, though, it decided that you could spend your way out of a recession after all, after the financial crash and coronavirus lockdowns.

His argument, then, was that there is no consistent economic theory held by the Treasury as an institution, independent of the politicians who lead it and the prevailing ideas of the time.

For example, membership of the European exchange rate mechanism, which ended in national humiliation in 1992, was supported not just by senior Treasury officials, but by the three preceding chancellors, Geoffrey Howe, Nigel Lawson and John Major, and by the CBI, the TUC and the Labour opposition.

In the end, Lord Macpherson said, the Treasury biases amount to propositions that “verge on being truisms”: that “stability, in particular price stability, is good for the economy”, and that “credibility matters”. Speaking as someone who has tried, as the chief civil servant in the department and since, to enhance its institutional memory, he said: “The disasters of 1967, 1976, 1992, 2008 and September 2022 are etched in the collective consciousness of the Treasury. This perhaps accounts for the Treasury’s obsession with frameworks designed to save the government from itself.”

His view of the Truss-Kwarteng experiment was only thinly concealed. “It generally takes two generations for a bad idea to be repeated,” he said. He ended the lecture by quoting Leo Pliatzky, a former second secretary of the department, who said in 1986: “The Treasury stands for reality.”

In other words, there may be different views about economic policy, but the Truss-Kwarteng Budget broke the bounds of basic arithmetic. As Lord Macpherson said in answer to questions after his lecture, “The reason you do have to count is that the markets will just turn against you.”

Thus Jerenomics (it is not going to catch on, is it?) is constrained in trying to recover credibility with the markets. The sums have to add up, but the political scope for dramatic changes in policy on tax or spending has also narrowed. There will be criticisms of the autumn statement when Hunt delivers it that he has over-corrected for the mistakes of his predecessor, cutting spending too austerely or raising taxes too steeply, but that will be because, as Lord Macpherson said, “credibility is hard won and easily lost”. That is just what Pliatzky called the “reality”, from which, as Michael Gove put it, Truss took a holiday.

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This is underlined by the political consensus. Rachel Reeves, the shadow chancellor, will refrain from offering alternative policies to the autumn statement – beyond trivial tax increases on non-doms and private school fees. Broadly, the government and opposition agree on fiscal policy. The national debt must be sustainable, which means it should be falling as a share of national income within five years; public spending cannot be cut much, because the NHS is sacrosanct and benefits have to keep up with prices; so taxes will have to rise.

Trussonomics was, in essence, a complaint that we shouldn’t have started from here: that it was a mistake to have spent so much to protect jobs after the financial crash and the lockdowns. But it wasn’t “Treasury orthodoxy” that led to those big one-off increases in government borrowing, any more than it was when Truss herself promised even more borrowing to protect people from high energy bills.

In each case, it was politicians responding to democratic pressure from the people, demanding that the power of the state be deployed to protect them. And, although it is fashionable to decry popular ignorance of economics, my view is that the people accepted that these interventions would have to be paid for. That is Jerenomics.