3. Safety in numbers
The Treasury, the Bank of England and the Office for Budget Responsibility
I. The problem
The Treasury
During the Second World War, as other departments of state expanded, the Treasury experienced a ‘loss of power1Its traditional role as the guardian of the national purse strings remained but, during and after the war, this was tempered by the expectation that ordinary people’s wellbeing must now play a crucial role in democratic politics, and by the state’s larger presence in the economy.
But in the 1970s, with inflation, debt and the deficit rising, repeated attempts to curb government spending culminated in the 1976 IMF crisis. This saw the government forced to take out an emergency loan, and it remains the modern Treasury’s foundational nightmare.
The Bank of England
The Bank was nationalised in 1946, and worked in cooperation with the government, which set interest rates. This set-up survived the transformations of the Thatcher era. But in 1992, in a vain attempt to keep sterling in the European Exchange Rate Mechanism, Conservative Chancellor Norman Lamont raised interest rates twice in one day, from 10% to 12%, and then to 15%. ‘Black Wednesday’ was the monetary policy equivalent of the IMF crisis. Once again, politicians appeared to have shown themselves incapable of managing the nation’s finances.
II. Power shift
The Treasury
In response to the crises of the 1970s, New Right economists, among them public choice theorists, argued for a radical break in economic policymaking, based on a new model. Elected politicians – self-interested ‘economic men’ like the rest of us – should no longer be so trusted with public money. Their wayward judgement should be constrained by measurable rules. The New Right’s ‘desire to prevent democratic damage to the stability of the free market order reinvigorated a vision for rules-based economic policy’2
After the election of Margaret Thatcher in 1979, something of this new approach was imposed on the Treasury’s resistant Keynesians. This liberated its traditional distrust of spending departments, and served to concentrate its power.
By 1997, the prioritisation of low inflation and Treasury control of departmental spending was so entrenched that, on returning to power, Labour embraced the model, and introduced an addition: fiscal rules. Chancellor Gordon Brown designed these to reassure markets that Labour could be trusted, but ensured they ‘only marginally constrained spending’.3
The Bank of England
One of the tools the Thatcher government had deployed to drive down inflation in the years after 1979 was the power to set interest rates. One Treasury minister would later write that monetary policy was ‘at the very heart of our new economic approach’.4
In the 1990s, however, Black Wednesday bolstered an emerging academic analysis that this grave responsibility might be better placed elsewhere. On winning power in 1997, New Labour made the Bank of England independent, outsourcing the power to set interest rates to the Bank’s new Monetary Policy Committee (MPC). Government’s role was limited to giving the MPC a rule to which to work: it should keep inflation below 2%.
As former Treasury permanent secretary Nick Macpherson told FGF in 2024, independence was ‘consistent with the consensus of the early nineties, the sort of globalist liberal institutional framework, that there are some decisions which you should leave to technocrats, because you’ll get better outcomes’5This was a pointed relinquishing of power. But it worked: the economy continued to grow, even if interest rates intended to curb inflation also cost jobs in manufacturing.6
Only in 2008 did the Crash force political focus back onto the power settlement embodied in central bank independence.
The Office for Budget Responsibility
In the wake of the Crash, the new Coalition government outsourced fiscal forecasting from the Treasury to a new, independent Office for Budget Responsibility (OBR).
This was a deliberate reprise of Labour’s surprise declaration of Bank independence, drawing on the same academic consensus. Labour accepted the new settlement ‘partly to signal their commitments to sound money and fiscal discipline’
7 The OBR’s advocates argue that it has improved the rigour of the policymaking process, and point out that the government still sets the fiscal rules.
III. Overextension
The Treasury
The Crash was caused by the hubris of post-1979 economic thinking, in the UK and the US alike. In response, the Brown government ran up debt to prevent catastrophe – but was still expected to show the financial markets that it could be trusted. Chancellor Alistair Darling accordingly tightened the fiscal rules. This further empowered the Treasury to discipline departmental spending, a tool Darling’s Conservative successor George Osborne used to impose austerity cuts, intensifying the application of the post-1979 model.
This approach initially had broad public support, but as growth failed to revive, stagnant pay and regional inequality stoked discontent. Unconventional Conservatives like Nick Timothy, Theresa May, Boris Johnson and Michael Gove pushed first for more help for the ‘just about managing’, then for ‘levelling up’, but came up against orthodox chancellors. Criticism that the Treasury’s Green Book cost-benefit analyses had long favoured the prosperous south-east won a hearing, but overall the Treasury’s wariness of capital spending, enforced by strict adherence to the fiscal rules, won out.
The Bank of England
Similarly, the Crash did not lead to government taking back control of interest rates. Instead, the Bank retained control. With interest rates already low, it began a process of quantitative easing (QE) – the organised purchase of bonds to raise their prices and reduce longer-term interest rates, thus making borrowing cheaper and encouraging spending in the economy. Critics suggest QE ‘represented a major expansion of [the Bank’s] powers’.8
This saved stricken banks and with them the economy. By pumping liquidity into the economy, QE boosted asset prices, even as pay stagnated, worsening inequality.
As a trio of academics wrote in 2016, ‘In the wake of the financial crisis, central banks accumulated large numbers of new responsibilities, often in an ad hoc way.’9
Times had changed, leaving the basis on which the independence had been granted behind. As they put it: ‘The old academic assumption that the more independent a central bank is, the better it is, should no longer hold.’ One of the authors was Ed Balls, who as a special adviser to Chancellor Gordon Brown, had been instrumental in making the Bank independent. While standing by that move, he argued that ‘the reforms we’ve seen over the last few years have hugely concentrated power in central banks’, and that there should be greater government oversight.10
The Office for Budget Responsibility
In 2022, the new Prime Minister Liz Truss saw the OBR as the over-cautious enforcer of orthodoxy. In an attempt to jump-start economic growth, her Chancellor Kwasi Kwarteng abjured the now-standard OBR prior review ahead of his ‘mini-Budget’, and announced £45bn of unexpected, unfunded tax cuts.
The City flinched; the pound sank to an all-time low; interest rates were forced up. Political recklessness interacted with a disastrous technical failure of strategy by the pension fund industry. The Bank of England intervened to save it, but Truss and Kwarteng were forced to resign. The debacle was widely read as revealing limits that no government could now transgress. The OBR has become ‘far more powerful than it was in 2010’.11
IV. Entrenchment
The Treasury
How does the Treasury’s culture and self-image embed the post-1979 model: its insistence on tight control of departmental spending, its short-termism, its fear of capital projects?
According to former officials, Treasury culture venerates certainty, particularly when expressed in numbers. As the guardian of the public finances, it wants to be as sure as possible that an investment of taxpayers’ money will generate a return. Secondly, subjective judgements risk implying bias, in breach of civil service impartiality. Treasury officials think of themselves as ‘the least biased people. Everyone else has got some special interest they’re trying to deal with… And only they have the bloodless logic to understand.’12
One danger of this is that it leads to a reliance on data even when its authority is an illusion. Any projection of the impact of future spending is, finally, a guess. Nonetheless, having numbers to hand helps win arguments. There is also a temptation to use quantification as a fig-leaf for the exercise of power, rejecting proposed spending plans on the grounds that they fail a cost-benefit analysis, rather than simply because they are not a priority.13
Alternatively, the spectre of subjectivity can be warded off through adherence to the authority of process, standards and rules.
The second danger is what quantification and rules exclude from view. Transformative improvements, like the impact of innovating, cannot be predicted and quantified in advance. Over-reliance on rules can foster damaging risk aversion: so long as officials follow the rules they have a defence, even if things go badly wrong. If they take a risk and it works, they may not win any credit. This raises the risk of bad outcomes for the public, further damaging the reputation of the democratically run state. But the Treasury may have no idea this is happening.14
The Bank of England
The creation of the Bank of England’s MPC served to institutionalise distrust in politicians, which was budding in the 1990s and has flourished ever since. To its critics, this reform entrenched an irreducibly political set of priorities and limits – not least the New Right priority on fighting inflation rather than low pay and unemployment – and did so by moving power from politicians to technocrats. But the advent of the MPC, staffed as it was by ‘Oxbridge economists, many of them embraced by the City or the Treasury’, also triggered the suspicions of industrialists ‘who saw the cost of money being settled by people with none of the experience of manufacturers’.15
This was not, however, a straightforward concentration of power. Under the new arrangement, the government sets the inflation target; this shapes the MPC’s decisions on the interest rate; this – and their own target – then shapes government’s fiscal decision-making. This created an elegantly-designed accountability sink, dispersing power round an institutional loop. Questioning the priorities and limits that underpinned it now risked upsetting the whole delicate architecture. Before 1997, chancellors had overruled the Bank on interest rates; afterwards, doing so was held to threaten Britain’s macroeconomic credibility.
The long period of growth and low inflation through the 1990s up to 2008 established central bank independence and its accompanying taboos as common sense. As the economist Leah Downey argues, the ‘central bank’s epistemic authority, as an independent body of experts pursuing best practices’ has allowed it ‘to shape what the legislature conceives of as possible’.16
This survived the Crash, because the fear of politicians’ recklessness, which underpins the whole concept of central bank independence, remains.
Downey suggests that this distribution of authority has lasted, in part, because politicians are ‘frightened of the responsibility that comes with exercising political power’.
The Office for Budget Responsibility
Osborne’s creation of the Office for Budget Responsibility further institutionalised the belief that politicians cannot be trusted. The OBR embodies a political attitude in its underlying premises: that the economy is measurable and that what is measurable is what matters; that the economy should be run on the basis of rules.17
Here too, insistence on short-term quantification skews perceptions. The costs of public spending ‘are reasonably easy to quantify, especially in the short-term, whereas the benefits aren’t’. The OBR scored Osborne’s cuts to Sure Start as a saving, for example, ‘but it made no attempt to quantify the long-term costs’, which likely deprived children of significantly improved health and education outcomes.18
Yet the technical veneer makes such mistakes harder to stop, as does the fear the OBR encodes – of profligate politicians tanking the economy. Nonetheless, as the political economist Ben Clift writes, in reality, ‘rules-based economic governance is inherently discretionary, and independent fiscal oversight involves extensive judgement’, and economic knowledge is ‘contested and ideological’. At issue is ‘the appropriate role of the state’.19
Alongside changes to the fiscal rules, the OBR has over time rethought its approach as its modelling has repeatedly failed to match fast-changing reality. More broadly, the boundaries of acceptable economic thinking have receded, not least as first the Crash and the failings it revealed, then the Covid pandemic’s overwhelming demands, ‘disrupted some settled economic wisdoms about the role of the state’.20
The considerations the model excludes have repeatedly tried to make themselves heard, whether through the Brexit vote, the vote for levelling up in 2019, or the vote for change in 2024. Yet as much as the OBR strives to adapt, it is compelled to stick to its remit. Immovable fear meets increasingly irresistible demands for change.
V. Public discontent
Taken together, the post-1980s Treasury, the MPC and the OBR have institutionalised distrust in politicians. It is therefore unsurprising that the public has come to distrust politicians.
The Treasury
The danger for Treasury ministers of presenting spending choices as having been imposed on them by external forces, rather than arguing confidently from principle, is that it suggests that the government is not in control.
Austerity fuelled several of the ongoing drivers of discontent, from increased poverty to the disappearance of bus services, libraries, Sure Starts and leisure facilities, via the long-term lack of effective regeneration to help deindustrialised areas recover from the original impact of this economic model in the 1980s. The closure of youth clubs has fuelled shoplifting, drug offences and other criminal activity, including violence.21This is exacerbated by the austerity-worsened decay of the criminal justice system, from policing, through the court system to the probation and prison services22 In this context, merely explaining the difficulties of taking decisive action, rather than taking action, is dangerously provocative.
The Bank of England
Downey links the ‘astonishingly widespread disillusionment with democracy’ and the ‘rejection of elites and experts’ directly to central bank dominance over political decision-making: ‘Contemporary dissatisfaction with democracy reflects a sense that voting makes little difference because the people one votes for do not exercise meaningful control over the bureaucrats they are meant to govern.’ Addressing this is less an ideological move, more – as with Britain’s periodic shifts in ownership of its public utilities – a matter of needing to give the system an occasional shake-up to prevent the accretion of power. Preserving a democracy’s health, Downey argues,
‘requires the legislature to regularly revisit the terms and conditions of delegated powers. In a dynamic world, this ensures that our approach to governing policymaking is sensitive to changes in social preferences, the environment, and innovation. It prevents ossification. Even more importantly, regularly revisiting the terms and conditions of delegation is itself an expression of political power. By regularly flexing this muscle, the legislature reminds both itself and its administrative delegates who is in charge.’23
This entails actively managing the framework within which democratic government makes decisions, rather than passively – or unknowingly – accepting it.
The Office for Budget Responsibility
In summer 2025, backbench Labour MPs rebelled over the welfare reform bill, in the light of the OBR’s assessment that planned cuts would save £1.6bn less than ministers thought, and the Chancellor’s consequent decision to make additional cuts to make up the shortfall.
Many Labour MPs had accepted the need for welfare reform, but the spectacle of orthodoxy’s rules and quantifications so visibly overriding the wellbeing of disabled people was felt to be intolerable. If Liz Truss’ defeat by the forces of orthodoxy marked one hard limit on trying to dodge the OBR, the defeat of the welfare reform bill appeared to mark a hard limit on obeying it.
VI. Government responses
The Treasury
On becoming Chancellor in 2024, Rachel Reeves raised taxes and reformed the fiscal rules to allow for a significant increase in borrowing to fund investment in Britain’s infrastructure while protecting most working people, raising the minimum wage and restoring public sector pay. The fiscal rule amendment was a ‘fundamental structural change’; by ‘moving away from a narrow focus on debt and deficits’24
he allowed the government to direct an additional £100bn in capital spending over five years (which increased again at the Spring Statement in 2025).
The new Chancellor also commissioned an audit of the Green Book, given criticism that its emphasis on cost-benefit analysis tends to undervalue the potential long-term benefits of transformational projects (following an earlier review initiated by her predecessor Rishi Sunak). In response, the Treasury committed to ‘improve the Green Book guidance on appraising transformational change’25
If, as that first Budget promised, the government ‘intend[s] to change, fundamentally, the UK’s prevailing economic model’, rescuing ‘the country from its post-2008 torpor’26
it may need to go further in addressing old ideas which constrain its power.
Having won the trust of the bond markets in very difficult circumstances, this is a matter of careful gradualism, but the government might usefully consider acknowledging the limits of quantification and rules and their capacity to ‘take the politics out’ of public policy, and the unavoidably political nature of institutions like the MPC and the OBR. Granting that government decisions are necessarily political, and making a confident case on that basis – rather than standing on obedience to external rules – could help to counter distrust in politics, while providing officials with a clearer direction of travel towards achieving political goals.
Senior veterans of the civil service and the Bank of England have called on government to acknowledge the volatility of forecasts and avoid excessive adherence to the arbitrary targets that follow from them.27As the former Treasury official and special adviser Dan Corry points out, a confident minister can simply overrule Green Book calculations. Greater political creativity, decisiveness and control would serve to override some of the constraints on government power we have been exploring by attracting greater capital investment. As one former banker puts it, with reference to infrastructure spending, levelling up, and other areas:
‘if there was more clarity and there was more certainty from governments about the type of things it cared about, and its risk appetite and the types of interventions it was prepared to make, then I think that would definitely help stimulate more private investment in support of government objectives.’
To do this, there is a fear that needs to be faced down. The lesson taken from the fall of Liz Truss has been that anything short of reverence for the OBR spells disaster. But as the welfare reform bill rebellion shows, this can also trigger political calamity. Truss’ fate was not primarily sealed by ignoring the OBR, but by the markets’ adverse reaction to her government’s inflationary tax cuts. Other factors included the disaster waiting to happen in the pensions industry, and the controversial intervention of the Governor of the Bank of England, which critics suggest fuelled market panic and forced Truss out. Truss prioritised unfunded tax cuts over the public’s financial wellbeing, but the lesson from this is not to prioritise arbitrary targets over the public’s interests instead.
Further steps could include:
- Review previous future projections, not to attribute blame but to learn lessons, and help reduce risk aversion by highlighting instances (the 2012 Olympics; Crossrail) where projections were inaccurately negative;
- Develop early experiments in negotiating spending settlements with several departments at once across broad policy themes, such as Managing Public Money; and
- Require all deputy directors in the Treasury to have worked at a senior level in a delivery department.
The Bank of England
Given the intense, ongoing pressure on the public finances, and therefore on the legitimacy of mainstream democratic politics, it is necessary to locate points where old orthodox approaches are still being applied despite the passing of the circumstances that prompted them. Where this is creating unsustainable unfairness, it presents opportunities for a careful assertion of ministerial power.
Over the last few years, the Bank of England has shifted from quantitative easing to ‘quantitative tightening’ – unwinding QE by reducing its stock of bonds, partly by selling them back to financial institutions, for less than it originally paid for them. Voices across the spectrum, from the New Economics Foundation to Reform UK, have complained that, as a result, tens of billions of pounds of taxpayers’ money are being transferred to commercial banks. This is because the rise in interest rates since post-Crash QE began means that ‘the income the Bank of England receives from its investments is much lower than what it has to pay banks on their deposits’28
This has led to proposals that the reserves the Bank holds should be ‘tiered’, returning to its pre-2009 practice of paying interest on only part of commercial banks’ reserves, as the European Central Bank does. Such an approach has been backed by two former deputy governors of the Bank, Charlie Bean and Paul Tucker, and by Gordon Brown.
One counter-argument is that this would constitute a ‘tax’ on banks – a claim even advanced, in January 2024, by the Commons Treasury select committee. But holding reserves is simply a cost to banks of doing business with sufficient care not to facilitate another financial crash. It does not merit taxpayer subsidy.
Bank Governor Andrew Bailey has argued that the Treasury owes the Bank, that the impact on banks would ‘likely be passed on to customers’ and/or would ‘reduce their demand for reserves’, and that it would make it harder to steer market rates.
But given the severity of the UK’s financial and political situation, it might be more appropriate for the Bank to work more co-operatively with elected politicians, and indeed in September 2025 it announced a scaling back of quantitative tightening. And given that the government has granted the financial services sector much of what it has asked for on deregulation and tax, might it not reasonably seek a quid pro quo: that banks refrain from passing on costs of a decrease in interest on reserves to their customers? This could draw on the precedent of the Coalition government, which persuaded the banks to invest some of their equity in a new Business Growth Fund, in return for a removal of the previous government’s levy on their bonuses.
Repeated warnings that tiered reserves would undermine Bank independence and risk market volatility or higher borrowing costs are a restatement of the founding nightmares of the governing orthodoxy – that changing the system would undermine the Bank’s control. But this is not what Tucker and Brown are advocating. These arguments are reminiscent of orthodoxy-protecting prophecies of doom which do not factor in the impact of not acting – and
which evaporate on contact with reality, such as the claim that abolishing ‘non-dom’ status would prompt those affected to flee the UK – a scare story the Chancellor has faced down.29
In May 2025, Tucker framed his case for tiered reserves on the basis of the danger implicit in maintaining the status quo: ‘With political legitimacy fragile and world order strained, it makes no sense for the resources available to government – whether used on defence, alleviating poverty, health care, education, tax cuts, or elsewhere – to be squeezed by avoidable debt-servicing costs.30
Drawing on Downey’s argument about the usefulness of ‘regularly revisiting the terms and conditions of delegation’ of power to central banks, ministers should politely reassert the primacy of the democratically elected government. This should not involve abolishing the Bank’s independence; merely a regular review of the MPC’s mandate in the light of current economic pressures. Ministers might, for instance, choose to emulate the Federal Reserve’s dual mandate to pursue price stability and maximum sustainable employment, but choosing to continue the single mandate to keep inflation at 2% should equally be cast as a positive political choice.
The Office for Budget Responsibility
The government’s relationship with the bond market remains delicate. Nonetheless, this must be balanced against the need to counter accelerating disaffection with mainstream democratic politics. If it is politically impossible to abandon the OBR model, it is necessary to find ways to ameliorate the constraints it places on improving voters’ lives.
The move to factor the government’s housing plans into the OBR’s growth estimates is a significant broadening of its overly narrow parameters, which has not caused particular controversy. Nor has the Chancellor’s announcement in her 2025 budget that the OBR will assess the government’s performance against the fiscal rules once a year rather than twice.
Further steps could include:
- Requiring the OBR to provide an assessment whenever the government wants to make a significant fiscal intervention, which would underline that ministers are in overall charge of the process.
- Foregrounding the impossibility of numerically precise forecasting, which the OBR itself readily concedes. The recent departure of the OBR’s chair offers an opportunity to signal this. As the Labour MP Andy MacNae points out, its forecasts are ‘almost certain to be wrong’.31Government should resist pressure to wring unachievable predictive certainty from the OBR’s projections. It should call out the media’s fallacious insistence on transforming a projected range of probable outcomes, based on imperfect information, into a single numerical prophecy. Likewise, it should resist the ‘headroom’ metaphor, which falsely attributes immovable certainty to an estimate. Visible determination to do what is necessary as unpredictable events unfold will reassure the markets just as effectively.
- As MacNae suggests, the government should ‘clearly communicate the inherent uncertainties’, treating the forecasts as ‘guides, not guarantees’. A vivid, confident sense of political direction would help here: as we’ve seen, the lure of certainty through data is often a substitute for a clear political narrative.
Our current system was designed before Brexit, Covid and the cost of living crisis. The danger it is structured to prevent – of profligate politicians stoking inflation – is no longer the most pressing. Some argue that government needs to be re-empowered through greater integration, or at least coordination, of fiscal and monetary policy.
These measures would involve facing down old fears of financial disaster. However, given the public pressure for change, they might rebalance power sufficiently to stave off a more extreme reaction. Reform UK has called for a review of Bank of England independence, perhaps even ‘direct influence over interest rates’.32
Former Cabinet Secretary Simon Case has suggested the OBR is one of the ‘obstacles’ a Reform government could ‘remove… at a stroke’33
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