Sir Nicholas Macpherson, Permanent Secretary, HM Treasury, UK: Exclusive Interview
Sir Nicholas Macpherson, a Treasury man for 30 years, has spent the last decade as permanent secretary to three chancellors. He talks to Global Government Forum about technological change, the credit crunch, the spending review – and his plans for the future
These days, most governments must operate in a frenetic blur of activity to keep pace with fast-moving events, global challenges, and the endless demands of a hyperactive, voracious media. Civil servants and politicians alike work in a blur of rapid media responses, ping-ponging email chains and shifting policy positions. It’s a far cry from 1985, when a young Nicholas Macpherson joined the Treasury: then, officials used to handwrite their advice and send it off to typing pools in Brighton or Croydon. Days would pass before ministers received the paper. “Things tended to move quite slowly,” Macpherson, permanent secretary of the Treasury, tells Global Government Forum.
Casting his mind back to the 1980s, Macpherson recalls that “the department I joined was dominated by paper”; the building “was in huge need of repair and still had bunk-beds in the basement left over from the Second World War,” and “the average age was much higher than it is now.” Electric cabling, he says, “was falling to bits” and “our offices were like cells: we didn’t really talk to each other – everything was done on paper.”
In the last 30 years Macpherson, who after a decade in the job is the longest-serving permanent secretary in the UK government, says the Treasury “has changed hugely, whilst still remaining true to its fundamental objectives – which are trying to create sound public finances in an environment where the economy grows, promoting free trade, and so on.”
Today, tablets, laptops and smartphones are used for written correspondence. And since the department swapped its century-old headquarters on Great George Street for new and more spacious offices on Horse Guards Road in 2002, officials have been working in an open-plan environment. Most people are hot-desking, Macpherson says. “I’m just about hanging on to a desk –although I’m afraid I’ve pulled rank there. Ministers get their own desks, ministers get their own rooms, but we encourage officials to work in the open-plan areas where those are available.” Thanks to this set-up, he says, “people talk to each other much more” and the Treasury is a “far more open” place.
However, he believes there is scope for further modernisation: “We need to become a more open institution which people can join, leave and come back to.” Macpherson wants to see more secondments between the Treasury and the financial services industry in both directions, and he wants to “encourage an environment where people can develop broader expertise across the public/private sector divide.”
He is quick to add that “we have to be careful about conflicts of interest and the so-called ‘revolving door’” between government and business jobs. Civil service rules discourage officials from using their contacts and inside knowledge to jump straight into private sector jobs. Senior figures’ moves are theoretically overseen by the Advisory Committee on Business Appointments, which can recommend that departing civil servants avoid some roles or activities for a set period. But Macpherson argues that, in his experience, “the advantage of having access to market-sensitive information diminishes very quickly, so I do think you can have greater movement between the two sectors.” Should cooling-off periods be shortened? “No,” he says, “I think we clearly try and adapt the rules to the responsibilities the person holds, but I think it’s incumbent on us to manage it in a sensible and sensitive way which maintains the Treasury’s reputation but also facilitates movement.”
There is also, he says, “increasingly a market for people who’ve made a reasonable amount of money in the private sector who want to come and work here later in their careers.” Though he notes that “we don’t want to become reliant on the charity of rich people,” he acknowledges that civil service pay constraints make it harder to recruit the right staff. Almost anyone qualified to work at the Treasury could earn significantly more in the private sector. Several current and former senior officials have warned that uncompetitive civil service pay makes it difficult for government departments and agencies to attract talented people. But Macpherson says: “The civil service will always be lower-paid than the private sector, which is fine and I accept it.”
Macpherson himself took a pay cut when he left his job as a senior analyst for Peat, Marwick and Mitchell Management Consultancy to join HM Treasury (HMT) in 1985. But he was willing to do so “because the quality of the work was just so much more interesting.” Another pull factor the Treasury has, in Macpherson’s view, is its people: “There are some incredibly committed people who work here, who are really interesting, who you can learn a lot from, have got really good values, want to give something to society, and are prepared to work very hard to ensure that happens.”
Despite the interesting nature of the work the Treasury has to offer, it has to “ensure it doesn’t fall behind other departments,” Macpherson argues. Historically, he says, “there’s been a slight tendency for the Treasury to be even more hair-shirted when it comes to pay than other government departments. I think we need to put that right.”
The challenge of staffing the Treasury, he says, lies “in managing this place to ensure that we can compete and still retain some really good people.” He adds that for people to be willing to take a pay cut to join the Treasury, it needs to “be the best employer there is in Whitehall.” This, he says, “means it’s really important how we treat people here and that we make the Treasury an attractive place to work. I think often we can be a better employer when it comes things like caring responsibilities and more flexible working practices.”
Another problem the Treasury is seeking to address is staff turnover. Any official who wants to make it to the top of the civil service aims to get a stint at the Treasury on their CV; partly as a result, churn at the finance ministry is notoriously high. In 2011 it was running at 28% a year, though in 2013-14 it declined a little to 23%. “We have quite high turnover – that’s partly deliberate,” Macpherson says. “In one sense we’re like a professional services firm where you want to recruit a lot of young people who you’ll then train, and then there’s a certain point where you want to retain the really good ones and you’re also happy for some of the others to leave.” Nevertheless, he adds that turnover “is an issue we’re seeking to address.”
The ‘biggest crisis in 100 years’
Looking back on the ten years he has served as permanent secretary, Macpherson says his biggest achievement was taking the Treasury through the 2008 global financial crash – “the biggest financial and economic crisis in 80 years, possibly 100 years – without it losing its confidence or ability to deal with really big challenges.” Today, he says, the Treasury is a “more expert and more confident institution because of what it did both in the crisis and subsequently, and although that is largely down to the many talented people who have worked in here in that period, I would like to think that I also had some influence and impact.”
One of the problems during the crisis was the lack of officials in the department who had experienced a recession. Macpherson joined the Treasury shortly before Britain was hit by a recession in 1991, and in 1995 Barings – the UK’s oldest merchant bank – collapsed after one trader racked up losses of £827m. At that time, Macpherson was working as principal private secretary to the then-chancellor Ken Clarke. Macpherson says Barings’ downfall was – in nature, if not in scale – “very close” to the credit crunch that began in 2007. But by then, most of HMT’s Barings veterans had moved on, and there was “nobody who had experienced a banking crisis like we experienced in 2008. In fact, there really hadn’t been a banking crisis on a similar scale since before the First World War, so no one was alive who had experienced such a series of events.”
For Macpherson, dealing with the crisis was not only about taking the necessary steps to steer Britain’s economy towards recovery, but also about “imparting the knowledge and experience that you’ve acquired to those who hadn’t encountered a similar situation.” And it meant accepting that “sometimes you face challenges which have never been experienced by anyone in the organisation, so you have to adapt, react, be agile, and remain really focused on the important issues, putting the less important issues to one side, as well as working effectively with partner organisations such as the Bank of England.” How did he do it? “By really strong teamwork; prioritising; ensuring that we had the right people in the right place with the right support.”
Macpherson admits that the Treasury made “some mistakes” along the way: “Of course, we didn’t get it all right: we were relatively slow to react after the run on Northern Rock in September 2007. There are a whole lot of things we should have done differently, but when the crisis really struck in September/October 2008, we had learned lessons, we were ready to act.”
Learning from other countries’ mistakes
Throughout the process, Macpherson says, the Treasury monitored closely how other countries were reacting and observed the results they were getting: “We have to be an outward-looking country. In autumn 2008, we started off with minor banking failure at Bradford and Bingley; we then had the Icelandic banking collapse and the Irish banks were falling apart – at each twist and turn you were trying to learn from what other countries were doing. Sometimes there were the wrong interventions. It’s no coincidence that we never guaranteed all the deposits in our banks. The Irish did, and that carried quite a heavy toll when the sovereign debt crisis kicked in in the Eurozone.”
So how bad was it? How close were British citizens to being unable to withdraw money from cashpoints? “Things got quite hairy in October 2008,” he says, and “could have gone badly wrong.” But, thanks to then-prime minister Gordon Brown and chancellor Alistair Darling, he says, the country handled it fairly well – adding that “the British approach to the crisis really did inform other countries’ responses too.” The UK came, “as Alistair Darling put it [in the title of his autobiography], ‘Back from the Brink’.”
By 2014, the UK economy had recovered its former size – though not its former per capita income – and was, according to figures by the International Monetary Fund, the fastest growing amongst advanced economies that year. Yet the Treasury is facing some tough challenges ahead – particularly in implementing the new Conservative government’s ambitious savings targets. Before winning a surprise overall majority in May’s general election, the Tory party pledged to cut £12bn from the welfare bill. And as part of this year’s spending review, chancellor George Osborne has written to departments asking them to draw up twin plans to cut 25% and 40% from their budget over the next four years.
The challenges ahead
On 25 November, the spending review will set out the government’s broad fiscal plan for the three years to 2020. In the run-up to that announcement, each department will have to engage in bilateral negotiations with the Treasury – wrangling over administration and programme spending, with most of them receiving smaller budgets. This process, analysts argue, is not conducive to achieving cross-departmental collaboration and one-government outcomes – something supposedly championed by this government.
Can cross-governmental collaboration truly be achieved in the UK without changing that system? “I think we’ve already achieved more collaboration, but we can achieve more,” Macpherson responds. To succeed, he says, the centre of government – the Cabinet Office, the prime minister’s office (Number 10 Downing Street) and the Treasury – must be “united and give a similar message”.
Partnership working has much improved, he says, hinting at the notorious tensions that split Tony Blair’s Number 10 and Gordon Brown’s Treasury in the years until 2008: “There were differences in views between Numbers 10 and 11 [where the chancellor lives]. But I think one of the impressive things about this government is the extraordinarily close relationship between [prime minister] David Cameron and George Osborne. I think that’s mirrored on an official level by the similar relationship between myself, Sir Jeremy Heywood, the cabinet secretary, and John Manzoni, the chief executive of the civil service. We meet together very regularly and I am confident that we will present a more united front in this spending review than ever before.”
The other challenge in building a cross-departmental approach into the spending review process, he says, is in having “a more open dialogue between the Treasury and departments: that is about building trust; about making spending departments realise that the Treasury is not going to double-cross them if they reveal too much information; and about generating a more collaborative approach to building the outcome. I do think the Treasury and departments can be open with each other and I would strongly encourage them to work at that, and from what I’ve seen so far – we’ve been discussing spending now for the last 18 months or so – people are up for the challenge ahead.”
Technically, however, there is no mechanism built into the spending review process that enables departments to make plans for collective expenditure – for negotiations are held between individual departments and the Treasury. Projects which require funding from more than one department generally only get off the ground if the prime minister gets involved directly. Macpherson responds: “You have to have a relationship between the department and the Treasury, because it’s the department which receives the money. But I think there is also scope to look at a number of cross-cutting issues in a more horizontal way; and although it would be premature to announce how we’re going to do that, I’m confident that we will have good examples of cross-cutting work which cuts across departmental boundaries. I think if it has the support of the prime minister and chancellor, things tend to happen, and my sense is that it will have their support.”
Besides achieving ambitious fiscal targets, Macpherson says, the Treasury faces a number of other major challenges: the government is currently selling its stake in Lloyds Banking Group, bailed out during the banking crisis to the tune of £20bn; and it is “very involved in the discussions” around renegotiating Britain’s relationship with the European Union. This agenda, Macpherson says, is “as exciting as it’s ever been.” It is also, he adds, “one reason why I’m still here.”
Rumours were circulating that Macpherson would quit either before or shortly after the general election. But he says he’s staying put: “I’m going to carry on being permanent secretary for a while yet,” he says. Asked if he will do a full parliamentary term and remain in post until 2020, he says: “I haven’t made up my mind, but I’m certainly going to be here for a while yet. I still think I’ve got something to offer the Treasury, but there will come a time when it makes sense to do something else, and the critical thing is to ensure that there are good people so that in a sense I become dispensable. I think I’m pretty much coming to that place; but as I say, I will be here for a while yet.”
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