John Kingman, champion of HM Treasury’s supply-side activism, warns of Brexit threat
The former second permanent secretary at the UK Treasury last week mounted a passionate defence of its activist micro-economic policies – now under threat in Westminster’s shifting political landscape. Matt Ross reports on John Kingman’s HMT swan song
John Kingman is imagining a meeting of the “central banking elite”, presumably held in “Basel or Jackson Hole or Mount Olympus.” As this pantheon of megabankers consider the years since 2008, amidst “the wringing of hands, what they’d probably tell us is that the central bank drugs brilliantly saved the patient during the crisis – but they’ve failed to restore the patient’s health. And the only thing that can do that, we are told, is a big burst of supply-side reform.”
This is celestial music to Kingman’s ears. For he’s spent much of his career in HM Treasury’s activist wing, where officials work to influence policy across government – pursuing a supply-side economic model built around supporting capital investment, cutting tax rates and regulation, and protecting free trade and open competition.
Conceived in the ‘70s in response to more statist Keynesian economics, supply-side theory argues – in essence – that boosting competition and cutting taxes improves productivity, maximising wealth creation and the overall tax take. It is, of course, a very neat fit with the Treasury’s long-held world view. And ever since Tory chancellor Lawson first championed the approach during Thatcher’s mid-‘80s heyday, HMT has added a third brief to its traditional tasks of controlling the public finances and macro-economic management: the self-appointed role of micro-economics policeman, ensuring that other Whitehall departments don’t introduce policies, regulations or services that distort or hamper free market competition.
Over 20-odd years at the Treasury, Kingman held many roles – among them leading former chancellor Gordon Brown’s productivity unit, managing the bank bailouts in 2007-8, and running public spending. He was briefly acting permanent secretary earlier this year, following the departure of Sir Nicholas Macpherson. But the top job went to Tom Scholar, and Kingman is now both founding chair of the UK’s new unitary science funding body UK Research & Innovation, and incoming chair of insurance giant Legal & General.
Before getting stuck into his new roles, Kingman returned to the Treasury last Thursday to give a lecture for the Strand Group – a remarkable and innovative arm of the Policy Institute at King’s College London. His talk was a paean to HMT’s expansive evolution: Kingman argued that today’s Treasury neatly bridges the awkward divide between controlling expenditure and supporting economic activity. “Teams like the Treasury’s housing team now do a superb and apparently effortless job of straddling their growth and public spending objectives,” he said. “The institution has slowly but successfully learned how to walk and chew gum at the same time.”
He did not pretend that everybody is as enthusiastic about HMT’s micro-economic interventionalism. “There are at least some Treasury colleagues who’ll tell you in private that all this supply-side stuff is at best a waste of time, a lot of gimmicks; or at worse actively damaging, corrupting of the Treasury’s more fundamental responsibility to manage the public finances,” he explained. “There’s also a completely opposing critique that says this supply-side stuff is incredibly important: too important to be left to the Treasury.”
This latter group, he added, argue that “the Treasury is inherently conflicted; that its responsibility for the public finances means it will never be sufficiently radical to do what is needed to fix the economy.” Some would like to see economic growth policy handed to a separate department; presumably the business department, which – having gone through four iterations in seven years – is currently called the Department for Business, Energy and Industrial Strategy (BEIS).
These critics are wrong, Kingman argued. Separating the economics brief from the source of public funding risks creating an “impotent think tank, bleating from the sidelines”. And the business department has few levers; it’s only been influential when led by “a secretary of state with real political heft… whereas the chancellor is almost always a big beast.”
What’s more, if you believe that the department charged with economic development must prioritise open competition, you probably wouldn’t hand the brief to the Whitehall champion of established industry players. “There’s constant tension between the interests of millions of consumers – highly dispersed, generally passive and disengaged – and the interests of well-resourced incumbent vested interests,” Kingman commented, arguing that BEIS is “institutionally conflicted by its natural role as the advocate for big business incumbents.”
To be fair, Kingman didn’t attempt to paint HMT as immune to the lobbyists’ charms. “In a classic case of ‘industry capture’, we allowed 15 years of successful lobbying and obfuscation to stave off… proposals to take on the oligopoly payment networks, the vital plumbing of the banking system, before they were belatedly and quite rightly implemented by [former chancellor] George Osborne,” he admitted. And it’s failed to dismantle Britain’s retail and SME banking oligopoly: indeed, “if anything, a frightened Treasury made the problem worse by permitting the Lloyds-HBOS merger in 2008.”
But in the main, he argued, “the Treasury has been the most powerful and consistent champion of competition in government.” HMT created the 2002 Enterprise Act, he pointed out – creating a “self-denying ordinance that took ministers out of almost all merger and market shaping decisions.” This in turn enabled the Office of Fair Trade and Competition Commission to crack the “London airports monopoly”, forcing operator BAA to sell two airports in 2008 – “something that ministers, particularly in a captured transport department, had long shied away from.”
The task of fending off special pleading from established businesses, Kingman argued, demands the firepower of a powerful and disinterested HMT. “The single best way to undermine productivity is to prop up failing and unproductive businesses, yet I have never known a government of any complexion which wasn’t frequently struggling with pressure to do just that,” he said, pointing to the wrangling over Wales’s troubled Port Talbot steel plant – which the government attempted to rescue, only to find its plans thrown into confusion by the UK’s Brexit vote.
Kingman has, he commented, “occasionally wondered what Margaret Thatcher – a portrait of whom [business secretary] Sajid Javid made a point of keeping on his wall – would have made of the endless meetings he had to hold under instructions from David Cameron to do whatever it takes to save one of the world’s least productive steel plants in a massively oversupplied global market.”
As well as fighting off the businesses asking for privileged treatment, said Kingman, the Treasury must repeatedly squash new government policies that would constrain growth or productivity. “All sorts of regulation can inhibit competition and innovation – either because regulation is badly designed, or because stopping competition and innovation is actually what the regulation is designed to do,” he commented.
Here, he wasn’t just talking about excessive red tape. “All governments actively limit growth the whole time,” he pointed out. “The planning system, a system of development control, is precisely that; and so is the migration regime.”
Kingman wasn’t arguing for the abolition of planning or migration controls; but he was expressing a deep-seated Treasury view that such systems should be as light-touch as possible – and, implicitly, that presentational, sentimental and political issues often weigh too heavily in the policymaking scales, trumping pragmatic economic goals.
These views were evident in his solutions to the biggest economic challenges facing Britain – which he named as education, housing, infrastructure, business investment and productivity. On infrastructure, he criticised the UK’s slow decision-making process, its obsession with ‘grand projets’ – including the HS2 high-speed rail scheme – and its “timid” approach to compulsory purchase, which means that “it’s impossible to capture any meaningful slug of the large land value uplifts that flow to private developers in big projects”.
On housing, he attacked the “colossal failure of political economy” visible in Britain’s sclerotic, locally-led planning system – and noted the limits on HMT’s influence: “The Treasury has simply failed to win the argument that the British people and economy would be better off, both in living standards and economically, with a marginally different approach to land use.” Kingman also regrets HMT’s inability to stand up for skilled immigration and foreign students, crucial to the UK’s world-class science and higher education sectors: when new chancellor Philip Hammond commented last week that there are “conversations in government” about excluding students from the touchstone net immigration numbers, Number 10 quickly ended that chat. The PM is “categorically not reviewing whether or not students are included,” said a spokeperson.
Kingman’s audience – littered with Treasury wonks, lords and former mandarins – was generally sympathetic. However, at the post-lecture drinks some did highlight the assumptions underlying his assessments. Kingman pinned the blame for chronic house price inflation on constrained supply – but those more positive about fiscal tools suggested shifting the burden of taxation from labour to property. This, they thought, would also capture those infrastructure land value uplifts – and it might help address the UK’s miserable record on venture capital investment. “It’s a very odd paradox that an economy that specialises in financial services, which has plenty of long-term risk capital from pensions schemes, and hosts the world’s leading financial centre, has been so weak in this area,” said Kingman – but given the returns that speculators can make in property or share dealing, it’s no wonder that SMEs struggle to attract investors.
Kingman’s depiction of HMT as a champion of growth policies, constantly fighting off other departments’ anti-competitive and burdensome ideas, also raised eyebrows. For the Treasury may exhort departments to generate their own growth initiatives, but it is much less keen to fund them; and when it does allocate resources, it much prefers tax breaks to cash – adding to the fearsome complexity of Britain’s taxation system.
On a deeper level, the Treasury’s micro-economic policing role can be seen as a symptom of its deep-seated mistrust of other departments. This mistrust is played out in HMT’s controlling approach to policy and spending decisions across government – and can lead this most financially-skilled of departments to over-ride decisions made by departments with far greater expertise in their own fields of policymaking. George Osborne’s city devolution agenda may run counter to HMT’s iron grip of spending, but Kingman’s qualified endorsement revealed more scepticism than enthusiasm: “It is at least plausible that handing these cities greater control of their own destinies is worth a try,” he commented.
The Treasury’s single-minded focus on free competition can also lead it to discount wider political and socio-economic issues – and many blame the UK’s Brexit vote, in part, on a free market growth model that abandons many communities to deindustrialisation and falling real incomes. Cameron’s desperate attempts to revive Port Talbot make no sense in economic terms; but the political and social costs of letting the plant fail could be just as harmful.
Nonetheless, the Treasury perspective underpinning Kingman’s analysis is built on long experience and enormous expertise; and the UK government does need a noisy standard-bearer for genuine competition and shrewd economic management. Indeed, Kingman believes that this need will only grow with the passage of Brexit – which, freeing the UK from EU law and regulations, will throw open debates that HMT thought it had long since closed down.
Some politicians, Kingman warned, are already contemplating a land grab to seize back control of market regulation: “Do ministers… want to take the opportunity, as they’ve hinted, to reverse the Enterprise Act and put politicians, not competition technocrats, back into the driving seat on individual merger decisions?” he asked. “Do we really want every major merger and acquisition deal to become an uncertain political bunfight, and to provide the protectionists with the great opportunity that presents?”
As the UK gears up for the start of EU exit negotiations, Kingman urged HMT “to seize what are some genuine opportunities presented by Brexit; to make a fresh and persuasive case for openness and competition; to achieve far more than I ever did or could on infrastructure, planning, housing, skills and migration; and to continue the real God’s work, which is stopping bad stuff happening.”
Chancellor Hammond, a natural fit in the Treasury, will certainly do what he can – albeit, it appears, with a more open-handed approach to public investment in infrastructure projects. But he lacks the political heft of his two predecessors, and the Brexiteers now leading crucial departments have long opposed the Treasury line on matters such as expanding Heathrow and permitting inward migration. For 30 years, the Treasury’s writ has run across Whitehall; but under the Tories’ new leadership, new and serious challenges are emerging to Kingman’s cherished supply-side interventionalism.
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