Treasury growth targets are doomed to fail 

Kyle Macleod

September 23, 2022

Kwasi Kwarteng’s ‘mini-budget’ announced this morning comes in the wake of the ambitious decision to redirect the treasury to focus entirely on achieving an annual economic growth rate of 2.5 per cent.

This policy is a genuine attempt to spur the UK economy and restore growth rates to those seen prior to the 2008 financial crises. However, it’s difficult to expect to bring up UK growth rates at anywhere near the rate which the government has aimed for.

When these targets are inevitably missed due to financial conditions largely outside of the government’s control, the Chancellor of the Exchequer will have handed his opponents a stick to beat him with. 

Truss and Kwarteng have frequently criticised the Treasury for both its lack of ambition surrounding economic growth, and its short-term focus. They have also both previously stated their belief that when trying to eradicate poverty and achieve greater prosperity, creating economic growth is of a higher importance than the redistribution of existing wealth.

It is therefore not surprising that the new government has proposed massive overhauls to the treasury’s operations. This strategy also comes at a time when many other government operations have struggled due to a lack of transparency surrounding their ultimate purpose or remit. The treasury is fundamentally different from other organisations such as the Bank of England however, as it does not have one clear goal to aim for. This is required by the nature of the department, as it must use nuance and wide-ranging objectives in its role to best serve the UK economy.

A target of 2.5 per cent, at a time when many experts are predicting low or even negative growth, will lead the government towards fiscally irresponsible policies designed to achieve their goal at any cost. To ensure balance between short and long-term economic ambitions, the Chancellor of the Exchequer should set a more fluid target which considers UK growth rates in the context of global economic conditions. This would provide the budgetary freedom required to enact lasting change without the risk of short-term financial instability.  

Setting a static target will also likely cause rifts and a lack of cooperation within the treasury; senior officials will surely expect the next government to discontinue this hard growth target policy as they struggle to manage it with their other ambitions, and civil servants will therefore be reluctant to commit to the changes it requires.

The removal of senior treasury official Tom Scholar from his long-held post will also affect the department’s willingness to cooperate in this regard. Kwasi Kwarteng may therefore face a rebellion among senior civil servants in 1 Horse Guards Road, who will be continually conscious of their other objectives such as reducing the deficit and ensuring fiscal stability.  

In the past, governments have experimented with various methods to try to eliminate the confusion existing within the treasury and prioritize economic growth. The most notable example was Harold Wilson’s attempt to create a separate government department with a remit for ensuring growth (named the Department for Economic Affairs).

There are many similarities between the period in which the DEA was formed and our current era, including a large deficit and challenges to the value of sterling. The DEA eventually fell apart as budget restrictions left it with little money to allocate and its functions were reabsorbed back into the treasury. Kwarteng’s growth target will likely fail for similar reasons that the DEA did: as the government struggles to commit to the necessary budget reduction required to give weight to the policy under harsh economic conditions, the treasury will revert to business as usual.

The next report by the Office for Budget Responsibility will likely be scathing as we see the short-term consequences of the Chancellor’s commitment to their 2.5 per cent target in the form of a higher deficit and a rapidly falling value of the pound. The government have therefore created a situation in which the public will need to see strong results from their policy changes in order for them to stand a chance of re-election. Today, the Chancellor has illustrated his commitment to his philosophy on how best to achieve growth, and the results of this approach will either make or break him. 


Written by Kyle Macleod

Kyle Macleod studies Economics at the University of Edinburgh and also currently works for a Conservative MP.

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