Public Expenditure, Management and Control

The most convenient starting-point is the work of the Select Committee on Estimates on Treasury Control of Expenditure [H.C. 254, 1957–58]. This report, prepared under the chairmanship of Sir Godfrey Nicholson, was published in July 1958: it was based on four months’ questioning of Treasury and other witnesses and substantial written memoranda: and its general tenor was critical but not unfavourable to the Treasury ‘system’. The sting was in the tail:

The aim of Your Committee was to find out whether the present ‘system’ of Treasury control is as effective as modern conditions demand. Your Committee cannot give a definite answer. The system appears to work reasonably well. But it would be idle to pretend that Your Committee is left entirely without disquiet …

Because of all these doubts, and because of the constitutional significance of the subject, Your Committee have reached the conclusion that further enquiry, at once more detailed and more expert, is required. Accordingly they recommend that a small independent committee, which should have access to Cabinet papers, be appointed to report upon the theory and practice of Treasury control of expenditure.

The first of these, which failed to establish itself, was a five-year forward survey of the Exchequer cost of the social services (housing, education, health, national insurance, child care). It was begun in the last year of Mr Butler’s Chancellorship, in mid-1955, and presented to Ministers early in December, just before Mr Butler was succeeded by Mr Macmillan. By our later standards, it was not a very sophisticated survey.¹ But it showed without any doubt that even on departments’ expectations on the basis of their policy of the time, before the great expansions of the late 1950s had got under way, the cost would expand much faster than any expansion that could possibly be expected in the gross national product.

The Plowden Committee began to work in October 1959. The chairman was supported by Sir Sam Brown, Sir Jeremy Raisman and Mr (later Lord) John Wall, all of whom had had much experience in public administration; with six permanent and deputy secretaries from the Treasury and other departments, who were more properly described as assessers, for they could not sign the reports. It must be recalled that this was an internal Treasury enquiry, responsible directly to the Chancellor of the Exchequer; and it proceeded by making interim reports to him, the first of which, covering the fundamental issues before the Committee, were presented at the beginning of June 1960. One must note from these dates that the Committee moved with effective speed: when I became an assesser in January 1960, the discussion of the basic principles was already well under way, and the questions of what could practically be done, rather than what was desirable, were beginning to dominate the situation. As the enquiry proceeded, it became clear that it would be necessary to produce a published report, and this was of course done [Cmnd 1432 of July 1961]: it covered the whole range of the Committee’s deliberations, and only omitted those points that the Committee wished to keep confidential to the Chancellor and his senior colleagues.

While the Plowden Committee’s interim reports had been going through their final stages in the early summer of 1960, the next steps were being developed. There were three essential things to be done:

Mr Selwyn Lloyd became Chancellor of the Exchequer in July 1960, arriving at the same time as the Plowden Committee’s first set of interim reports. Mr Lloyd was probably unique among post-war Chancellors in bringing with him into office his own ideas about how to handle public expenditure: he favoured long-term planning of public expenditure and taxation, so found the Plowden Committee’s advice welcome. He also wanted to simplify the Estimates and Accounts, and the Plowden Committee’s advice fitted well with this. He wanted to create a single tax for companies, instead of income tax and profits tax, and set the studies on foot that led to Mr Callaghan’s corporation tax in 1965; and he wanted to merge income tax and surtax, an extremely difficult reform to accomplish, ultimately done in Mr Barber’s 1971 Budget. Mr Lloyd took the unpopular step of bringing the surtax threshold into line with the fall in the value of money, raising it from £2000 to £5000: he began the removal of Schedule A tax on resident owner-occupiers: he introduced the short-term capital gains tax. He introduced the ‘regulator’ to permit changes in indirect taxes between Budgets (and the abortive ‘regulator’ to change employers’ insurance contributions, quickly abandoned).

Very soon after the Chancellor had made his expenditure and investment statement on 27 February 1962, the pressure for reflationary action began to build up again. Mr Selwyn Lloyd made no concession to this in his Budget speech on 9 April, but in the next few weeks it became insistent. The Prime Minister, as in 1958, was in the lead in this and, writing of this period, records:¹

I had been continually pressing on the Chancellor of the Exchequer and the Treasury the need for a substantial reflation…. On 8th March 1962 Bank Rate was reduced from 6 to 54 per cent. But I was not satisfied and kept pressing for further expansionist moves. On 22nd March, Bank Rate came down to 5 per cent, and to my great delight the Treasury and the Bank agreed to a further reduction to 41/2 per cent on 16th April…. I was also anxious for the system of Special Deposits to be modified with a corresponding increase of the total sums available for credit: this was done on 31st May when £70 million of these deposits were released.

A new and important dimension was introduced by the decision of the National Economic Development Council (‘Neddy’) on 6 February 1963 to approve the objective of a 4 per cent a year growth rate for the economy. This committed the Government up to the hilt, for the Chancellor was chairman and there were two other Cabinet Ministers there: indeed, only the Government could truthfully be said to be committed to any action by the decision, for the industrialists and trade unionists could not be regarded as delegates committing their organisations. The General Council of the TUC had specifically made this a condition for accepting Mr Selwyn Lloyd’s invitation to be represented. In their letter of 24 February 1962 to the Chancellor, they said:

[In accepting the invitation] they wish to emphasise that they attach great importance to the right of the members of the NEDC to report to the organisations which they represent, and that they would not regard association with NEDC as debarring those organisations from expressing in public such reservations as they might hold about government decisions on economic policy.

The members from the management side of private and nationalised industry were representing themselves, though many were closely associated with the original constituents of the present CBI.

The first half of 1963 was a difficult period for expenditure decisions. The reflationary policy and situation had greatly weakened the brakes: any relaxation of the normal Treasury pressure against expenditure is bound to have this effect, even if it is supposed to be highly selective (e.g. for short-term projects only). The Government’s adoption of the 4 per cent growth objective had similar effect. The General Election was coming into sight. The terrible weather in January and February, with the interruption of outdoor work, led to high temporary unemployment and mistaken fears that the Government’s reflation policy was failing.

The four-year period from 1961 to 1964 is of great interest as showing the beginning of the impact of the growth of public expenditure in relation to resources from the low point reached in the second half of the 1950s. Public sector expenditure (including debt interest) was going up at about 7 1/2 per cent a year (in money): public sector receipts by about 7 per cent a year. There were, so to speak, four-and-ahalf Budgets — Mr Selwyn Lloyd’s of 1961 and 1962, Mr Maudling’s ‘mini-budgets’ of end-1962, and his Budgets of 1963 and 1964: they occupied one modern-style trade cycle, with unemployment at the beginning the same as at the end:

In February 1964, I was invited to give the Stamp Memorial Lecture, then as now a signal honour. Lord Stamp (1880–1941) was one of the truly outstanding men of his time. His death so early by enemy action makes it impossible to compare him with his contemporaries, such as Lord Waverley (still better known as Sir John Anderson, 1882–1958) or Lord Beveridge (1879–1963). But his career showed the immense opportunities offered to young men of ability by the civil service before the First World War: he entered the Inland Revenue as a clerk at the age of sixteen: by 1916 (aged 36) he was assistant secretary to the Board of Inland Revenue, and already perhaps the greatest expert on taxation in the country. He left the Inland Revenue in 1919 to be a director and secretary of Nobel Industries (future constituent of ICI); and was at once put on the 1919 Royal Commission on income tax and on the 1924 Colwyn Royal Commission on taxation and national debt.¹

The Labour Party was voted into office on Friday 16 October, and Mr Harold Wilson took charge immediately. The first issue was machinery of government, and the long-expected break-up of the Treasury and the creation of the Department of Economic Affairs (DEA); and Mr Wilson has described in his memoirs¹ the background of his thinking, and how he reached agreement with Mr George Brown and Mr Callaghan on that first evening. For the control of public expenditure, the division of responsibilities and the ability of the two Ministers and their departments to work effectively together was of crucial importance.

Most of this book has been about concepts and systems and the harsh realities of every Government’s public expenditure decisions. But the subject is really about people, and how they spend their time, and what they actually do. This is nowhere more important than in the Treasury; for the job is to supervise and authorise, by direct or indirect means, the expenditure of some, £30,000 million a year. This function is carried out by a very small number of high-quality people — rightly very small, and rightly of high-quality, for the only way to begin to deal with a task of this kind is to find the crucial points on which to press,¹ and to enlist the help and support of hundreds of other people, in departments, local authorities, nationalised industries, etc. The whole purpose of PESC is to do precisely this; and for my part I would sooner tackle it with a hand-picked staff of too than with a great bureaucratic empire of 10,000.

In the course of this narrative from the beginnings of ‘Plowdenry’ to early 1966, I have interspersed a great many comments, both those of the time and in retrospect. I shall not repeat them; and in this last chapter I shall try to look at PESC in historical and critical perspective. If the years of effort devoted to it since 1960 have been justified, the future will recognise it as one of the great historical reforms in the control and management of public expenditure, in the same line as the Exchequer and Audit Department Act of 1866, which brought together into one system the procedures of Estimate, Appropriation, Expenditure and Audit, and Sir Warren Fisher’s reform of 1920, that the Permanent Secretary of each department should be Accounting Officer, ensuring that responsibility for policy and responsibility for finance were inextricably linked together, and that control of finance was no longer an ‘outpost’ of the Treasury. If what (for the sake of convenient abbreviation) one may call the PESC system succeeds and survives, this will be seen as the point at which control was established over the public sector of the second half of the twentieth century — double the old ‘Supply’ and involving scores of institutions, from nationalised industries to local authorities to a great miscellany of public bodies. It is this survival power that is examined in this chapter.