THURSDAY 9 NOVEMBER 2000

SIR MICHAEL PARTRIDGE KCB

  427. Good morning, Sir Michael.
  (Sir Michael Partridge) Good morning, Sir Michael.

  Mr Kidney: There is an echo in this room.

  428. Can I begin by thanking you very much indeed for agreeing to see us today to impart your wisdom and the experience you have had as, I do not know whether customer or victim is the right word, and specifically your relationship with the Treasury. That is what we want to look at because you were, I suppose, the biggest receiver.
  (Sir Michael Partridge) Spender.

  429. Spender, or whatever. Therefore, the relationship you had with the Treasury is of great interest to us. I wonder whether you might at a very general level, first of all, say about that relationship and how it evolved during your time as a senior official in the Department.
  (Sir Michael Partridge) I will try to be very brief because I think it would be best if you asked me questions. I am very glad to have the opportunity to be here and I will try to help the Committee all I can. As you say, I have got long experience over some 35 years of dealing with the Treasury, 1960-96. I spent most of my life helping in devising and repealing successive pension schemes for Mr Crossman, then Sir Keith Joseph and Mrs Castle and then for others.

  430. You will never be out of a job.
  (Sir Michael Partridge) When it was DHSS we spent a third of public expenditure and had something like a sixth of the Civil Service, 120,000 people, in it. Even when it split, DSS was still a quarter of the public expenditure, about £100 billion a year by the time I retired (it is much larger now) and we still had about a sixth of the Civil Service, about 100,000 people. The Civil Service has shrunk and Health is not very big at headquarters. Also, I was Deputy Under Secretary of State in the Home Office in charge of the Police Department for four years from 1983-87 which gave me a rather different perspective. I think the main perspective is, first of all, the DSS is really the main determinant of success or failure in public expenditure and financial management control. It is easily the largest part of the annual rounds with the Treasury and if DSS goes right everything goes right and if DSS goes wrong the rest of Whitehall cannot really make it up because they have only small bits. I think it was a fellow Permanent Secretary from Employment, Sir Geoffrey Holland, who said at one point that it took him some 20 years to realise in Whitehall that really public expenditure rounds are really about DSS and the rest are crumbs that fall from the table, whether you get it right or not. I have seen various systems of public expenditure control, which I think is the main function of the Treasury, tried over the years from 1960, the rounds of bids and then cuts, trying to set global totals, trying at one point to have inflation linked limits, because one of the problems was that it did not take account of inflation, and then finally cash limits and annual squeezes. I will develop those points as I go along. My main thesis, which I put in my letter to the Clerk, is that I think the Treasury has a vital role to play in control of public expenditure and management of public finances and, generally speaking, it is one of the best in the world at doing that. There were occasions when it lost control which I have seen, from 1964-66 which ended in devaluation and 1974-76 which was largely due to excessive expenditure and ended with the IMF arriving. I remember I was in charge of staff planning then in DHSS and we had to take 15,000 staff out in three days and plan for that, which was pretty disastrous. I think—I will expand on this—the Treasury can do a lot of good on that. I think where they are weakest, which I can come on to, is where they try to drive other Departments' policies because they are not actually very good at that, particularly on social policy. That leads to confusion and a lot of trouble, and I can tell you some anecdotes and stories through the years of where that went well and where it did not. That is my general outlook and thesis. I would just say that DSS and police share the common factor of being driven by a lot of public sentiment in favour of more expenditure, so in that sense you are on a reasonable wicket with the Treasury, unlike other Departments; but that has its dangers. Naturally the relationship tends to be the Treasury trying to control expenditure and the Departments trying to get more. I tried to break that in the 1990s and work together with the Treasury and get Treasury people seconded into DSS and second people there. We worked on public expenditure with Peter Lilley as a team effort with the combined aim of trying to use the resources to best advantage, and we did bring public expenditure in Social Security under control. I think for the first time between 1992-95 it actually went up by less than the growth of GDP—it is going up faster again now—because of the various measures we took. That is all I would like to say by way of general introduction.

  431. Still at the general level, what are the dynamics of this? While you knew them and were working with them, were they getting more or less powerful, if that is a concept even worth thinking about?
  (Sir Michael Partridge) It varies from Department to Department. I was very struck when I went to the Home Office that financial control did not dominate the Department in the way it does at DSS and DHSS. The finance division in Social Security is enormously powerful and nothing moves without their approval or their full knowledge because it all costs money and even one per cent is £1 billion, so it is a lot of money. In the Home Office that is not quite so, the financial control is much smaller and it tends to be more policy driven because there is not so much money involved and you tend to bring in finance later and consult the Treasury later. You can do quite a lot of policies in the Home Office without consulting the Treasury so much. So there is a difference. I saw in DSS, as I have said, the Treasury started off quite strong in the 1960s but they lost control between 1964-66 and 1974-76 and that was pretty disastrous for the Government and for the country. It is important that they do stay in control. I observed them getting much stronger in my last ten to 15 years. Partly that was by design, the partnership and the team efforts that I was talking about, but partly it was because they made this mistake of trying to move into policy and there I think they wasted an awful lot of time and civil servants' time and effort in considering ideas which were non-runners either practically or politically. I will give you a good example. The Treasury has a wish list of things it would like to cut in Social Security and I could reel off about 50 items because they wheel them out every year. I remember in my last year, 1995, they wheeled out, as usual, abolish war pensions, which is high on their list. I thought my Secretary of State, Mr Lilley, dealt with it extremely well with the Chief Secretary, Michael Portillo. He said "I happen to think there is a lot of merit in that, there is quite a lot of money wasted on war pensions and I cannot think of a better year to do it than 1995, the fiftieth anniversary of D-day with an election coming" and Mr Portillo said "I think we will go on to item two". Mr Lilley said "we are certainly not writing a paper and taking that through Cabinet Committees, it is a barmy idea".

  432. So what are you saying? Are you saying that, therefore, the relationship between, for instance, the DSS and the Treasury is dependent upon the personalities of the Ministers?
  (Sir Michael Partridge) Yes, I think it is and I think it is very dependent, not as much as it used to be, on personalities in the Treasury. When I came in in 1960 the Treasury was, and still is, a collection of very bright individuals but they operated very much as bright individuals, each one had a programme, and it depended on the ability and force of personality of that person whether the Department got a hard time or not. I think that was not a good system and they were rather behind Whitehall in a lot of the managerial changes that we made in the 1970s and 1980s. I think it was not until Sir Terence Burns, as he was then, started to reform the Treasury in the early 1990s that they started to catch up on these modern management methods. I think he has reorganised it a lot so that they now look at public expenditure on a three year basis and more globally and more as a team. The management reforms he made changed that. Before it was very dependent on personalities and particularly on the personality of the Chancellor and the Chief Secretary and, of course, the Secretary of State for Social Security. I worked for a succession of powerful Secretaries of State—Mr Crossman, Sir Keith Joseph, Mrs Castle, Tony Newton and Peter Lilley particularly—who were very, very good at discussing things with the Treasury. Not always in a confrontational way but in a sense of saying what do you want to achieve in restraint of public expenditure and what is the best way to do it. I think Mr Lilley, again, summed that up very well. He used to say fairly forcefully to them "Look, you stick to the money, tell me how much you want to save, is it £3 billion a year or £4 billion a year? I will go away and devise the best policies to do that. Do not waste my time in putting forward piecemeal policies and seeing how they add up to £3 billion or £4 billion, I will go away and do that because you can find a billion in Social Security easily, one per cent, by just shaving upratings and other items by a few pence. That may be a more sensible way to do it than, say, abolishing war pensions". I think he got it right, the Treasury should stick to managing the money and scrutinising policies, they should not try and make policy.

  433. What does the Treasury do well? The last few sentences there were the beginnings of defining that but would you like to elaborate on that a bit further?
  (Sir Michael Partridge) I think the Treasury has two main jobs in my view. One is financial management of the country, the Budget and that sort of thing, and the second is control of public expenditure and if they do not do it public expenditure will soar because things like Social Security have a built in escalator. Those are the two essential tasks. I think they should eschew getting into taking responsibility for particular policies, like running financial services or trying to take over pensions, which they are always trying to do, and they should eschew trying to do other Departments' policies for them.

  434. Can you give us any other examples of where the Treasury has spurred Departments into securing better economies or more efficiency?
  (Sir Michael Partridge) Oh, yes. The Treasury is one of the most powerful allies that the Permanent Secretary and the Departmental Accounting Officer has in trying to get efficiency and value for money in the Department because his Ministers are not running the finances of the Department, he is directly responsible to Parliament. They tend to want to expand the Department and if the Permanent Secretary is going to keep it under control and get it more efficient, there is not a lot of votes in that frankly. When I reorganised the DSS into agencies in 1989-92 Mr Newton, who was a very, very good Secretary of State, took some persuading that this was a good thing to do because the Department was working quite well and why throw the whole thing up in the air, it might go wrong and he would take the can and he could not see much political kudos from saying "I have carried through a great management revolution". The Treasury were enormous allies, and can be, in pressing for greater efficiency and better means of doing things. They can also curtail panics when people get into a crisis and want to spend a lot of money because that is the easiest way to solve it, the Treasury can say "hang on a minute, what is the real problem" and help you to analyse it properly.

  435. To what extent do complaints regularly made about the Treasury arise from Departments having pet schemes blocked or questioned?
  (Sir Michael Partridge) There is partly that, but I will come to another more important thing in a minute. I have spent my life, as I say, helping in devising and implementing new pension schemes. The Treasury has been solidly against new pension schemes right from graduated pensions, through the Crossman reforms, Sir Keith Joseph and Mrs Castle. They do not like National Insurance, they prefer means-tested benefits which they can control because that comes from tax and you can put them up and down and people do not build up rights. They fought pension schemes tooth and nail and I think they fought them too far. I can also give you a good example from recent years where I think a very good idea of revising child support, child maintenance, which was in a hopeless position in the courts, was a good idea and it was ruined by the Treasury's insistence, when we came to the details on the proposals, on not agreeing to three key features. One was that the woman should keep part of the money. The second was that we should phase it in. The third was that we should not take on all past cases from the start, we should start with new cases. The Treasury won all those three battles and the scheme was doomed to disaster from that moment because it was too big. They tried to get as much money upfront as they possible could and the answer was we ended up getting far less and the whole scheme got discredited. I think that is one point about pet schemes, the Treasury can be useful but they can also destroy good ideas. I think the more important thing though is that it is not so much that they can stop good schemes, it is that they themselves can promote bad schemes. If you do not have a strong Minister you can get a new policy put in, in the secrecy of the Budget, which has not been properly tested in Cabinet Committees and Cabinet which turns out to be disastrous. I have to say, that has increased in my experience over the last ten years, and particularly in the last five, that the Chancellor tends to cook up ideas and the Department is either told at the last minute or not told at all. There is no chance to work it through like a a proper policy and say "Will this really work? Is it feasible? Is it practicable? What is the best way to do it?", it gets rushed in and things get done and they do not work.

  436. To what extent do you think the Treasury defends the taxpayer from Departments becoming the advocates of various lobby groups?
  (Sir Michael Partridge) That is their main job. Departments do become the advocates, I think, of their pressure groups, there is no doubt about that. The other thing the Treasury can do is to try to get some co-ordination across Whitehall, they can be an ally there. We had, for example, under the Conservatives in the 1980s, a policy of putting up rents. This went so far that we were left in DSS to pick up the bill to help the poorest and we paid their rents 100 per cent. We got to the point where we were able to demonstrate the money they got from the increased rents was actually less than they were paying out in means tested benefits because the levels were going up so fast in response to popular pressure—the earning limits went up £3,000, £5,000, £8,000, £16,000—that it was actually a counter-productive policy. Now we could not get the Department of the Environment to cease—because that was their golden goose—and we were picking up the tab. The Treasury were very useful in saying "Hang on a minute, this is not a sensible policy across Whitehall. We need to rethink this".

  437. Is there a case for the Treasury being split up?
  (Sir Michael Partridge) You have first to find what you want it to do. I think the two key things are the things I have said, financial management and control of public expenditure. I think it would be pretty disastrous to break those up. I think other things, like control of economic policy, have tended to drift into the Treasury away from people like DTI with bad effects. I do not think, as I have said, the Treasury should try and run policies. They have also been clawing in some social policies. Since they gave interest rates out to the Bank of England, which I think was very sensible, the Treasury is about right at the moment. The other thing I think it should not try and do is run the Civil Service. It did for many years, then there was the Civil Service Department, and that has now been split off to the Cabinet Secretary and the Cabinet Office. I think that is quite right. The more you add to the two essential functions, the less effective the Treasury will become, and it is certainly less effective when it is in charge of the policy itself because it should not be, it should be the watchdog and guardian and sceptical critic of all policies.

  438. Do you think there is a case for establishing some other unit in Whitehall to counterbalance the Treasury's power and influence such as, for instance, enhancing the role of the Cabinet Office?
  (Sir Michael Partridge) I have seen various experiments on this. The Treasury is enormously powerful and it takes some doing to set up a counter-balance to the Treasury. I saw the DEA set up in 1964 and that failed because they did not have sufficient clout and you could not really run economic policy, separately in that sense. I have seen the Civil Service Department split off to try and run the Civil Service as a counterweight, that did not work. I think it is now rightly placed with the Cabinet Office and the Cabinet Secretary. The Treasury have also hived off interest rates, as I have said, which I think is right too, they cannot run both, otherwise it becomes schizophrenic. I think it is a mistake to try to set up something as a specific counterweight to the Treasury. I think that will either diminish their effectiveness in their proper role of control of public expenditure and financial management or it will duplicate things and you will get a fight and the Treasury will win. I am not myself in favour of setting up a big Prime Minister's Department to do that. I think the Cabinet Office should work for the Government as a whole. I think what one is really saying in trying to set up a big Prime Minister's Department is "We do not like the Treasury running everything". The answer is to stop the Treasury running everything, the policies, not to set up a counterweight. I think that would merely lead to tensions in Whitehall and play one off against the other.

  439. Under the new arrangement, do you think the Treasury should be allowed to set various Departments' budgets, negotiate things and judge whether the Public Service Agreement contracts have been met?
  (Sir Michael Partridge) No, I do not. I think this should be left with Departments. I was a very strong proponent when I was Permanent Secretary of the fact that I was the Accounting Officer, and the head of the Department and I ran the Department. Indeed, I think what the Treasury should do is set the global totals. It should do that and probably cut them, because that is the biggest step to efficiency, cut them a bit each year and ask for efficiencies. I had a strong battle with the Chief Secretary when we got to my departmental running costs, which were £4 billion a year at that time in the DSS, where we wanted to have a big new computer operation and the Treasury said they did not like it. They did not think we should do it and they were not persuaded and I said "Frankly, it is none of your business. You should decide how much money I get, eg. £4 billion. If you want to cut £300 million off because of my computer project, do it, but you should not try and run my Department. You should not try and say `You should do this and you should not do that', that is my responsibility and I am the Accounting Officer responsible for the Department and I should be trusted to run that". I think if you centralise too much like that you take away all responsibility. I tried in setting my agencies at DSS to devolve power right down to my agency heads and the Treasury did not like this. I said "I am not going to try and run their agencies. I shall give them a budget. I shall hold them to account. I shall cut their resources. I shall look for efficiencies, to be presented here, but I am not going to tell them how many people they employ or in what grade or how many computers they should use or how they should organise". I was very pleased that the Benefits Agency decentralised everything and that the Contributions Agency, which has now gone to the Inland Revenue, centralised everything because that was the most efficient way to run that. You could not have done that under a centralised system either under me or the Treasury. In the end the Chief Secretary said "I suppose you are right" but I fear that has become less true now because the Treasury, as you say, is getting involved in this detailed management. I think it is a big mistake. I am Chairman of Middlesex University too and I have encouraged the same system there. They devolve budget responsibility to the Deans, they do not try and run it from the centre.