The power of finance ministries – a case study

This blog seeks its inspiration from an excellent example of an institution-specific study of fiscal policy as viewed through the prism of finance ministries. This is represented by a thorough and independent review of the UK’s Treasury. It was commissioned by the Shadow Chancellor of the UK, John McDonnell MP and led by a high-powered panel of academics and practitioners.

The study begins by noting that the Treasury is a ‘small department’ by UK standards but wields ‘immense power’. This is largely because of its role in managing government finances, but also because of the power and status associated with the UK Chancellor (equivalent to finance ministers in other parts of the world) in the government hierarchy. The study makes the cutting observation that the Treasury is often seen as ‘arrogant, overbearing and insensitive to other departments’. It is also criticized by the study for becoming an avid advocate of fiscal austerity and for seeking to take control of the policy agenda under the guise of exercising its financial and prudential obligations. The Treasury is criticized for failing to take the leadership in responding to UK’s multiple economic challenges as reflected in low productivity and underinvestment that has held back fair and sustainable growth.

The study recommends that the Treasury be reformed to become a truly independent and impartial source of macroeconomic policy advice, especially given that the Bank of England, in common with other central banks in advanced countries, have assumed the primary role of short-run macroeconomic stabilization. This would mean encouraging diversity of economic views, playing the role of an ‘honest broker’ in initiating debates on UK’s long-term economic challenges and how to respond to them, devolution of fiscal authority, and encouraging a culture of inclusion towards other departments.

Is this characterization of the UK Treasury a reasonable depiction of finance ministries across the world, especially in developing countries? There are some general principles that seem to emerge from the study. First, it is probably the case that finance ministries in developing countries wield significant influence, if not actual power, largely because of their role in managing government finances and the status enjoyed by finance ministers in the government hierarchy. This influential role is enhanced by the fact that they are the traditional interlocutors to the international financial institutions, most notably the IMF. Second, in cases where central bank independence is constrained and inflation targeting regimes are not fully embedded, the finance ministry ends up becoming the preeminent voice in managing the macro-economy. Third, the relationship between the finance ministry and the other spending departments can indeed turn out to be unequal, creating scope for a corporate culture of arrogance and overbearing proclivity. Fourth, and perhaps the most important, finance ministries can become bastions of fiscal conservatism to the neglect of broader developmental concerns.

 

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