Taking the shine off fool's gold

You could think of the Treasury as a body of highly intelligent neutral civil servants, forever guarding our economic wellbeing. They stand as watchdogs of the taxpayers' money, making sure that every penny is spent in the most useful way. The Treasury mandarins are like Hegel's "universal class", which stands above the divisions in society and judges impartially their conflicting claims.

If you hold this view, this is the book for you. David Lipsey is an insider-outsider. He is a fan of the Treasury and shares the values of its culture. His book is therefore a good introduction to that Treasury. One gets a combination of recent economic history, a picture of how the Treasury works, a few gossipy inside stories, the occasional stern judgement and gushing admiration for the guard dogs of George Street.

But there is no reason why one should accept such mythologising. It is all part of the public-school Oxbridge mystique that used to pervade the British civil service. The rest of Whitehall has quite lost the mystique - the Treasury still thrives on it. The reason is that by failing in its job of running the economy properly for the past 50 years, the Treasury has become even more important to our fortunes than any other ministry.

When the times were good and Britain was the leading economic power, the Treasury was far less important. The chancellor was low in the pecking order, except for Gladstone who combined the role with that of prime minister. Most of the chancellors of those days are quite rightly forgotten. The marquess of Salisbury, who was thrice prime minister in the last quarter of the 19th century, denounced Treasury officials as "imbecile punctilios". When Stanley Baldwin offered Churchill the chancellorship in 1924, the latter thought he meant the Duchy of Lancaster.It was Keynes who made Churchill's tenure as chancellor immortal with his pamphlet "The Economic Consequences of Mr Churchill". As for Churchill, he hated his Treasury officials for bouncing him into the return to gold at $4.86 to the pound.

That was not the only disastrous advice the Treasury gave. Keynes, having propagated that Treasury thinking was obsolete dogmatic nonsense, went and joined it in the war and wrote the next orthodoxy. This the Treasury clung to in the postwar years, and did not admit any error. The performance of the British economy - "stop-go", balance-of- trade crises, two devaluations, both of them late, the "stagflation" of the 1970s - were all the result of the Treasury's not revising the lessons it had learned in the 1940s. It always presumes omniscience and berates outside critics; and it can always subdue other ministries by denying them money.

The clever people of the Treasury have managed not to get the blame for any of the failures of the British economy. Reading Lipsey you would not think that this is a body that has presided over the 95 per cent depreciation of the pound internally and its roller-coaster ride on the foreign exchanges. If the subtitle of the book is to be taken seriously, and if the Treasury indeed "runs" the economy, one has to ask how the UK over the past 50 years has slipped so far down the international pecking order. Even Will Hutton in his so-called indictment of the UK, The State We're In , does not blame Treasury mandarins. He blames the class system, the trade unions, the City, the education system, but the Treasury remains a shining beacon.

It is a con trick. The English have this awe of the brainy. Tell ministers that so-and-so has a planet-sized brain and they fall at the person's feet. The Treasury, having built up this myth that it only recruits first-class brains (there is a lot of it in Lipsey's book), is therefore right, even though its decisions defy common sense.

After all, the Treasury is not an economics ministry; its officials are bean counters who regulate cash flow. Their accounting systems are old-fashioned and have been abandoned by most companies. They care not for wider social benefits, they care for current expenditure. The rules on public-sector borrowing requirement, under any other name, make no economic sense, because they do not allow for the future benefits of capital investments. Taxes not collected, such as zero-rated VAT items, are not treated as costs. Thus when the family credit became withholding tax credit, it ceased to be expenditure, and hence the government "saved" money: all because cash did not literally leave the Treasury's coffers but just failed to arrive. And, apparently, you needed several Oxbridge degrees to make this calculation.

If you think I am exaggerating, I suggest a reading of a bill now going through Parliament. It concerns the Treasury's adoption of resource accounting at long last -just in time for the end of the 20th century. It will treat capital expenditure more rationally than its current practice of putting it on the same footing as current expenditure. But it will still not factor in larger social benefits. You can shout till you are deaf that the million-plus carers in the UK who voluntarily care for their relatives, saving the Treasury a couple of billion of pounds, should be given recompense. Never, says the Treasury: that is unjustified expenditure. It is the old story of Professor Pigou, who realised that if he married his housekeeper, the national income would go down because she would no longer be paid for what she did.

The Treasury will carry on regardless. It has captured the economics press and the pundits in the City. Any chancellor who does what it tells him is regarded as sage. Thus, not spending £23 billion of telecoms windfall is regarded as sound economic sense, although universities could do with better research facilities and salary upgrades to make up for the 30 per cent shortfall, the public libraries could restock, museums and art galleries could become free again or housing could be built for the less well off. No, that is all sentimental rubbish. The Treasury has pinched the penny and clipped the pound all these years. If you want to know how, read this excellent introduction to its ways.

Lord Desai is director, Centre for Global Governance, London School of Economics.