The case against the Treasury

At times in this sweltering summer Conservative leadership campaign it has felt as if the greatest enemy of British economic prosperity hasn't been inflation, the Labour Party or the striking trade unions - not even President Putin and his weaponisation of Russia's fossil fuel exports - but rather a single government department. Or, more specifically, the mindset of those who work within that department.

The so-called "Treasury orthodoxy" has been relentlessly characterised by Liz Truss and her supporters as a baleful anchor on the UK economy, holding us back from a voyage into the sunlit seas of economic growth and rising living standards. "What I know about the Treasury from having worked there is that they do have an economic orthodoxy and they do resist change," she said last month.

Truss said that the Treasury had been "peddling" a particular type of economic policy for the past 20 years and that it hadn't delivered growth. "What people in Britain desperately need now is change," she insisted.

Dig into the Truss critique and the Treasury's main offence has been an apparent failure of imagination; its inability to recognise the growth-enhancing potential of unfunded personal tax cuts, an approach that she has pledged to introduce from "day one" if she becomes prime minister on September 5 by reversing the April rise in national insurance contributions.

The attacks on the Treasury serve to needle her opponent, Rishi Sunak, who was chancellor until his resignation last month and who introduced those national insurance increases as well as plans to lift the headline corporation tax back up to 25 per cent.

Yet Truss's attacks on the Treasury orthodoxy have been so seemingly popular with the Conservative membership that Sunak has taken to echoing them, citing the times that he ignored their hidebound advice.

None of this, it should be pointed out, is particularly novel. The "Treasury view" was castigated as far back as the 1920s by the father of macroeconomics himself, John Maynard Keynes, for resisting additional state spending in the face of a collapse in consumer demand on the grounds that it would be economically counterproductive.

As Britain slipped into the Great Depression in 1931, the Treasury urged ministers to cut welfare and public sector wages in a vain attempt to balance the books — a strategy now regarded as a historic error. Truss's description of the Treasury's "abacus economics, of making sure that tax and spend add up but not focusing enough on economic growth", is one that Keynes would have recognised.

Few people know as much about the Treasury as Terry Burns. A coalminer's son from Co Durham, Burns spent 20 years at the department, rising to become its permanent secretary in 1991. He held the post for seven years and served under the chancellors Norman Lamont, Ken Clarke and Gordon Brown.

Now Lord Burns, he said, whatever its mistakes in the past, the idea that the Treasury was unconcerned with longterm economic growth was nonsense.

He added, though, that outside of emergencies, such as financial crises, wars and pandemics, it was essential for the Treasury to be prudent with the public finances. "There are some principles that I regard all finance ministers seek to operate by in normal times and it is about sound money, sound public finances — it's about an efficient tax system and control over the overall level of public expenditure," he said.

He did not conceal his distaste for the recent rhetoric from politicians, regarding it as a cynical attempt to deflect blame for the outcome of their own economic policies, often taken against the advice of the Treasury. "I think people [at the Treasury] will be surprised that they have been controlling the shots rather than ministers," he said.

Most independent experts would agree with Burns that much of the Treasury-bashing is grossly over the top and that Whitehall needs to exert discipline on departmental spending, not least over prime ministers who often regard increased public spending and tax cuts as attractive levers to pull regardless of the consequences for the nation's finances.

Yet the view that there is something troubling about Treasury orthodoxy is not merely the preserve of those with a political or ideological axe to grind. Diane Coyle worked at the Treasury as an economist and now studies it closely as professor of public policy at Cambridge University. Her critique of its mindset relates to its stance on public investment, especially in relation to areas such as net-zero infrastructure or upgrading the skills of the nation's workforce.

"It doesn't allow for long-term investment — for the state to take a strategic view of what the economy needs," she said. "You have a fiscal orthodoxy that doesn't distinguish between different kinds of government spending — doesn't allow that long-term view."

The Conservative MP Kemi Badenoch, before she was eliminated from the leadership contest, advocated a structural split of the Treasury. The idea was to create one, far less imperial, department to steward the public finances in the short term, and a new economic department to write budgets and focus on long-term economic growth.

Critics say that such a plan failed in the 1960s under Harold Wilson. "I see no urgent need to change the architecture," said Lord Burns. "And I take the slightly cynical view that those people who [want to] have not actually been conducting the use of the institutions in the best way that they could have done."

Such a division already exists in countries such as the United States, Germany and Japan. And it's a reform that the Liberal Australian prime minister Malcolm Fraser enacted in 1976. Since then, Australia has enjoyed an average annual GDP growth rate of 3 per cent, versus 2 per cent in the UK.

Correlation does not equal causation. But for advocates of a similar reform in the UK, it's evidence that facing down Treasury orthodoxy - and power - isn't necessarily the road to economic ruin.

This piece was originally published byThe Sunday Times on 21 August 2022

Sri Lanka's protestors took the palace, but China holds the key

The angry crowds broke through the gates of the president’s palace, brushing past the few ineffectual security guards that remained.

The hungry and desperate protestors swarmed the luxurious rooms and then celebrated by taking a dip in the leader’s private pool.

Across the city, a mob burned down the prime minister’s house.

The scenes from Sri Lanka in recent days have been reminiscent of the storming of the Bastille in 1789 or the Winter Palace in 1917. This was a textbook revolution.

President Rajapaksa, who was not in the palace as the crowds burst in, has resigned and fled the country.

On the face of it, the way is now cleared for this economically shattered nation to rebuild itself, having thrown off the corrupt and incompetent Rajapaksa dynasty. It should be able to restructure its massive foreign debts and begin to restore economic order. Yet, alas, Sri Lanka still faces a major obstacle on the road to economic salvation, in the shape of China and its debts.

Beijing could determine not only Sri Lanka’s future, but also that of dozens of other countries that have borrowed heavily from China over the past decade. Some fear that it could play havoc with the traditional postwar role of the International Monetary Fund (IMF) in rescuing bankrupt nations.

When countries run out of money they call in the IMF, the international lender of last resort to bankrupt sovereign states. In fact, since winning independence from Britain in 1948 Sri Lanka has called in the fund no fewer than 16 times.

This time is different, though, and the prospect of an international financial rescue is deeply uncertain. China is a major creditor of Sri Lanka and the question of how that debt is dealt with is complicating the bailout negotiations, which began in earnest last month when a team from the IMF visited Colombo.

The fund judges Sri Lanka’s total debt — at about 120 per cent of national income — to be unsustainable and in urgent need of being written down to restore order to its finances.

Estimates of the size of the debt to China vary wildly, but Nandalal Weerasinghe, governor of the Sri Lankan central bank, puts it at about 15 per cent of the country’s $50 billion external debt. The Chinese cash has mostly been used to build infrastructure such as new highways, ports and conference centres — many of which analysts argue are destined never to deliver an economic return.

China is not the biggest bilateral lender to Sri Lanka. Japan, for instance, has lent more. And Sri Lanka’s sovereign bonds, issued to international investors, are the biggest tranche of its borrowing. Yet the problem is primarily a Chinese one because Beijing doesn’t seem willing to play by the usual creditor rules when it comes to debt restructuring.

The IMF’s procedures require countries to impose writedowns (or haircuts, in the jargon) on all their creditors equally. It cannot, and does not, allow its emergency bailout cash to be used to pay off external third parties. Will China agree to a haircut on its Sri Lankan loans, unlocking the IMF bailout? Well, it hasn’t yet.

Weeresinghe recently told me he was optimistic that it would. The governor last month described China as a “good friend” of the country and that he was confident Beijing would ultimately offer “similar relief” as other creditors. Yet, as a key participant in the negotiations with the IMF, it’s Weeresinghe’s job to be optimistic.

Others are not so sure. “It’s not clear China would agree to a haircut,” says Umesh Moramudali, an economist at Colombo University. “But you can’t do this restructuring without China. It’s going to be a problem”.

So why might China be hesitating? The problem is that Sri Lanka is part of a much bigger tableau of lending for Beijing.

China has spent hundreds of billions of dollars making loans to developing countries as part of its so-called Belt and Road Initiative, a massive infrastructure lending splurge instigated by President Xi. Among the recipients of these loans it’s by no means only Sri Lanka that is in financial trouble.

The World Bank has warned that up to a dozen other states are at risk of default in the wake of the pandemic, during which they borrowed copiously to stay afloat, and the global food and fuel price rises unleashed by the Russian invasion of Ukraine. On top of this, interest rate rises by the US Federal Reserve are sucking global capital out of developing countries, hammering the value of their currencies against the US dollar and making their debts ever more unsustainable.

The sovereign bonds of 27 states are yielding more than 10 per cent — a benchmark for a high default risk. And many on that list — including Ecuador, Kenya, Venezuela, Tajikistan and Suriname — are heavily in hock to China. Sri Lanka, then, is regarded as a template for a swathe of bankruptcies and restructurings.

“What happens in Sri Lanka will set precedents for what goes on in many other countries. It is the canary in the coalmine,” said Gabriel Sterne, a former IMF analyst, now at Oxford Economics.

In the Chinese embassy in Colombo last month, Qi Zhenhong, the Chinese ambassador, was evasive when I asked him for BBC Newsnight about the possibility that Sri Lanka would be a model for other countries which require debt restructuring. He chose to demur, quoting Tolstoy.

“Happy families are all alike; every unhappy family is unhappy in its own way,” he said. “I think Sri Lanka is unique”.

American politicians, and the head of MI6, accuse China of laying “diplomatic debt traps” to lure countries into over-borrowing and then snapping up their assets, such as strategic ports like Sri Lanka’s Hambantota, on the cheap. The more prosaic reality is that Belt and Road was as much a way of deploying China’s excess domestic savings and spare construction capacity abroad as projecting Chinese power.

And when it comes to debt writedowns it’s more likely that Beijing is, in a phrase from the former Chinese leader Deng Xiaoping, “crossing the river by feeling the stones”. Sterne said: “They’ll drive as hard a bargain as they can. But they don’t have a completely powerful hand. They’re not getting paid at the moment. Getting paid something from any creditor is better than being paid nothing.”

In a Colombo vegetable market Jehan, who runs a local photography business, is agog at prices up 60 per cent on a year earlier. “Very soon a majority of people will be starving if it carries on like this,” he says.

The Sri Lankan people have had their political revolution. But an end to their economic suffering remains some distance away.

This piece was originally published in The Sunday Times on 17 July 2022

Why are Chinese students so keen on the UK?

China is the world's biggest exporter and one of its most contentious exports of late is students.

Every year it is estimated that more than 700,000 Chinese people leave their country to study abroad.

And many of these end up in the UK, learning at British universities.

There are about 144,000 in Britain according to the Higher Education Statistics Authority, a number that is up 50% in just five years.

As the flows of Chinese students into the UK have grown in recent decades there's been growing scrutiny of their impact.

The chairman of the House of Commons foreign affairs select committee, Tom Tugendhat, last year argued that the increasing financial reliance of UK universities on the tuition fees of Chinese students, some with hardline nationalist views, could compromise the academic freedom of these institutions.

Another growing theme is that so-called Crazy Rich Asians - the sons and daughters of rich Chinese industrialists - are swamping campuses and crowding out domestic British students.

Yet there's been rather less focus on the views and attitudes of these Chinese students themselves.

Glasgow is a popular destination for Chinese overseas students, with more than 6,000 studying on its campus, according to the university's authorities.

For a recent Radio 4 documentary, we spent time with some of those students, listening to their perspectives and stories.

And what we found belied many of the stereotypes and raised concerns that have received scant attention.

Despite the Crazy Rich Asian cliché, we found that many were from modest financial backgrounds.

"I was 24 years old and had no experience of living in another country," says student Hua.

"I came from a small village in the countryside in Shandong province."

Indeed, the majority had never left China before they arrived and experienced a culture shock on arrival.

The initial attraction of Glasgow - as well as its solid academic reputation - to many was how the Victorian university buildings looked on the brochures, rather like Hogwarts from the Harry Potter films

"I was amazed by the buildings in Glasgow because I'd never seen that before," says Yifei.

Some felt they weren't getting value for money from the considerable sums their families had scrimped and saved over many years to fund their education.

"I would say that the Chinese students don't get enough attention or enough services for their money," Hua told us.

Luna asks a question of the university.

"We sometimes call ourselves study machines," she says.

"Do you really want to be a study machine maker - or do you really care about the student's wellbeing and want to help them achieve the most during their overseas study?," Luna asks.

Some wanted to integrate more with local life and felt the university wasn't doing enough to facilitate that, being too ready to house them in large exclusively Chinese blocks of residence - like the city's West Village development - and not doing enough to develop their English language skills.

"I really want to make friends with local people, but I don't know how to communicate with them - that makes me a little bit sad," says Fiona.

Glasgow University told us: "As well as language assistance, the university offers international students a host of dedicated services, from practical and academic advice and guidance, to health and wellbeing support, from pre-departure right through to graduation and beyond."

As for politics, despite the fear that students are intolerant Communist Party mouthpieces who impose their views on others, what we found more often was a reticence to get involved in political discussions.

"Even if we have more access to different opinions about democracy and other political topics we don't talk about it that much because we will get in trouble," says a post-graduate student called Eugene.

"We can have some opinions in our own hearts, in our own minds, but we don't talk about this".

But he added that one of the attractions of a UK university, at least for him, was that it allowed more individuality and self-expression than a Chinese higher education.

"You don't have to be a product on an assembly line," he says.

Nevertheless, one student called Jo from Taiwan did say she felt uncomfortable because of the nationalist political attitudes of some Chinese students.

"I don't like to make friends with Chinese students because usually I will get bullied. They always say 'you are Chinese' but I am not," Jo says.

Yet the point is that there is no typical overseas Chinese student experience - just as there is no typical overseas Chinese student.

Cora Xu, a former Chinese international student who now lectures at Durham University, told us that the central problem is that these students tend to be regarded and treated as a homogeneous bloc, both in the public discourse and also by university administrators.

"They are treated as a faceless group that shares certain negative stereotypes," she says.

"[But] they're extremely heterogeneous, extremely diverse - they are very, very vibrant."

This article was originally published on the BBC website on 5 March 2022