Lord Nicholas Macpherson joined the Treasury in 1985 and served as Permanent Secretary from 2005 to 2016.
This interview was conducted on 18 October 2021.
Q: Could you tell us about your engagement in regional policy at the Treasury?
My role in regional policy was relatively limited. I joined the Treasury in 1985 and for my first year, working as an economic adviser, I was working on industrial support and regional policy. Then from 2001 to 2004, I ran the Public Services directorate of the Treasury, which contained the team responsible for regional policy. As a result of the 2002 Spending Review, I shared responsibility, as a Senior Responsible Owner, with whatever the Industry Department was called. During that period, the Department for the Environment, as it was called in the 1980s, went through various transformations – the Office of the Deputy Prime Minister, Department for the Environment, Transport and the Regions. They were involved too.
Q: What were the policy objectives that you were trying to achieve with respect to regional inequalities in the early 2000s?
My recollection is that the Government at that time was, like most governments, committed to sustainable growth whilst also addressing poverty. It had, I think, an explicit objective about ensuring that the rate of growth between the fastest growing regions and the rest was narrowed. It wasn’t just ‘levelling up’ in the conventional sense. This was actually about the second derivative. It was about recognising that some regions historically had grown faster. It was not about reducing those faster growing regions’ rates of growth, but it was about narrowing the gap in growth rates. I should say that that objective came out of extensive work by the Growth Unit part of the Treasury. There was a team which was concerned with raising productivity growth. Chris Martin did quite a lot of work on the regional aspect of productivity. Generally, we looked at regional growth within a growth framework which had wider application.
Q: How did you monitor progress towards that objective?
One of the problems, which I think we were all dealing with, was the relative paucity of decent statistics. As I recall, there was a measure of gross value added by region but that was a nominal measure and it was produced with a long lag. About this time, in the early 2000s, there had been a serious effort, encouraged by the then-Chancellor and his economic adviser, to try and improve the stats. There was a review by a guy called Chris Allsopp, in 1999 or 2000.
I think with hindsight – partly because the Office for National Statistics was relatively arm’s length – we didn’t have as much success in transforming the relevant statistical series. Obviously, there are lots of other indicators. Regional unemployment is produced quickly. But the measure which we actually used was Gross Value Added. It’s better than nothing. But perhaps there are better measures.
Q: Are you surprised that we haven’t seen convergence across regions given the policy bundle in place from the early 2000s?
I would make two points. First, the financial crisis just drove a coach and horses through government microeconomic policy. Suddenly the Treasury, the Prime Minister, were very much focused on the macroeconomic agenda, which just meant that policies like these got squeezed out. It doesn’t mean there weren’t people in the Treasury really worrying about them and thinking about them, but perhaps they fell down the list of priorities.
Secondly, the Coalition Government elected in 2010 really didn’t subscribe to this agenda at all. For perfectly good reasons, it was committed to quite rapid reductions in public spending and didn’t really consider those changes in spending through a regional lens. In fact, if anything – if you look at the accompanying policies like abolishing Sure Start and so on – I think it’s fair to say that the regional and anti-poverty agenda didn’t really feature.
If you’re going to have any impact on underlying longstanding problems in Britain, I think the solution requires a cross-party consensus, real persistence and focus on the part of central government, working closely with local and regional players. Had those conditions remained in place post-2004 and had there been consistent policy between 2004 and 2021, I’m pretty sure you’d be beginning to see some consequences. That would have required a degree of focus and persistence which British central government rarely shows, partly because governments come and go, but also because the central government finds it very difficult to focus on anything very much.
Q: Did the setting of those objectives in the early 2000s feel like a radical break in policy?
It represented a change in objective because here was an attempt to quantify inequality and report against it. It was part of a Public Service Agreement framework which had been invented pretty much on the hoof in 1998. By 2002, partly because of the reduction in targets and partly because of the greater focus on cross-cutting issues, which required real cooperation across Whitehall and local and regional tiers of government, that represented a pretty substantive change.
I joined the Treasury in 1985 and for my first year, working as an economic adviser, I was working on industrial support and regional policy. That year there was a Treasury-led review into regional policy, published in 1986. It was looking across the gamut of industrial interventions. In those days, there were programmes like the Advanced Factory Programme, where the government would effectively subsidise – or actually build itself – factories, which clearly had a huge regional dimension. There was a generic Regional Development Grant if you created employment in more deprived areas. And there’s also something called Regional Selective Assistance, which was designed to target specific projects.
The big change in 1986 was that the old Regional Development Grant was abolished. The Government chose to put more focus on Regional Selective Assistance, subject to tough Treasury criteria around additionality. That system could occasionally give large amounts of money to people like Nissan, then setting up factories in the North East. The amount of money which was spent on regional policy was reduced substantively. Thereafter, under John Major in the 1990s, there was slightly more sympathy for regional policy, though it was necessary to keep a tight grip on public spending. I don’t recollect expenditure going up very much.
Labour in 1997 understandably wanted to do more things in this area. I think it’s fair to say that the Treasury – the political Treasury as well as the official Treasury – was quite sceptical about going back to 1970s-style generic grants and was more interested in the ‘drivers of growth’, the drivers of regional productivity. There were local programmes like the New Deal for Communities, which I think did have quite a big effect. We tended to support deprived areas within regions. The main priority in the late 1990s was to get a better evidence base to ensure that when the government did intervene, it would have a more serious effect. There’s some really good analysis, coming out of the productivity team and the Treasury’s work on regional inequalities, which demonstrated that often inequalities within regions were as great as inequalities between regions. Therefore you have to look at this in a slightly more mature way.
Q: Alongside persistence and partnerships, what level of resources do you think are needed to achieve meaningful regional convergence?
It’s very difficult to say what the ‘right level’ of resource is. With public spending programmes, it depends on how it’s spent. I am struck by the resources which went to some of the agencies created around about the turn of the century – the Regional Development Agencies in particular – and I’m not sure where that money went. I suspect post-2010 it was re-allocated to other agencies but, in the process, cut substantially.
I think you do need some resource, and probably more than goes in there at the moment. Whether or not you recreate the Regional Development Agencies, it needs to get through to organisations who are more in touch with localities and city-regions. The one thing you can’t do is run these policies out of Whitehall. It just simply doesn’t have the capacity and doesn’t have the knowledge. I think the one lesson – which has emerged as a cross-party consensus – is that you need to devolve more. The city mayors of the Andy Burnham-variety in Manchester reflect a cross-party consensus and are becoming embedded. The challenge is: it’s relatively easy when you can identify a clear city-region as you can in Greater Manchester; it’s far more difficult if Leeds and Sheffield aren’t talking to each other and so on.
Q: Was there a common Whitehall view of how much to devolve to drive growth?
I think it was very variegated picture. Normally the Department which is responsible for local government is more enthusiastic about devolving than the public service departments. For the Treasury, the problem in the early 1980s was that the Treasury couldn’t control public spending. Local authorities still had quite serious revenue raising powers and much more of local authority spending was financed by taxation in those days.
By the early 1990s the Treasury could control public spending. At that point, I think, it started to become an ally for greater devolution, partly because it was acutely aware of all these very centralised departments who were determined to hang on to their budgets. I’m referring mainly to education which had moved in a very centralising direction as local authorities increasingly were cut out of education policy; but also the Home Office, the Department for Health. All of these organisations had been given pretty big, serious objectives, and wanted to keep the money and decision-making to themselves to drive progress on their programmes with a vertical structure.
The Treasury, along with the local government department, was always seeking to chip away at ring-fenced programmes to try and devolve greater autonomy. At a very micro level, I remember coming out of either the 1998 Spending Review or the 2000 Spending Review with Local Public Service Agreements. Explicit in that was: if you could agree some general objectives with the local authority, more money would be devolved to them to enable them to take decisions rather than the central government. It was always very hard work because traditional centralised-spending departments in Whitehall were opposed.
Some of the individuals in the business department were pretty unreconstructed centralisers. I think there’s another reason which was problematic: certainly by 2004, the internal politics of the Labour Party. This was largely a John Prescott and Gordon Brown agenda and the Prime Minister simply wasn’t interested. He may have made some speech at some point, but most of his priorities were things like reducing waiting lists or dealing with street crime. He preferred a very centralist approach where, instead of devolving street crime in Manchester, he’d get the Chief Constable into Number 10 Downing Street and demand to know why they weren’t making more progress on street crime.
So variation in departmental positions were partly official differences of entities, but also different positions within the government. If we really wanted to make progress, it would have been nice if the Prime Minister had been more interested in this. It just might have helped unblock the odd thing. He wasn’t interested in regional devolution either.
Q: What is your evaluation of capability and capacity in local government?
A lot of this depends on local leadership. This is an arbitrariness to all of this. Where you’ve got very strong local leadership with strong local capacity, I think it’s possible to make faster progress. People would use the Manchester example: you’d had the same chief executive for years, Howard Bernstein, and he knew just how to engage with central government.
You can’t just build these things up from nothing. It takes time. Usually, when you’re reorganising or creating new agencies, there’s a period where everybody is applying for jobs and recruiting people. This tends to take away focus from the immediate problem you’re dealing with. It’s one reason why I would always apply a very high bar before ever recommending reorganisation of anything. Politics is all about five-year terms, and if you waste two years of them rearranging deck chairs, that can be destructive. On the other hand, sometimes, if you really want to change things, you’ve got to rearrange deck chairs. I do think that local areas which have now been under this new regime for some time – take London, where there’s been a mayor now for 23 years or so – then capacity has been built. There’s a far stronger sense of what you’re doing and what works. But this isn’t the sort of thing you can build in a year or two. It takes real persistence.
Q: What are the lessons from Scottish and Welsh devolution for England?
It’s difficult because devolution to Edinburgh has been accompanied by centralisation within Scotland. I don’t get a great sense that the Cardiff government has wanted to devolve too much power either. I think the lesson of Scotland and Wales is that you can develop a seriously different approach to public services, for better or for worse.
Interestingly, the amount of tax-raising powers which have been devolved, until relatively recently, have been very small. I think in the end, if you want to transform Britain, you do need to devolve more tax-raising powers. Scotland now has considerably more tax raising powers than it did, say, six years ago, but it has been amazingly reluctant to use them. I think partly because most of their financing in practice still comes from Westminster.
I don’t think there’s a huge amount of lessons from Scotland or Wales other than that – rather like Greater London – there is no question about their geographic composition. The problem with the English regions came after the North East referendum where regional democracy was rejected. It’s difficult to create the same democratic legitimacy as the Welsh and Scottish governments have. Maybe city-regions are the answer, but that still leaves really substantial areas of England without coverage. This has been the problem going back to Edward Heath’s changes to the local government in the 1970s and further back still.
Q: How important is an accountability tier – an elected parliament or regional assembly – for enabling devolution?
I think it’s important. I was always hopeful that regional assemblies might take off because it’s the obvious way of squaring the circle. It’s also a problem with the mayor model in my view. You create these potentially quite powerful figureheads. They’re accountable to the electorate, but not an assembly. It’s striking that thing have been devolved to Manchester in some areas that haven’t been devolved to London, but tax powers have not.
I think tax does lie at the heart of this. There has been a move over the last 70 years to greater centralisation, certainly in education. Health was always centralised – with the famous Bevan quote about bed pans. When I started in the Treasury, education was still very much a local authority responsibility. The Department for Education provided a framework, and it was local authorities who were there to implement it and were accountable for that. You had a democratically elected education authority. But that’s all in the past because education policy has become more centralised. Education Secretaries are claiming that they’re decentralising more by creating academies and free schools.
It is quite tricky. One problem is the tidy-minded Treasury mindset, which wanted to have regional assemblies. I detect no desire now from anybody to create them.
Q: Is there a feasible path towards greater tax and fiscal decentralisation in England?
I think the horse has largely bolted. We have an absurd system of local taxation. There hasn’t been a revaluation of the council tax since 1990. Its incidences are pretty arbitrary. You wouldn’t want to give up huge amount of power over the council tax simply because it would have an arbitrary effect on taxpayers. In a rational world, you would have a different form of local taxation. There were some quite good reviews of that in the early 2000s.
Personally, I’ve always seen a good case for a local income tax of some sort. Whether that’s determined at the local or regional level would be a matter for discussion. But if you’re going to devolve, you’ve got to devolve a tax which is fair. That is indeed what happened in Scotland and Wales, but I don’t think either of them really have used their powers to raise more revenue except at the margin.
If you’re going to have a sensible devolved tax regime, you want local areas to raise a higher proportion of their revenues. The reason they don’t do that is the difference between Bury and Buckinghamshire and the South is such that you end up having to have some redistribution regime. It’s a measure of the sophistication of our redistribution regimes, most of which are completely incomprehensible, that every government plays with them as a way of rewarding their people. The Tories move to a system where local authorities keep more tax simply to ensure that the areas like South Buckinghamshire do well. England is one of the most centralised states in in the world, considering its size. I don’t see any of these problems being solved anytime soon. I think the modern media makes central government politicians feel even more responsible for things than they did in the past.
Q: What has been the main barrier to decentralisation over the past few decades?
On the tax front, the revealed preference of successive governments is to avoid having to take any tough decisions about local taxation. That can be the only explanation for the fact that the council tax hasn’t been revalued in 30 years. It’s just always too difficult. Even in the high watermark of Gordon Brown’s Treasury, we marched up several hills only to march back down again.
Q: Are there other countries that do better at overcoming this inertia?
I should think so. Some because they are basically federal systems: in the US or if you’re an Australian state or a German länder. I’d be interested to see what the French have done because the French historically have been more centralised than we were. I get a sense that the French devolved a bit more. They did create regional tiers, and I’d be interested to see whether they have moved in one direction.
I think tax is an important issue. But to this issue of locality and where people have allegiance to, I think there is a really interesting obsession with postcode lotteries. It’s a reminder that there are a lot of people in England who basically want the same treatment. Fairness means equality of provision of services across regions. It means the same systems. People don’t want a region to make judgments about how much it spends on this part of health care versus another. It’s really difficult, and that will sound defeatist. I’m not – I just don’t see any great mood for change. And it’s interesting to see the whole new Tory obsession with Levelling Up, I’ve been really interested to see how that actually plays out in practice as opposed to the rhetoric of it.
Q: How did the Treasury think about the relationship between cities and wider localities – were cities thought of as the drivers of growth rather than the region?
I think we thought more in conventional, geographic, regional terms. Where the Treasury was persuaded was that, if you take the 1990 to 2010 era, there was an extraordinary transformation of Northern cities. A lot of that was to do with universities, spinouts from universities, the innovation agenda and often quite dynamic city leadership – at official level, because there weren’t mayors then, but also among the council leaders.
By the mid- to late-2000s, there was a greater interest in the city-region as a phenomenon. What never quite cohered – and it didn’t really cohere later, when George Osborne jumped on that bandwagon – was a clear model of what you would actually devolve to city regions. It was all case by case, and therefore incoherent. I think the Treasury was quite happy to accept that cities could play a role.
Coming back to London, I think London’s success has got remarkably little to do with central government. Devolution and mayors may have played a part in London’s success, but the drivers which have moved London forward have been in place for centuries. They have certainly been reinforced over the last 40 years with liberalisation, the City of London, high degree of immigration and the fact that, structurally, it had a greater service industry focus, unlike the North which had often been dominated by manufacturing which was in decline.
Q: How do you think about the microeconomic interventions needed to drive growth now?
I’m not in the 1980s. I think it would be a real pity if we were to go back to bribing people to locate businesses in specific areas. I don’t think it works – it actually encourages rather crap jobs, which don’t do anybody any good. I’m somewhere between the 2000s and later. I think the priority has got to be to support the drivers of growth, which I see primarily as innovation and encouraging entrepreneurialism, macro issues like competition, infrastructure and, above all, skills. But equally, on all those things, you want to have a greater regional dimension to decision-making to ensure that money is spent sensibly and in a coordinated way.
I don’t want to make a fetish of mayors, but I think they could be part of the solution. I would want to see pots of money being devolved to regional levels and then, ideally, improvements to governance to drive that forward. Where I still don’t have an answer is the democratic accountability aspect of that. But I think we should persist in trying.
Q: To paraphrase you, we have been successful in driving up the graduate share of the population but are missing the coordination needed to support innovative and high value-added companies to scale up, so this is a problem on the local demand side and not the supply side?
There’s definitely something in that: successful cities are ones in which generally graduates do stay behind because they like it. It’s a fun, happening place, and they can do interesting jobs. I’m pretty sceptical about any policy designed to make the world more entrepreneurial because the idea that government has the first clue about being entrepreneurial – forget it. Certainly, more support on just making places attractive for graduates seems to me important.
I still worry about the of 40th to the 75th percentile of the population who I don’t think get a particularly good deal when it comes to skills. This is a problem which people have been wrestling with for years. It doesn’t mean we shouldn’t stop. But if there was a simple answer, I’d like to think someone might have implemented it.
ENDS