Environmental Audit Committee
Oral evidence: HM Treasury and the economics of climate and nature, HC 23
Wednesday 4 November 2026
Ordered by the House of Commons to be published on 4 November 2026.
Members present: Mr Toby Perkins (Chair); Julia Buckley; Jonathan Davies; Cat Eccles; Barry Gardiner; Alison Griffiths; Chris Hinchliff; Manuela Perteghella; Dr Roz Savage; John Whitby; Sammy Wilson.
Questions 160 - 187
Witnesses
II: Jill Rutter, Senior Fellow, Institute for Government; and Professor Michael Jacobs, Emeritus Professor of Political Economy, School of Sociological Studies, Department of Politics and International Relations, University of Sheffield, and Visiting Professor, Global School of Sustainability and the Suntory and Toyota International Centres for Economics and Related Disciplines (STICERD), The London School of Economics and Political Science.
Witnesses: Jill Rutter and Professor Michael Jacobs.
Jill Rutter: I am Jill Rutter. I am a senior fellow at the Institute for Government now, but in previous lives I was at the Treasury for quite a long time—and quite a long time ago—and then I was reincarnated as director of strategy and sustainable development at DEFRA, where I worked with Mr Gardiner as one of our excellent ministerial team back then.
Does the Treasury create barriers? Not in principle to that spending, any more than any other type of public expenditure. The Treasury obviously is in control and sets fiscal aggregates. It is then up to the Cabinet and, in particular, No. 10 and the Treasury to decide what the priorities are and how they want to regard that. While a lot of the emphasis is on the Treasury as an expenditure controlling Department, the Treasury actually has lots of other interests. It sponsors the financial services industry. It has a very big interest in growth, the supply side and regulation. That may flux a bit depending on who is Chancellor. It is also the sole proprietor—with HMRC as its delivery arm—of the tax system, which is also very important. I think when you are looking at the role the Treasury plays on this, you have to remember those other functions as well as just the spending side of the equation.
Jill Rutter: That is very valid. I would say the Treasury is a civil service Department. It is the Chancellor and the Ministers who make those decisions. One of the interesting things is that this area, and this may be a reflection of the relative weakness of relevant Secretaries of State, has been very vulnerable to chopping and changing policy, whether it is on that, or whether it is on investment in carbon capture and storage. When Rishi Sunak was Chancellor, he introduced a thing called the green homes grant as a covid employment measure and turned it off incredibly quickly.
One of the things that I think the Treasury institutionally fails to do when thinking about these projects is it does not seem to understand its market-shaping role—that it takes time to gear up to have enough accredited suppliers to do that necessary retrofit under something like the green homes grant. Then you find if you do that for a limited period and switch it off suddenly, the people who did invest in upskilling their workforce to undertake those projects and take advantage of the grants available suddenly discover that that was a wasted investment because that tap has turned off.
There may be other areas of policy that are as vulnerable to that chopping and changing, but I certainly think that that is a fair commentary on the last 15 or 20 years of policy in this area—that it has too often been subject to an on and off switch without regard for the need for long-term consistency.
Professor Jacobs: Good afternoon, everybody. I am very glad to be here. Thank you for inviting me. My name is Michael Jacobs. I am emeritus professor of political economy at the University of Sheffield and visiting professor in the department of economics and global school of sustainability at LSE. Probably more relevantly for your purposes, I was an adviser to Gordon Brown in the glory days of the last Labour Government, first at the Treasury where I was a member of the council of economic advisers, and then at No. 10 when he was Prime Minister, so first from 2004 to 2007 and then 2007 to 2010 when we were rudely ejected by the electorate. I was mainly focused on environment, climate and energy.
I think the term “Treasury” covers a lot of different things. I am sure you have covered this before. You have certainly covered it in previous inquiries of the Environmental Audit Committee to which I was also invited. Treasury can be the officials, the Chancellor and Ministers, and the process. Jill is absolutely right. As I am sure you will know, in the end it is the Chancellor who makes the decisions. Of course, the Chancellor is advised by Treasury and Treasury as an institution certainly has some cultural biases and so on. But having worked for Gordon Brown, I can tell you that a determined Chancellor can command what his or her officials do.
The process point is the one I want to come to here. The Treasury has a process that is completely unique, which is called the Budget. We still have only one of those a year, although don’t be surprised if there is another fiscal statement made. The Budget is completely unlike any other process because the Chancellor can make decisions in a Budget, which the Treasury would never allow any other Department to make, with no scrutiny and no legislative scrutiny. It is not just no scrutiny of the Chancellor and what he or she is doing, but no legislative scrutiny. It goes into a finance Bill, and the finance Bill goes through without any of the scrutiny that an environmental Bill put forward by DEFRA or an energy or climate change Bill put forward by DESNZ would have.
In a Budget, there is now an incentive—which of course does not come from my old boss at all—to fiddle. We had a lot of measures in the Budget passed a week or so ago—98, I think there were. Gordon Brown was known sometimes to pass lots of little measures, and those measures do not have any scrutiny, and they can be extremely disruptive to markets in the real world, business investment and so on. This is a problem, and I do not think it has had enough attention.
It is not about the environment; this is true in any field. The Chancellor can just muck around with the tax system and indeed subsidies, grants, and other bits of policymaking, which he or she and certainly their civil servants would never allow any other Department to do.
Professor Jacobs: My information as to actual practice is out of date. I have not been at the Treasury since 2007. You will have heard, I hope, from people with more recent experience, but my general view of this is that there are two major problems. One is that the Treasury is very powerful—it literally has veto power on almost all expenditure decisions—but it is the assessor, not the proposer, of the policies in every area except those of fiscal policy and some growth policy. The Treasury’s job is to say yes or no, and quite often no. It is quite often “no” in a structural sense because there is always too much expenditure demand from Departments, so it has to say no to some things.
I was always very frustrated that some of the brightest civil servants that I encountered in Whitehall were in the Treasury saying no to things rather than in the other Departments proposing things. I think that is a structural problem, and there is still a cachet in being a Treasury civil servant, and it is somewhat true. I suppose it is still true, and other Departments might question this, whether the brightest graduates in the fast stream go into the Treasury.
As far as that is still possible, or even if they are not the brightest, but they are just very bright, it always frustrated me that all they did with the policy was to say yea or nay. That is a structural problem, because in the end, good policymaking is innovative and creative, and has to find ways of overcoming problems, satisfying different stakeholders and so on. I would like to see the brightest civil servants trying to do those things.
There is another way in which this is generally true, which is if you have even three-year spending settlements, everything has to work within the three years. Clearly, a lot of environmental policy is designed to work over much longer periods, both on the investment side, because it is aimed at trying to get investment, but also simply on the preventative side, on adaptation and so on. Things do not have three-year paybacks, and the Treasury system can pull things back to what can be done in three years, what can be proved in three years, the Green Book and so on. Yes, I do think that there is a bias. I do not think it is specific to the environment. I think this is true in social policy and various other areas as well.
Jill Rutter: There are some things that have improved. We have multi‑year spending rounds, which was an initiative under Gordon Brown, whereas previously we had essentially one-year spending rounds, so that gives a bit more certainty. This Government have extended the period for capital to five years, which is better than three years. The Government have recently reduced the discount rate, which will benefit projects with longer‑term benefits in response to—
Professor Jacobs: It is slightly delayed, given that the Stern review proposed this in 2006.
Jill Rutter: Yes, but the Treasury never regarded the Stern review particularly as being relevant to it, as opposed to the rest of the world, which I think was an issue with the Stern review, or at least a Treasury official told me that at the time, that “Stern was for foreigners”, when I suggested it might be influencing the next Budget—that was when I was at DEFRA, rather than at the Treasury. I do not think it is a challenge function.
We have written extensively at the Institute for Government about the oddities of the Budget process in a report we put out in 2017 called “Better Budgets”. It is very weird and very different from normal policymaking processes. One of the big frustrations, if you are in a Department like DEFRA, is that you will find policies in your area being developed by the Treasury without reference to what you are already doing.
Then, because the Treasury can almost pass you in the fast lane through the Budget process, you will discover that your painstaking work with stakeholders to build some consensus on something, which you think is your policy area, has been overtaken by the Treasury trying to do its own scheme in a similar area so that the Chancellor can announce it rather than your Secretary of State, or that some initiative you have been working on has been cut off by a commitment that the Treasury has made.
I remember we were working up something at great length on corporate sustainability reporting, which we had done quite a lot of work on, only to discover that a very senior Treasury official had persuaded the Chancellor that this should be dropped as part of a deregulation initiative after a lunch with the CBI. The Treasury can throw its weight around, and you can very often in another Department feel very much at the receiving end.
What you do not get enough of—in my time, I think it has probably improved to an extent now—is genuine co-production of policies in these areas between the Treasury and the relevant Department, particularly if it is something that is going to be in the Budget. We saw stories this year that John Healy was imposing more siloisation within the Treasury itself, more compartmentalisation.
The Treasury is incredibly protective of anything that the Chancellor is going to announce in a Budget. As a non-Treasury Department, you only ever get to see a little slice of that, if you get that. It may be when it is already in the documentation and too late to say, “We think there might be a slightly better way of doing that.” I think that is a bit frustrating, but I do not think it is a challenge function, per se, that is the problem. I think the problems lie elsewhere.
Professor Jacobs: Let me answer this one first. There is a very specific technical reason things that might prove valuable after more than five years are not properly assessed. There are quite a number of reasons, but I want to focus on one, because I have literally just written about this in a piece in The New Statesman, which is that the OBR has an economic model that literally assumes away any multiplier or long-term effect beyond five years, so there are none in the way the OBR models the economic effects of policy, which is a problem on the growth side—less on the social and economic benefits side, because the OBR does not measure those things.
On the purely growth effects, if, for example, you have an investment that is mainly going to pay off genuinely in financial or growth terms after more than five years or in generating more growth, or it is going to save you money and have a growth or fiscal impact after more than five years, it does not count, basically. This definitely militates against doing it, because on the fiscal rules side, in compliance with the fiscal rules, the way the OBR is going to judge your policy is important, and the OBR scores every policy.
As well as the Treasury’s fiscal scoring, the OBR has to do a growth scoring of policies. First, it literally does not take anything beyond five years, but even within the five years, it is a rather sceptical body. Technically, its multiplier effects are smaller than many other people’s estimates. It has a strong crowding-out hypothesis, so public investment tends to crowd out private investment. It assumes that the economy is nearly at full employment and the output gap is small. There is a very technical thing about the OBR model in all of this, which I think is worth the Committee—it is not just environment, but it clearly has an environmental impact—
Barry Gardiner: Professor Jacobs, very eloquently and with great erudition, you restated what I thought my question was.
Professor Jacobs: Then the answer is yes.
Professor Jacobs: I would be very glad to. I think the OBR model needs reviewing. Some colleagues and I have literally just written to Professor Jonathan Haskel today suggesting that. If the Environmental Audit Committee also wants to suggest that it would probably count more than our letter. That is on the very technical side.
The more general answer—and this is the kind of an answer to many of your questions today, in so far as we have been generally briefed on what you are interested in—relates to the challenge function, which is that at the moment Departments propose and Treasury assesses. That is not a very good way of engaging the Treasury. The experience that both Jill and I had of the last Labour Government included the creation of the Office of Climate Change. If you are not aware of that, it is worth going back to. The Office of Climate Change was set up by David Miliband when he was DEFRA Secretary in 2006—
Barry Gardiner: It was 2007.
Professor Jacobs: Was it from 2007? It was a new office—
Barry Gardiner: The Act was in 2008, but—
Professor Jacobs: The Act, yes. It was mainly operating to that. I cannot remember exactly when it was set up.
Jill Rutter: It was 2007.
Professor Jacobs: I defer to Jill, whose memory is better than mine. It was cross-departmental and did some very good work at the Institute for Government about that experience. It had officials coming from all the Departments who had a dual line of accountability. They were still accountable to their line managers in their own Departments, but they were also trying to produce joint work, jointly accountable to the Secretary of State.
This was not put under the Cabinet Office; it was put under the person who had the official responsibility for climate change policy. It generated two things. One is quite a lot of innovation; we had quite a lot of new thinking. Secondly, we had more buy-in. It was much easier to get buy-in from the Treasury because it was involved in the process.
I would regard this as a good model in general for policymaking, not just in this field, which is that you bring the Treasury and all these bright civil servants into the process as part of the policymaking process. That also means that, when it goes to the Cabinet Committee, you do not have the Minister proposing and the Treasury Minister getting advice saying, “No, no, no.” That includes the other Departments too.
Some of you have been on Cabinet Committees, and they are a kind of disastrous process in which the Minister is the presenter and everybody else has their briefings from their officials, which say why they don’t like it. The fact that you are all members of the same political party has completely gone out of the window. More collaboration between Departments at official level, and I would also say at the ministerial level, is one way of overcoming that.
Jill Rutter: I agree. I think the OCC was a very good institutional innovation. David Miliband’s initial intention was that it should be a Cabinet Office unit. The then Cabinet Secretary did not want any more units in the Cabinet Office. That was why it ended up in DEFRA, with cross‑departmental sponsorship as far as people were up for that. It did work very well, I think.
I would say to do some more things. The OBR has quite a limited role. It is up to the Government. The Government set the fiscal rules. It is up to the Government how much weight they give to the OBR. Even if the OBR does not look beyond five years that is no reason the Government should not look beyond five years.
There is an interesting thing about filling in the gap between the OBR’s horizon that we see in accompanying Budget statements, which is the five-year forecast period, etc, and its 30-year fiscal risks report. It is an interesting question about should we not have a view, maybe a more operational view, of what is happening in that intermediate period?
There is also an interesting question about scope for collaboration, which may be helped by one big fiscal statement a year, if we can go back to that. I agree with Michael that next year might be an exception—hopefully just an exception—in getting more collaboration between the OBR and other people looking forward in the economy to ground some of that fiscal risks look.
If we did spending reviews with a 10-year-out projection, it would be quite interesting. You might then start to see some of the benefits of prevention spending paying off. One of the things that the Government should get credit for is the announcement last week that they are going to put a ringfence around prevention spending. What we do not know is whether that is going to be narrowly defined as preventative services as opposed to the normal day-to-day services, because we see them being raided regularly whenever there is a problem in acute services, particularly in the health service.
Alternatively, are the Government going to have a much more expansive definition that would apply to some of the things like building additional resilience, adaptation to climate change and so on? I do not think that is clear yet, but it may be a thing where the Committee would like to take a view.
Professor Jacobs: Can I add one more thing on the OBR while we are on the OBR? I realise we may be pre-empting some of your further questions. The OBR’s fiscal risks report, which looks out 50 years—
Jill Rutter: Thirty.
Professor Jacobs: Is it now 30?
Jill Rutter: Maybe it is 50. It is long term.
Professor Jacobs: I was literally just looking at it, and it does not talk about the environment. It has all the other risks in it, but not environmental risks. Now maybe there are none.
Jill Rutter: It talks about the climate.
Professor Jacobs: There is no heading in the executive summary of the one that was published this year on environment and climate. That might be another thing you want to ask them about.
Jill Rutter: It has had climate risk.
Professor Jacobs: It used to, but it does not have climate risk now.
Jill Rutter: Oh, right. That is interesting.
Barry Gardiner: I know that because I have a number of questions that I want to ask you, the Chairman is going to get on my back. I am going to ask you for—
Professor Jacobs: Shorter answers. Apologies.
Professor Jacobs: I shall try to be shorter. The answer is yes. There is a big difference, legally, between environment targets under the Environment Act 2021 and the Climate Change Act 2008; the climate targets are legally binding, and the environmental ones are not. That makes a massive difference. There was a possibility that the Environment Act ones would have been legally binding, but the Secretary of State at the time, Michael Gove, unsurprisingly, said no. That difference in their status makes a big difference.
The Climate Change Act and its legally binding status is a proper driver of policy. If you are not on a reasonable trajectory, the High Court will tell you to go and do it again, and that has happened twice. It might happen again if some of the rumours in the newspapers are to be believed about the direction of policy. With the Environment Act, nobody can do that because they are not legally binding.
Yes, as far as they exist and those targets exist, I would like to see budgetary processes and investment assessments made against them. There is not much point in having those targets unless they act as some kind of constraint or driver—even better—of policymaking.
Barry Gardiner: Thank you. So we can take that—
Professor Jacobs: That is a yes, Barry. That is as short a yes as I can give.
Jill Rutter: This is a problem that is not confined to this area. It is a general problem everywhere. Accounting officers are supposed to take account of benefits on programmes that are not their own. One of the real problems that we see is that if there is a strong central lead, that something is clearly a prime ministerial priority, and a Secretary of State is interested in it, then you see progress.
We saw a bit of that in Boris Johnson’s Government, when the Government produced its net zero strategy, which did have quite a lot of actions by individual Departments. Too often we have seen weak strategies that rely on DESNZ. I thought that was one of the problems, to an extent, with the mission that was originally defined for the Department for Energy Security and Net Zero by Keir Starmer and Ed Miliband. That was very focused on what DESNZ could do, which happens, and it was not used as a way of driving action in other Departments.
There are so many areas in Government where benefits—we see it at the moment particularly acutely in the Home Office and Ministry of Justice co‑management of the criminal justice system, where one has every incentive to up sentences and the other one has the problem that it cannot cope at the other end of it in terms of courts and particularly the prison estate. I think that is a big problem to solve, not confined to this area.
Jill Rutter: This is where you need to have a proper cross-Government delivery plan for the targets. The Government sign up to a carbon budget, but there is only a point in signing up to that if you then have a cross‑Government delivery plan that will show what actions everybody is taking to deliver that.
Professor Jacobs: Can I give a more specific one, which is the spending review?
Barry Gardiner: I was just coming to that.
Professor Jacobs: Do you want to ask your spending review question? Under Gordon Brown, spending reviews had PSA, public service agreement, targets. There were 600 of them and some of them were ridiculous, but we gradually whittled them down. Many of them were cross‑departmental. The spending review got attached to a quasi-contractual arrangement—it was not always clear what the penalty for missing it was—between the Treasury and the relevant Departments.
Jill was reminding me that she was responsible for the whole of sustainable development. Then the PSA targets were abandoned after 2010; subsequent spending reviews did not have them. They were a very good way of saying, “We have cross-departmental targets, which require several Departments to deliver. Here they are. We have named them.” Within the civil service, they were given named accounting officers. I think you were one of them.
Jill Rutter: Yes, I was.
Professor Jacobs: They were responsible for delivering them, and that was a good way of doing that. Then you could do prevention and various other long-term things.
Jill Rutter: When you have the Treasury before you, I think the interesting question is—as you know from your ministerial experiences—did the environmental impact actually affect anything in the real world, in terms of the decisions, or was it just pasted on at the end? I have never seen that in Government. Was it actually a compliance exercise at the end, or did it drive decisions? In particular, did it also help Parliament to scrutinise the decisions better by having that assessment? It is a “Was it worth it?”
question. It would be very interesting to get the Treasury’s perspective on that.
Professor Jacobs: I think publication is important because it is a discipline, but it does depend on people reading them—this Committee and the NAO reading them, and then having a post hoc disciplinary impact. I am not sure how far that is the case. That is the point of your Committee. Much more important is the pre-assessment, which is how it goes into the process of making the policy.
Jill Rutter: It is quite interesting. The Green Book requires any project lasting to 2040 to be assessed against a 2 degree climate risk, and any project going beyond 2040 to be assessed against the risk associated with 4 degrees of warming, at your top end. The interesting question with these things is, does it then change the decisions that people make?
One of the recommendations that we have made from the Institute for Government, particularly on adaptation to climate change, taking account of climate risks, is that the Treasury should very explicitly make this a responsibility of the accounting officer—effectively the permanent secretary—in every Department, to ensure that your spending, your programmes are resilient to climate risk.
You could add in other wider environmental risks and have a core value for money requirement. It is quite a good articulation of longer-run value for money; if you are spending money in a way that looks good value up front, but requires massively expensive retrofit down the line, then that is not good value for money. That would bring home and surface those risks better in Departments.
This summer and the repeated heat waves have raised consciousness quite a lot across Government of the risks particularly associated with heat in the summer. There is quite an interesting climate resilience assessment that has been produced by the Ministry of Justice where it talks about the fact that terrifying amounts of the prison estate are vulnerable to both flooding and to overheating. That obviously has enormous consequences in the cramped environments, with risks of violence and things like that. We have seen what is going on in France with schools and so on.
It is rising up, but I think an explicit way on resilience and adaptation of saying—the Treasury could be saying it, but why does the Treasury not wire it into the system in the same way as accounting officers being very aware that they should not overspend their cash limits or that they need to preserve the propriety of spending?
Professor Jacobs: I think if it is told to, yes, I certainly do. In defence of the Treasury, the reason we are going to overshoot 1.5 is not entirely its fault. It is very helpful to have procedures, because there can be cultural biases in how people are educated and trained, particularly economists who, despite the Stern report, do have a discount rate in their head, and it is higher than most of us have. Discount rate is a major problem in anything to do with this because it basically devalues the future, both costs and benefits.
Yes, there are definitely biases, but the Treasury needs procedures. Value for money is exactly where it should be done. If you look at Treasury procedures—indeed, this is true of Government as a whole—there is value for money, which has very high priority, and then there are lots of other things that you should be doing, like qualities and various other things, which just get lower priority and are much easier to do as box‑ticking. It should be in the Green Book, and it should be in the value for money, and it should have accountable officers.
I think Jill is right. Basically, the problem of climate adaptation has been brought forward, which means that the discount rate is lower, and we need to do it now. That was not true until very recently.
Professor Jacobs: Yes, I do. The Green Book is genuinely followed, and it has got better. As Chancellor, Rachel Reeves improved it by political order, and that is what happens, so yes, it is, but I am sure it can be improved. I am not sure, even though it was revised in the last two years, that it fully gets the urgency of resilience.
Professor Jacobs: The OBR and the Bank of England are very different in this respect. The OBR is basically governed—in the sense of what it is doing—by the fiscal rules, which are not set by the OBR. As I have explained, there are problems in the OBR model. In the end, the OBR is right to say, “If you think the fiscal rules or the fiscal policies should be changed, they are political responsibilities.”
The Bank of England is more independent in that sense than the OBR. The Bank of England is not doing as much on climate change under its present governor as it did under Mark Carney. It does have a mandate to do that, again set by Rachel Reeves. That can be looked at, and I think that is a good line of inquiry for the Committee. I am not exactly sure how that interacts with Government policymaking.
In the end, this is about the priorities of the Chancellor, and of the Prime Minister and the Government as a whole. I am sure that if it were raised in political priority, techniques can be used, including in the relationship between the Government and the Bank of England and the mandate and so on, to make sure that that is true across the gamut of institutions.
Jill Rutter: I think the priority is going down because what we have seen under successive Governments, starting with the Conservatives and carried on by Keir Starmer—I am not so sure about the current Administration—is an emphasis on regulators and the priority of growth, with all the strategic steers saying that their absolute priority needs to be growth, rather than the supplementary duties that have been landed on them. When you see the Treasury, it would be very interesting to ask how it thinks that is working out in practice. Is that short-run growth? Is it a sugar rush for the next few years? We have seen the living standards forecast, so we understand why that is very important. Is it longer-run, more sustainable growth, if you like that phrase? I think there is a bit of rowing back on putting net zero duties on to regulators.
Professor Jacobs: The risk in this, which I think is a risk that the Treasury mindset and institutional culture does leave, is that growth is seen as a driver, and environment and climate are seen as constraints on the driver, rather than having synergistic goals. There are definitely trade-offs, but there are ways of getting growth that are climate and environment-sustainable, and those are the things we should be going for.
Our mentality should be, “What are the synergistic ways of achieving our multiple goals?” That is also true of social and other things. Seeing growth as the driver and environment as a constraint—always in trade-off, where it just takes a Chancellor or a Prime Minister to say, “We’re going for growth,” and suddenly that gets more push—is a very poor way of looking at it. There is quite a lot of synergy that we can be going for.
Professor Jacobs: The fiscal risks report—because it is not imminent. We know what is imminent, and it is going to be more floods, more wildfires and so on, which all should be able to be taken care of by proper value‑for‑money investments, priority given to that and so on. The deeper risks of hitting 1.82 degrees, where you get potentially catastrophic global tipping points and so on, should be in the OBR’s fiscal risk reports, which are long-term. Unless I have just misread the executive summary—or the OBR has not included it in the executive summary—there is no section on environmental risks, so the answer is yes.
Jill Rutter: May I caution against putting too big a burden—the OBR is three very technical economists on the Budget Responsibility Council. I do not think you can put the burden of getting the Government to take the climate environmental risks entirely on the OBR, whose legitimacy is already under quite a lot of challenge from people who would definitely think it was stepping outside its brief quite dramatically. I think that is a responsibility for Government—horizon scanning, forward planning, national risk assessment, national security establishment, the national risk register—not for the OBR to lead on. The OBR should reflect, but it is not its job.
Jill Rutter: How does policy get made in Government? It gets made when the Department says to its Ministers, “Look at all this mounting scientific evidence. We have already paid out a bill of x this year. That is only going to get higher. Do you want us to make sure that, when we account for next year, we put that in or build a bigger reserve?” The deteriorating geopolitical environment is another example of exactly that as well. Advice should be coming up, maybe from the Environment Department and so on. We have the Climate Change Committee as well saying, “This is what is happening.” It has an adaptation sub-committee.
Julia Buckley: Those inputs are coming.
Jill Rutter: Yes. Then it is for Ministers and officials in the Department to work out how they are going to respond to it. Then it is for parliamentarians, if you think they are being far too complacent, to hold them to account on it. I do not think you can outsource this to a body set up for a very different purpose and say, “It’s on you.”
How are people assessing it? Ministers have to take account of the changing environment all the time. Why are we having a very long debate on how we radically increase defence spending compared with what we had when we were enjoying the peace dividend from the end of the Cold War? We have that conversation because Ministers are out there, and people are waking up to a changed external environment.
Professor Jacobs: Now that the frequency of climate change impacts—let’s take wildfires and floods—is getting greater and their magnitude is getting greater, it is possible to calculate the economic costs: the cost to growth, basically, of the extra expenditure that is required, and the investment that companies or households have to make in that rather than something that is net growth producing. I don’t know whether the OBR is doing that, but if it isn’t it definitely should be.
I want to make the more political point, which is—we all agree on this—however much input you get from the technicians, civil servants and external bodies, in the end it is a ministerial responsibility. My question—which I don’t know the answer to—is how important it is to DEFRA and local government Ministers, who are the Ministers responsible for climate adaptation, in their priorities? Who is the Minister for climate adaptation? I don’t know the answer. I know that it is your job to ask me questions, and I am meant to know these things, but I don’t know who the Minister for climate adaptation is. I don’t know whether it is the Secretary of State for DEFRA or whether there is a junior Minister who is the junior Minister for climate adaptation. That is genuinely about political prioritisation, as well as the technical inputs.
Professor Jacobs: She has a lot to do.
Chair: She does indeed. Someone else who has a lot to do is John Whitby, and I am going to give him an opportunity to do it.
Jill Rutter: I don’t think it is for the Treasury to deliver cross‑departmental levers, but I think there has been a very interesting innovation under the new Prime Minister of trying to develop a more powerful strategic centre with the creation of what he is calling the Office for the Prime Minister and Cabinet. It is more on the Australian, New Zealand, Canadian model of a more powerful driving centre.
The Treasury obviously has an interest in growth, but it also—as you have rightly said— has an interest in expenditure control. Lots of people make the analogy of: you don’t let the chief finance officer drive business development and so on, because they are interested just in the finances. I think you need the Treasury to still be playing that role.
The bit that has been missing in the British Government for too long is that the Prime Minister has not had the wherewithal to draw on to drive the Prime Minister’s priorities from the centre of Government. As Michael said, it is about bringing the Treasury in, because the Treasury obviously matters enormously. That is where the priority should be determined for the Government as a whole. You should be having those debates. The Prime Minister should be making some of these important trade-offs.
What is very interesting about the role of the First Secretary of State, who effectively is overseeing and driving that, is that I think she is overseeing four specific taskforces on things like public control and devolution, but there isn’t one on adaptation and resilience. That might be something that would be quite interesting for the Committee to think about—“Isn’t this important? Should we task someone in OPMC?” We do have the resilience secretariat. I think it is probably in OPMC rather than the Cabinet Office, which is lurking slightly behind the scenes in slightly zombie form. I am not sure where the resilience secretariat is located—whether it has gone into OPMC, which is effectively the secretariats supporting Cabinet Government. I think using that is a much more powerful agent of change.
One of the things that was good under the last Labour Government—Michael mentioned the OCC, which I think was a good bit of innovation—was also the Prime Minister having a strategy unit. We have not had that since the Blair Government. It was a bit sidelined under Gordon Brown and used a bit less. I think that is another important piece of capability in Government that is quite sorely missing. Combining that with looking at future risks and preparedness around future risks would be a very useful addition to the capability in OPMC, which should be the place to drive it, not the Treasury.
Professor Jacobs: If you look at No. 10 North, it has the growth function, and there is a collaboration there. It is slightly uneasy right now, in my impression, but there is a putative collaboration between Treasury, including Treasury North from Darlington, and No. 10, in a kind of joint growth thing, and I think resilience definitely needs that and other things.
Professor Jacobs: I would put that function in the Office of Prime Minister and Cabinet because the other innovation we did in the last Labour Government—as well as the strategy unit—was a delivery unit. The delivery unit was not very good, as Jill has just reminded me, on cross-departmental delivery, because it had a supply chain model in its head of how you delivered things, and obviously a network model of delivery is a much more complicated thing.
The idea is that there is a bit of the Government that takes the top priorities of the Government as a whole, and the Prime Minister, and there is one bit of Government that does the strategizing and innovation. The innovation is really important here. Some of these things are difficult, so we need very imaginative ways of thinking about it. Having the top civil servants thinking imaginatively about policy in a strategy unit, and then a delivery unit that is saying, “Is this actually happening?” is a rather good thing. I am very supportive of the bigger Office of Prime Minister and Cabinet. I think that was essential. It has an uneasy relationship with the old bit of Cabinet Office, I think still, but that is where I would put them.
Jill Rutter: There is a delivery unit, so it is a question of tasking it as a priority there, and working closely with the Treasury. That is one reason why I am keen on the accounting officer change that I was mentioning, because a lot of these risks are within Departments, on resilience, and I think the Department should be owning them and should be regularly held to account for how they are managing those very specific risks. There are some that are cross-cutting, but there are quite a lot that are specific to the school estate, or the prison estate. How is DEFRA helping farming adapt to changing climates and things like that? I think those need to be appropriately owned because that is where the expertise is.
To go back to your points about the OBR, the OBR is very dependent on the intelligence it gets from Government for lots of things—for the costings of policies, and for identification of the working-level risks. It is not going to have the capacity—it is quite a small organisation—to do big, independent work on that. One thing that might be quite interesting is that in Denmark there is slightly hybrid institution. I am not quite sure how it works, but it takes some of the functions of the OBR and some of the functions of the Climate Change Committee and brings them together in a more unified way. I think it might be quite interesting to find out a bit about that, as a way of bringing the two sides of the equation together better.
Chair: Thank you very much. Very interesting.
Professor Jacobs: My answer to that is: if it is going to be done at regional level, combined authorities will do it. Obviously, they do not cover the whole country, and I would say that a lot of resilience needs to be done at that level. You need to then resource it because the combined authorities are under-resourced for the kinds of functions that they are now taking on.
In areas of the country where local government reform is, shall we say, still in progress, that will be slow. But I definitely think that is where it should be. A lot of it is land use, emergency services and various kinds of economic development planning. In so far as No. 10 North is trying to co-ordinate that and think about what that means for central Government, yes, that is where it would be. As I say, I think it is still slightly unclear how No. 10 North is operating as another bit of Government and how far its new address—
Professor Jacobs: Yes. Why is No. 10 North useful here? It is because it is new and it has new staff with a new mandate. One of the things I would quite strongly recommend is, when you are reforming, when you want to do something new, create a new unit to do it. It is partly because you can make sure that that unit actually has that mandate, and it is not just adding on to its existing mandate, and partly because you can recruit new staff to it. The new staff will be very keen on the thing that they are doing because that is why they have applied for the job.
Professor Jacobs: So much of this is land-based that you need to be where the land is managed.
The Chair will be delighted to hear that this is the last question. You talked before about the separation between strategy and implementation. We talked a bit earlier about monitoring and how that feeds back in. Do you think there is anything else the Treasury should do, or should request or require, regarding those assessments? You touched on the environmental impact assessments. It might not be that. Is there something else that they should or could do so that the feedback loop is actually reporting back against the things that get funded?
Professor Jacobs: You have the experience, Jill, of being an accounting officer.
Julia Buckley: So looking at oversight, disclosure—
Jill Rutter: I was an SRO. I was not an accounting officer.
Jill Rutter: This is a hugely valuable question for you to put to Treasury officials. One of the things you have in Government is lots of bits of process that, with the right will in the world, could be very useful and could allow you to do all this. Then the real question—and it is very difficult to tell from outside—is does it get done? The adaptation sub-committee, which was not in the original climate change legislation but was inserted during the passage of the Bill—DEFRA originally opposed it but is hugely happy now that it is there—has quite a good role, in the same way as it calls out lack of progress on mitigation, to be assessing the adequacy of what Government is doing. It is more powerful in some ways done from outside than from inside.
I am not sure at the moment that people perceive there to be a significant political price inside Government for not complying with these processes. That is why Parliament is quite important if Ministers keep on getting asked, “Why is your Department bottom of the league table for adequate preparedness?” We used to love league tables of Departments for things on what we used to call sustainability on the Government estate, because we thought nobody wanted to be at the bottom of a league table, independently assessed as falling behind.
Jill Rutter: It is an economic question, but there is also then a merger with ministerial incentives, which goes to the question of ministerial churn, if I think I am only going to be in a Department for a year and a half. Why do we underinvest in pandemic preparedness? Because I will take a bet that it is not going to happen on my watch as Health Secretary, and I can spend the money on slightly reducing waiting lists and hope that, if it happens, it will happen under someone else or, even better, under a different Government. That sounds very cynical, but there is always a natural incentive to want to spend on things that deliver results now rather than on the future. If you like, what we are really talking about are insurance policies. You hope that you are not the person who is landed with the bill.
Professor Jacobs: That is exactly what I was going to say, which is, since you started your inquiry and thought of all your questions, the Treasury has announced something that should be part of the answer. It should be part of the answer in the way—to answer your question—that it is a procedure. It is an official process of a preventative budget, and nobody quite knows what it can be used for, how it is going to be assessed and so on. I would think that you could help that process.
I do not know what is going on. I do not know how much thought has gone into it. It is one of the correct mechanisms to engage with this properly, which is to have budgets that are specifically about this thing. Even if you cannot assess everything, as long as you can identify, “We want something to go into a PDEL,” you have a process. I am not familiar with the guidance that the Treasury has put out.
Professor Jacobs: We are meant to be giving you recommendations.
Julia Buckley: Please do.
Professor Jacobs: I think that sounds quite sensible. I recommend that.
Jill Rutter: One of the things that would be quite interesting is if you had an independent assessment of future risk, and you almost charged Government Departments an insurance premium for that on their current budget, but if they were spending to reduce that future risk, that premium would go down. You crystallise the cost of that risk. I used to want to do this when I was responsible in the Treasury for oversight of the Export Credits Guarantee Department, which is now UK Export Finance, which Ministers always regarded as completely free money because they could announce massive cover on the world’s ropiest country, and it is only an export if someone foreign pays for it.
Julia Buckley: Risk pricing mitigation.
Jill Rutter: You had some way of crystallising the risk that you were running, and you could see something in a budget. But frankly, there are huge amounts of money in the contingent liabilities lines in Government accounts, and nobody pays very much attention to them. If you did, you would have much better funded maternity services.
Chair: That was a very interesting way to end. Ms Rutter, Professor Jacobs, thank you very much for that evidence. It was a fascinating session and very helpful in terms of the future session we will have with Ministers.