As a particular example, it says it has not seen sufficient evidence that HM Treasury has absorbed a key lesson of the 2007-08 financial crash: how best to prepare for a future financial crisis that may occur as a consequence of the interconnectedness of financial uncertainty with wider risks and uncertainties.
The report says there are isolated instances of systematic and imaginative analysis of trends, risks and possibilities around Whitehall, but too often the day-to-day crowds out preparation for the longer term and the unexpected. There are some policies which represent genuine efforts to confront long-term challenges on a cross-government basis, such as the Better Care Fund, the National Risk Register and the Whole of Government Accounts which provide deeper understanding of matters such as the Government’s £2,893 billion long-term liabilities.
But the Committee was particularly surprised at the "urgent gap" in the Treasury’s preparedness. The Treasury acknowledged that the UK remains exposed to the risk of another adverse global economic event, such as the impact of a crisis in the Eurozone, and that this could be on the same scale as the 2007-08 financial crash. Yet financial and economic risks are not included in the Government’s National Risk Register, so the Government does not consider these systemic risks alongside other, non-financial risks, such as pandemic flu and antimicrobial resistance, and different responsibilities and functions are divided between the Bank of England, Financial Conduct Authority and the Treasury.
The Committee concludes:
- The Treasury should undertake planning for a range of crisis scenarios, based on a broad range of forecasts, data sources and assumptions, and which may be triggered by non-financial as well as financial events; this should include desk-top exercises, or “war games”, involving the Bank of England and the Financial Conduct Authority as well as the Treasury.
- The Cabinet Office should include systemic financial and economic risks in its National Risk Register; and ensure that lessons learned from this are synthesised into policy making and spending decisions.
- The Treasury lays claim to responsibility for economic growth. It accepts that “slow productivity growth” raises “massive issues” for the future, but does not yet seem to appreciate the role of Government in promoting new technology and innovation across the public sector and in the private sector, such as in reducing CO2 emissions in transport, or leading the revolution in electrical energy storage. The Government must set out how it will exploit all the available knowledge to counter this risk of “secular stagnation”.
- The Cabinet Office’s horizon scanning programme team, while welcome, is too small to gather, let alone synthesise, all the relevant understanding generated around Government. The Canadian equivalent, covering a much smaller population, has some 25 staff and draws on a large number of outside experts. With such a small resource – just five people - the Government cannot identify, assess and synthesise this information and so advise ministers on how to address gaps or duplication in policy and plans, or to resolve conflicts and generate a comprehensive view of the key policy risks and challenges. The report points out how this lack of understanding contributed to the scale and duration of the recent Ebola crisis.
- There is growing awareness of the need for coordination between horizon scanning and risk assessment, but not of the need for coordination between horizon scanning and public investment decisions. There is a clear requirement for new capacity to inform spending reviews and decisions about financial priorities. The report recommends stronger coordination of cross-government financial planning under the joint leadership of Treasury and the new Chief Executive of the Civil Service.
- Early in the next Parliament, the Government needs to set out how it will improve the machinery of government and better educate civil servants at all levels to think ahead about systemic risk, risk management, uncertainty and future challenges.
- Senior civil servants’ career development should include a period with the Cabinet Office’s horizon scanning programme team – which would also provide the unit with much needed extra capacity.
Bernard Jenkin MP, Chair of the Committee said:
"The Treasury has done a lot, but there is more to be done to be ready for another financial crisis. We still have institutions which are ‘too big to fail’ but with so much national borrowing capacity used up, they may prove ‘too big to save’ if it happens again. We did not find evidence that Government and the City are actively practising and exercising for this worst case scenario. We found this lacking in other areas too. The failure to act quickly on the developing Ebola epidemic in West Africa cost thousands of lives and billions in aid. This failure was by no means unique to the UK but the Chief Medical Officer and the Joint Intelligence Committee combined their understanding too late for timely action.
We have found a lot of assessment and planning for the future, which is key to maximising opportunity as well as managing risks, but we need better co-ordinated, systematic and imaginative analysis of trends, risks and possibilities across the whole of government. This would better underpin far-reaching decisions on long term issues such as low productivity growth, infrastructure, technology, financial regulation, defence and security.
Whitehall has developed a lot of useful capacity for assessing risks, building resilience and looking for long term opportunities, but so much more could be achieved by understanding how to bring this together. This will mean we can deal with unforeseen adverse events more effectively, but also increase the UK’s capability to exploit opportunities and innovation, which is necessary for us to remain competitive and viable."