Leading Article: A lost opportunity to rethink the Treasury

What is the Treasury for? We ask the question not in an grumpily anarchist or sneeringly globalist tone - but because it is no longer as easy to answer as it used to be. Is it for setting macro-economic policy? Partly, of course; but we are all monetarists now and the pursuit of price stability for Britain probably requires the removal of interest- rate decisions from political hands - EMU or no EMU. The Chancellor of the Exchequer, Kenneth Clarke, has made a tentative move by giving us a sort of cheery monetary vaudeville between himself and the Governor of the Bank of England. (How many fewer tickets would have sold if the front end of this panto horse had been called Robin or Montagu rather than the matey "Eddie"?) This was supposed to tear away the mystery from the making of monetary policy. In practice, it has demonstrated how a self-confident and so far lucky politician regularly wipes the floor with a more cautious banker. It has been highly entertaining, but it has hardly been a machine to ensure monetary virtue.

So what of new Labour? Isn't this an open goal for the party to shoot into: all Gordon Brown, the shadow Chancellor, needed to do was to trust his instincts and make an immediate declaration of his commitment to the principle of central bank independence. That would have given him, and Labour, an unassailable right to claim the title of the party of financial honesty. It would also, almost certainly, have ensured lower interest rates in the early years of any Blair government.

Instead, however, when Brown spoke yesterday he merely hung around the penalty box. As he dribbled the ball, he seemed to be intoning St Augustine's prayer - Lord make me virtuous, but not quite yet. He set out changes which would, he said, make Bank of England deliberations more professional and better informed. Well, yes, they might; and they might legitimate the Bank in the eyes of a Labour Party some of whose members retain the bitter folk memories of the Thirties legacy of Philip Snowden. Reform by stages - if this is what is on offer - may make good political sense, however impatient the City feels.

But yesterday's speech could also be read as an exercise in procrastination by a party which has a lot more strategic thinking to do about the central institutions of modern British government. Labour's tragedy could be its discovery, on taking office, that the daily pressure of events means it has no more time for fresh thought.

Take Mr Brown's exciting proposal to subject the national accounts to an independent audit after the election. That budget projections of taxing and spending give all sorts of room for jiggery-pokery is hardly news; Kenneth Clarke has availed himself generously of the opportunity, and he is hardly the first Chancellor to exercise his imagination in this way. Around the Private Finance Initiative has been built a veritable superstructure of obfuscation to conceal the way short-term savings on the capital account are being purchased at the expense of revenue expenditure in a decade's time. The Treasury's potential for muddying the waters is approaching a maximum as it moves towards "resource accounting".

Labour will have fun pulling out all sorts of dirty washing if it gets to open the bottom drawers in Great George Street. But Mr Brown said little or nothing yesterday about where his Treasury would fit in the architecture of new Labour's state. Why not go the whole hog and, having given the Bank of England an inflation target, re-engineer the Treasury, perhaps recasting it as two separate entities, one responsible for delivering the spending, borrowing and taxing implied by the Budget, the other (necessarily small and expert) advising on macro-economic policy? In time, full independence for the Bank would follow.

That would be a clearer and more effective Treasury. Given that Mr Brown is, if anything, even keener on British membership of the single European currency, it would help his bigger ambitions. The problem, of course, is that such clarity and slimming-down would undermine the Treasury's micro-economic pretensions, all those "real world" economic changes the shadow Chancellor was on about yesterday.

Read literally, Mr Brown's claims for the Treasury's competence amount to political megalomania. In his idea of Whitehall the Treasury remains utterly and everywhere dominant. Top-heavy, omniscient, it bears down on departments (including Mr Prescott's super-department) at every turn. What room, one wonders, is left for Number 10?

Our short and uneasy answer is - not enough. Mr Brown is a hugely energetic, talented, ambitious politician, quite capable of using the Treasury as a sort of auxiliary government, with a finger in every aspect of a reforming Labour administration. But - and he knows it, surely - that would be old Labourism, more of the era of George Brown than Gordon. In the late Nineties, the Treasury, particularly if it falls into Labour hands, needs to be very clear about its priorities and the limits of its reach.

To return to our original question: in the future, it will be there, primarily, to control and oversee public spending, while other departments carry out the social reforms. Economic success today requires excellent education, a stable monetary climate and controlled, effective public expenditure. Only one of these is properly the job of the Treasury. It is hardly surprising that the Treasury itself has a corporate bias against the fact. But a radical incoming Chancellor should have not the slightest doubt about it.