Treasury and opportunity costs

Dr Eric Crampton
Insights Newsletter
3 August, 2018

Treasury is the heart of economic expertise in government.

But it is more than that.

Lots of Ministries have economists on staff – even Chief Economists. Treasury’s unique role is to run a straight economic ruler over policy initiatives proposed by other Ministries and to provide advice to its Minister about which government policies pass muster, and which do not.

Government has limited resources and it is important that every dollar go where it can do the most good. It takes well-trained economists to distinguish sound cases for government action from cases that simply advocate for a Minister’s preferred policies.

In last week’s National Business Review, I went through the qualifications of existing Treasury analysts and recent hires.

While Treasury has excellent data, reported in the annual reports, on gender and ethnic diversity of all its staff, Treasury’s HR systems are unaware of the qualifications of just over 42 percent of its analysts and senior managers. Among those whose qualifications are known, economists are outnumbered – even if we include those analysts with only an undergraduate qualification.

Treasury’s business-as-usual job is difficult enough. But Treasury has also built a substantial rod for its own back in wishing to develop an entirely novel system for budgets under the Living Standards Framework. In November 2014, Treasury Secretary Makhlouf said that Treasury’s Living Standards work would be at the frontier of economic thought. Work at the frontier requires building economic capability.

But Treasury’s most recent internal organisational survey noted diminishing capabilities, with those noting worsening capabilities outnumbering those citing improvement by a ratio of 2:1. Comments included statements like “The Treasury has been getting rid of economic & financial experts”; “Weak economic expertise. This is our core work and should be prioritised”; and ”Our deep economic expertise is very thin.”

Only two of nine hired in Treasury’s 2018 intake of graduates had any background in economics: one with a Masters, and one with an undergraduate qualification. 2019’s cohort saw improvement, but among the 10 of 15 who had training in economics, only four had a Masters or Honours qualification in economics or finance.

Treasury, like everyone else, is subject to opportunity costs. Less economic expertise means Treasury advice will contain less economic content – and especially where Treasury also must deliver the Living Standards Framework.

Restoring Treasury’s economic expertise and competence should be the primary goal for outgoing Treasury Secretary Makhlouf and his successor when his term expires next year.

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