1. Why Negotiating with Government Means Negotiating with the Treasury

Welcome to the latest in our Negotiating Government podcast from Negotient. This is me, David Gauke, one of the founding partners of Negotient, and I'm delighted to be joined once again by John Hall, former Treasury official. John, welcome.

Thanks for having me back, David. Great. So what we're going to talk about today is negotiating with government.

2. The Big Argument: The Treasury Is Always in the Room

Not the first time we've discussed this particular point, but we're going to particularly focus on the role of the Treasury. And at the risk of a big spoiler, we're going to make quite a simple argument, which is that if you are ever negotiating with the government, you are in practice negotiating with the Treasury. Not the only party you might be negotiating with, but the Treasury is always going to play a role one way or another, and that was certainly my experience as Chief Secretary to the Treasury.

John, I'm hoping that you're going to say that's the experience you had as an official. If not, we're going to have to reframe this podcast altogether.

No, I can reassure you I was equally vilified by colleagues across Whitehall as the demon who was always sitting on their shoulder when they were having conversations with people about improving public services in their areas.

So let's start that. Let's try and substantiate our assertion that the Treasury is always an important player, and therefore understanding the Treasury is always an important part of the process of negotiating with the government, by just looking at what the Treasury role is and how it plays that role.

3. Why HM Treasury Matters: How Government Spending Really Works

So, John, let's get your opinion on this. Why is HM Treasury so crucial, and how does it try to approach its role as the department that looks after the public finances?

I mean, in a very simple sense, David, Treasury is there because Treasury is the one department which has got to raise the money to pay for everybody's great ideas for improving public services, for making households and firms' lives better. The Chancellor is the one minister who's got to go on the TV and defend the cost of raising that.

Across Whitehall, you've got very dedicated public servants who are all trying to improve public services, who are all trying to do good things in their areas. That's very fragmented. Where government needs to come together in terms of its impact on people's lives is on the money, because the money ultimately needs to add up.

4. The Treasury Mindset: Why Every Department Feels the Pressure

So, John, what is the role of the Treasury, and how does it go about fulfilling that role?

I mean, I think it's fair to say that for most civil servants working across Whitehall, dealing with the external world, they see the Treasury as the evil demons who are sitting on their shoulder. I mean, that's largely true for a very simple reason. Government affects people's lives in myriad ways, and virtually all of the things they do involve spending money, and that money needs to be raised somehow.

And that's got two impacts. Firstly, while policy may be fragmented across government and across public services, the numbers have got to stack up, and that happens within the Treasury budget. And secondly, while lots of ministers are spending money across Whitehall, the Chancellor is the one minister who needs to raise the cash to pay for everybody else's hopes and dreams.

As a result of that, it's very easy from a Treasury point of view to say everybody around you is wantonly wanting to spend money in all directions, almost like the last bastion of civilisation and now barbarians are at the door. And that can lead to a sort of siege mentality of Treasury, where we constantly feel as if we're in a war of attrition to try and keep control of the public finances and stop spending getting out of control.

5. The Three Questions That Decide Everything: Affordability, Need and Value for Money

So, John, you've got a department comes to you, and they have been working with a private sector entity, and they've got a plan to spend some money as a consequence of this plan to meet their objectives.

How is the Treasury going to respond to that, in the sense of what are the questions that a Treasury official is going to be asking about any such proposal?

I think a lot of the job actually comes down to three questions, David. And the first is what I'd be saying to a spending department is, can you afford it? What I mean by that is, have you prioritised within the budget that we've set you for the next three years? Because if you haven't, you can't afford it. Secondly, are you prejudging the next spending review by trying to create facts on the ground, which leaves the Chancellor with no room for manoeuvre in the future, because then I've got a problem.

6. Why Most Government Proposals Fail Before They Ever Get Approved

So the first question is, can you afford it? A lot of proposals never get past that question. If they do, it's a simple question to which the answer is no, surprisingly frequently, do you need it? And by that, I mean, there's lots of good things that government can do. There's lots of policies which will make people's lives better.

But as a process of business planning and spending reviews, departments set out their priorities. Is this proposal one of the things you need to do to deliver your priorities? Or is it nice to have? And it's surprising how often I would find that proposals were coming to the Treasury which hadn't actually been agreed with the top of that department's board or with its finance function.

If you need it, and if you can afford it, what Treasury then needs to reassure itself on behalf of the taxpayers is, is it value for money? Is this a good way of doing the thing that you want to do? And it's always important to remember that Treasury officials over their shoulder have got the National Audit Office, that they will come in and review big projects of public spending, do very well-funded, transparent reports to the Public Accounts Committee, and there'll be a public hearing.

And if as a Treasury official you cannot justify that you did due process in ensuring that taxpayers were getting value for money, then you're going to get roasted in front of that committee.

7. Why Good Ideas Still Get Rejected Inside Government

So the reality is that the Treasury is going to take a view and departments are going to have to persuade the Treasury on a particular project.

For example, I was reminded, John, when you were talking about can departments afford it and do they really need it, very often the message when I was Chief Secretary would go back: well, you've got an idea, but that's got to be from reprioritising your current spending.

You've got an idea where you want to spend more money—well, we're not going to bail you out for this. We're not going to provide some money from the reserve. There's not going to be something outside the normal process. You have to cut something else, essentially.

And that's all about trying to the Treasury, unpopular though it might be, is badly needed.

You do need that external pressure on spending departments to try to ensure that money is not wasted, that it's not unstrategic and so on.

8. Why Negotiating with Government Often Feels Slow, Opaque and Unpredictable

But let's move on to the mindset of other government departments. Now, we did a podcast on this with Miranda Worthington a little while ago, setting out how challenging that was.

We won't go through all of that, but very often when you're dealing with a… if you're a private sector entity dealing with another government department, there seems to be shifting goalposts. It's often diktat, not negotiation. Sometimes you go through long periods of silence.

You don't really know what's going on, and it's a bit of a mystery. And we tried to show a little bit about why that all was.

But John, in your experience, how do spending departments respond to this little demon on their shoulder, which is the Treasury? How do they try to deal with that when they are negotiating with a private sector entity, knowing that they've also got to negotiate, in a way, with the Treasury?

9. Inside Whitehall: How Department Culture Shapes Decisions

Yeah, it's interesting, because Whitehall departments are very different beasts. And, as you say, they're united by the fact that they're all very large and dealing with complex responsibilities. Compared to private sector entities, the accountability, the scrutiny, and the public debate about what you're doing is absolutely enormous.

And priorities do shift all the time. I mean, without being flippant, until recently most of us had never paid much attention to what the operational maintenance patterns were for Royal Naval destroyers, and then suddenly it's something which attracts an awful lot of attention over the last week.

So while departments have got that in common, they've also got very different cultures, skill sets, and mentalities. So if you think of three of the departments you were Minister for, David—Ministry of Justice, HMRC, and DWP—they employ the vast majority of civil servants, they've got huge operational arms, and they know everything about how their services are delivered.

You've got other departments which are far more strategic, which hand out cash to other people but don't deliver anything themselves.

And then you've got two departments, I think, which have unique cultures, which are Defence and Health, which have very large service cultures—whether it's the military or whether it's the NHS. And that, again, infuses the culture and how that department works. It's very common in the Department of Health for people to say that they work for the NHS, as opposed to working for ministers, which is something you would never hear amongst, for example, Treasury officials.

Now, the reason I raise that is it means that departments have got different skills in terms of operational versus strategic, different cultures which may mesh, whether better or worse, with Treasury cultures, and different understandings of how Whitehall works.

10. Treasury vs Departments: The Clash of Cultures Behind the Scenes

Generally, I think the view of most departments would be shared by Ken Clarke when he was Chancellor—that most of the people who work in Treasury are the sort of people who would work in an Oxbridge college. They might be very bright, but they've never actually done any real jobs in their lives.

I think it's very frustrating for people in Whitehall departments—firstly, how young most Treasury officials are. Secondly, that they move from area to area and typically, although Treasury is getting better at this, have very little expertise in the area that they're covering. And while they seem to have enormous power to say no to things, they seem to have very limited bandwidth to get into the detail and understand the operational delivery of the project that the Whitehall department is trying to put forward.

Yeah, it's interesting, the sort of clash of cultures. And I remember being particularly exposed to this when I was in the Treasury but had responsibility for HMRC. And here you had two organisations that were in the same building.

You generally always knew who was the Treasury person and who was the HMRC person. HMRC people were very often lifers within that organisation—many of them had been in the Inland Revenue or Customs and Excise back in the day—tended to be older, had a lot of practical experience, and were very focused on operational matters.

Treasury officials, generally younger, probably brighter—yes, they're probably at the start of a kind of glittering career—but wouldn't have the same experience as HMRC officials would have, particularly in terms of operational matters.

And so, in many respects, that could be really positive because they were bringing different perspectives and so on, but they were really quite different cultures. And you could see there would be circumstances where they would rub each other up the wrong way.

So, in terms of—we've got these different cultures, government departments always conscious that they need to persuade the Treasury that the project that they're working on, the proposal that they're making is a good thing to do, that it meets your test, John, of being affordable, of being needed, and of being good value for money—but they've got a sceptical Treasury official that they've got to get through and persuade.

What does all of that mean if you are a private sector entity negotiating with a spending department, and thinking about how you make a pitch that is essentially one that negotiates not just with the person in front of you, but with a little demon on that person?

11. The Hidden Decision-Maker: Why You Never Meet the Real Stakeholder

Yeah, I think something that people from the private sector find very frustrating is that they're dealing with a government department and there's this figure lurking in the background who they never get to meet.

In many cases it's Treasury, but in other cases it can be other decision-makers within that government department. And as you say, that can mean that it feels like the government is dictating to you on something which is clearly a negotiation.

It feels like you have a discussion and then this silence, and you hear absolutely nothing. It sometimes feels that the goalposts are shifting all the time.

And it's certainly true that if you read every National Audit Office report ever written, it's often the case that government is quite slow to work out what it actually wants, and is quite poor at engaging with private sector firms in terms of co-producing that and understanding the market and the practicalities of delivery.

So if I'm having that negotiation with the department on behalf of Treasury, then I think the most important thing to think is that the person you're negotiating with is your person inside government.

Instead of being the enemy you're negotiating with, it's more like an account manager. Because for your business case, your proposal, your policy area to go forward, they need to do all the heavy lifting for you—which means they need finance agreed within their own department, and they need their ministers to agree to the proposal.

If the package of things that you need to happen involves regulatory levers being pulled all over Whitehall, or packages of support being put in place, they need to align people across fragmented government departments to make sure those things are all there. And ultimately, as always, the business case and the funding need to add up when it comes to the Treasury.

12. How to Influence the Treasury Without Ever Speaking to Them

So, John, what would be your top tips for a private sector entity negotiating with a spending department, thinking about how you get the Treasury on side?

I mean, first and foremost, you've got to build relationships, both at official levels and, if appropriate, ministerial levels. The person you're dealing with, who's the policy lead on the area that you care about, is the person putting the advice up to ministers.

If you haven't convinced them completely and equipped them with the tools to get that agreed across Whitehall, then your thing is definitely not going to happen.

Things I saw done genuinely very badly were private firms who came into a government proposal and just said, “No, this won't work. Stop doing this. It's stupid.” That never changed what I did as a result of someone using that technique.

I think it's really important for private firms to understand what the government is trying to do. And if something doesn't work in your sector because of your detailed knowledge of how the market works, operational considerations and so on—educate instead of opposing.

It won't work because of this. Have you thought about doing it this way?

I certainly saw examples where private sector firms would say, “The thing you're proposing to do will not deliver what you want. However, if you did it this way, you will achieve your objective, and you will also do it in a way which is much more aligned with our interests.”

I think the third thing I would offer is that often the people who are negotiating with government are representatives of trade associations or industries or sectors. And it's really important, given that you yourself are shepherding together a coalition of interests with overlapping but conflicting incentives, different market positions and so on, that you build confidence with the government department—and therefore with the Treasury—that you are able to deliver on your side of the deal.

I find it often that people will simply say no, and it leaves the Treasury slightly bemused as to two things: why will they not do the thing which is obvious to do, and what is really driving that position? And it's often because it wouldn't work for one of the firms in the sector.

Yeah, no, I think that's all helpful advice. And look, I think the fundamental point—and let's go back to where we started here—is that when you are negotiating with a spending department, you also want to be helping them to negotiate with the Treasury and make their lives easier.

And if they think that you are presenting a case that will be compelling to the Treasury, they're much more likely to respond positively than if the contrary applies. So I think that's all good, sensible advice.

13. Why Fiscal Pressure Is Making Government Negotiations Even Harder

Now, John, whilst we've got you here—we're recording this in mid-March—we've had a… it was going to be a Spring Statement, then became a Spring Forecast. And then pretty well at the time that that forecast was being set out, it had already been overtaken by events in the Middle East.

And we are in a different world because of what has happened in the Middle East. It's going to mean that inflation is higher, it's going to mean that interest rates are higher, it's going to mean that the debt interest bill for the government is going to be higher, and it could well be that the level of activity in the economy is going to be lower—all of which will have an impact on the public finances.

So we're entering a period of turbulence. There's obviously a lot of uncertainty. A lot of this is going to depend upon how long this crisis in the Middle East lasts.

And we're not a geopolitical podcast, so we're not going to speculate on all of that. But John, what's your thinking about how your former colleagues in the Treasury will be thinking about everything that is going on, what the implications might be? And again, what is that going to mean for those who are negotiating with government?

I mean, even for hard-hearted Treasury officials, David, I think you've got to have some level of compassion for Rachel Reeves, who's a genuinely unlucky Chancellor.

On the day she was standing up and trying to give a reassuring message—that as a result of tough decisions made, things were coming good—interest rates had fallen in the previous months, reducing the burden of national debt, inflation was coming down, borrowing was coming down.

It was a story of stability. And all of the economic weather was being made outside of the UK at that time, as you say.

What does that mean? Of course, we don't know. Things are very uncertain in terms of how these will play out.

But I guess there are three things I would highlight.

The first is all that stability Rachel Reeves talked about was predicated largely on a bunch of tax rises which haven't happened yet, and a little bit of spending restraint which also hasn't happened yet.

So unlike, say, Ken Clarke, who did a fiscal consolidation path split roughly half on tax and half on spending, or George Osborne, who did 80% on spending and 20% on tax, Rachel Reeves is doing almost all of it on taxes—and they largely haven't happened.

Her headroom also comes from effectively a spending freeze in the year before the next general election, which seems completely implausible to me.

So the question is: are we quite as stable as we thought we were anyway?

And the second thing I would say is, we've got a bit used in the UK—we've had a succession of crises now: a financial crisis, a COVID crisis, and an energy crisis associated with the Ukraine war—in which we got used to government stepping in and helping us out.

And to give an example, I think the package that Liz Truss announced to protect households and businesses from rising energy bills cost about £35 billion.

Now the impact of that is it means that government has kept stepping in and ratcheting up debt on these one-off crises, but there hasn't been enough time between them to repair that.

I think the scope now for the government to protect British households and firms against the economic effects coming from the Middle East is far less than it has been in the past, and they may need to be much more targeted and less generous in their support.

I guess the third thing I would raise is that it seems likely this will add to the pressure already existing on the government to increase defence spending.

We're currently spending about 2.4% of national income. It's already planned that will go up to 2.6% next year, but we've made pledges of 3.5%, and that would cost us another £35 billion. That would be about seven pence on the basic rate of income tax.

Even to get to 3% would cost us about £15 billion. I don't see where—that is currently not funded—and it's going to be very challenging to think about where the tax rises come from to pay for that.

Because while it might be acceptable to borrow for a one-off, temporary bit of energy support, that's a very different question to borrowing to pay for a permanent, sustained increase in defence spending going into the future.

What does this mean for private clients negotiating with government? To be honest, I don't think it changes anything.

It's not a pleasing scenario that you've set out, and I very much agree. And interestingly, the ability to support households coping with higher energy costs has got weaker, but expectations have probably got higher.

And this is a really difficult position for governments, but at some point there is going to have to be a shift. Because I think after COVID, and then after the energy support, there is an expectation that governments can always come in and protect people from adverse movements in energy prices and so on—and sometimes they just can't.

But there we go.

Now, just to finish off—in terms of does this make a difference to anyone negotiating with government—I guess the fundamentals haven't changed, it's just all become a bit more difficult, hasn't it?

I think that's absolutely right.

Well, we've finished on a point of agreement as well, so that's always a relief—ex-officials agreeing with an ex-minister, just as it should be.

So, thanks very much for listening to the latest in our Negotiating Government podcast. I hope that's been helpful. I hope we've explained exactly why the Treasury is always part of a negotiation, even if they're not in the room with you when you're negotiating with the spending department.

So, thanks for listening, and thank you very much.