5. Submissions on Behalf of His Majesty’s Treasury by Mr Block KC

Mr Block: Good morning, my Lady.

Lady Hallett: Mr Block.

Mr Block: My Lady, as you are aware, His Majesty’s Treasury has not yet addressed the Inquiry. Therefore may I associate the Treasury with the sentiments of the Inquiry legal team and those core participants who made opening statements and offer our sincere and heartfelt condolences to those who lost family members, friends and colleagues, and our sympathy to all those who have been affected by the pandemic.

My Lady, no one who heard the moving and courageous evidence yesterday morning can be in any doubt about the profound effects on individuals and families.

My Lady, I’m instructed by Robyn Smith of the Government Legal Department, and appear together with Mr Steven Gray.

May I say at the outset that the Treasury wishes publicly to reiterate its intention to assist the important work of this Inquiry. It has sought and will continue to seek to assist you as best it can through disclosure of relevant material and provision of comprehensive witness evidence.

So far, in relation to Module 1, we’ve disclosed a significant number of relevant documents to the Inquiry, and supplied a detailed corporate witness statement from the second permanent secretary, Catherine Little, and we have also supported George Osborne, the former Chancellor, to facilitate the Inquiry, receiving detailed written and oral evidence from him.

My Lady, we hope it’s of assistance to you and all of those following the Inquiry to provide a summary of the Treasury’s role in government insofar as it’s relevant to Module 1 and to pandemic preparation and resilience.

The Inquiry has not heard oral evidence of these matters, and of course it’s only core participants who will have seen the written evidence.

Catherine Little’s statement, as requested, explains to the Inquiry the Treasury’s role in governmental risk management and emergency planning, and it sets out the detail of the Treasury’s involvement in and engagement with pandemic planning.

In summary, the Treasury is the government’s economic and finance ministry, responsible for maintaining control over public spending, setting the direction of the United Kingdom’s economic policy and working to achieve strong and sustainable economic growth.

Of course the positions taken by Treasury officials are determined by ministers in accordance with relevant government policy, and the Inquiry has heard and read evidence relating to the Module 1 period from some of those ministers.

It’s not the Treasury’s function in this Inquiry to seek to persuade you of the merits of the United Kingdom’s fiscal and economic policy during the relevant period. Indeed, Mr Keith has, for understandable reasons, made clear on a number of occasions during the hearings that the Inquiry is not concerned with the merits or otherwise of government policies, as well as the government’s fiscal policy generally, and this obviously includes the policy of austerity, which has been the subject of comment at various points during the module and in particular during yesterday and today’s closing statements.

The Inquiry is focusing in this module on the period from 2009 to 2020, and the Treasury submits that the evidence shows that, following the global financial crisis, the Treasury acted to strengthen the economy to a level whereby it was able to respond to financial and other crises.

My Lady, I turn now to briefly address you on two issues in relation to this module, firstly the Treasury’s role and approach to planning for a civil emergency, in other words the Treasury’s plan; and, secondly, the Treasury’s contribution more specifically to the United Kingdom Government’s planning for a pandemic.

Catherine Little’s statement addresses both of these issues in detail and, my Lady, for that reason we don’t propose to burden you with lengthy written submissions to supplement this oral submission, but we do commend to you her statement.

I do intend to highlight certain aspects of the Treasury’s general role in government, including its role in the United Kingdom’s pre-pandemic emergency planning and also the involvement the Treasury had in that planning. We hope that the following summary of the Treasury’s role in cross-government emergency planning and risk management, including pandemic planning and preparedness, is helpful.

Emergency preparedness except in the case of a crisis originating in the financial system is not a lead responsibility of the Treasury. However, the Treasury has always engaged with the departments who are responsible for specific risk planning to provide targeted support in civil emergency preparedness where appropriate.

Like other government departments, the Treasury feeds in to the Cabinet Office National Security Risk Assessment, about which you have heard much, and the risks published on the National Risk Register. For the risks where the Treasury is the lead department, namely the economic and financial risks, the Treasury develops scenarios and determines the potential impacts and likelihood of the risk in question, and we’ve provided detailed statements of that for later modules. That was the case prior to the Covid-19 pandemic, and remains the case.

In the context of emergency planning, the Treasury’s focus is inevitably, therefore, on economic risk management. Firstly, monitoring and responding to risks to the economy and public finances; secondly, monitoring and responding to risks to the stable operation of the United Kingdom financial system; and, thirdly, setting budgets and applying spending controls for government departments, associated bodies and the devolved administrations, the sober reality, of course, being that there is a finite amount of public money available.

As set out in Catherine Little’s statement, the Treasury has a detailed and comprehensive risk management framework, including the Treasury economic risks, fiscal risks and financial stability groups, together with resilience and contingency planning units, which regularly assess, monitor and scrutinise risks to economic, financial and fiscal stability, and they draw on information and data from a wide range of sources and work with other organisations such as the Bank of England, the Prudential Regulation Authority, and the Financial Conduct Authority.

The Treasury’s work in this regard also has an international dimension. By way of example, the Treasury is the joint chair with the Foreign, Commonwealth and Development Office of the quarterly Global Economic Analysis and Risk Group, and this group works to ensure that there is sufficient focus on and analysis of important global economic issues and risks. It has previously, for example, included the health risks in relation to Ebola.

In addition, the Treasury has regularly taken part in G20 discussions on civil emergencies and health threats.

The Treasury’s risk management framework undoubtedly benefitted significantly from the detailed review and the lessons learned exercise carried out in respect of the Treasury’s handling of the 2008/2009 global financial crisis, the White review, to which you’ve been referred. This was commissioned in 2011 and it published its findings in 2012.

The review made 56 recommendations. By 2014, the Treasury had fully accepted and completed 46 of those, it had partially accepted and completed eight of those, and it rejected only two of those.

The implementation of these recommendations materially improved the Treasury’s ability to react in a nimble and responsive way to new and fast changing priorities, including the Covid-19 pandemic.

In addition, both prior to and during the pandemic, the Treasury’s internal risk management framework was supported by the Office for Budget Responsibility, the OBR, which is the government’s official independent economic and fiscal forecaster. It’s the – and I hope I’m forgiven one abbreviation – it is the OBR’s statutory duty to examine and report on the sustainability of the United Kingdom’s public finances. That’s the duty which feeds directly in to the Treasury’s fiscal objective to deliver sound and sustainable public finances. The OBR’s regular fiscal risk report, introduced in response to recommendations included in a 2015 review by the Treasury of the OBR, has made a major contribution to the Treasury’s wider risk management systems. Indeed, the International Monetary Fund has recognised that those reports “raised the bar on the assessment and quantification of fiscal risks to a new level that other countries should look to meet”.

In 2017, a new fiscal risks branch was established within the fiscal group to support the Treasury’s increased engagement with the OBR on assessing financial risks, and the first report was published in 2017.

One of the main lessons to emerge from the OBR’s fiscal risk reports, and which has underpinned the government’s fiscal strategy and the Treasury’s approach to internal risk management, is the need to ensure that public finances are managed prudently during more favourable times to ensure that when economic risks do crystallise they do not put the public finances onto an unsustainable path.

There is therefore, to state the obvious, a limit to what can be spent at any one time.

It was the Treasury’s position prior to the pandemic, and it remains the Treasury’s position now, that the uncertain nature of economic shocks makes developing specific granular response plans for every possible contingency ahead of time difficult. We echo Mr Hill’s submissions in that respect. Such plans would need continuous updates and may not ultimately prove to be directly applicable to the shocks that do emerge or crystallise.

The OBR published its third report in July 2021 and it’s addressed in the statement of Richard Hughes to this Inquiry. That report specifically focused on and considered lessons learned from the pandemic. The OBR recognised with hindsight that the risk of a global pandemic received far too little attention from the economic community.

However, the OBR’s focus was not on prescriptive scenario planning. Instead, it concluded that fiscal policy needs to be more nimble than previously thought, so as to be able to adapt quickly to the unexpected, and that – and this is a quote again:

“In the absence of perfect foresight, fiscal space [by which I understand in simple terms it means a room for economic manoeuvre] may be the single most valuable risk management tool.”

Without economic flexibility, it simply is not possible to respond to those risks whose size or timing is too uncertain to explicitly provision for in advance.

As George Osborne explained, a plan isn’t worth the paper it’s written on if it can’t be paid for.

A crucial part of any plan for any economic crisis, such as an economic crisis which may accompany a pandemic, is being able quickly and nimbly to scale up resource or surge public expenditure when necessary and as required to meet the specific economic and financial demands of the emergency.

It is that economic flexibility which is also required when an emergency requires the scaling up described by Professor Sir Chris Whitty as being so important in responding to a health emergency such as a pandemic and this pandemic.

The Treasury’s role in setting budgets and controlling public spending is, in this context, an important part of its remit, and essential to maintaining sustainable and flexible public finances.

Departmental budgets are set as a result of the spending review process which is overseen by the Treasury, and Catherine Little’s statement explains this process in detail. However, it’s ordinarily the Secretary of State for each department, on the advice of their officials, who is responsible for decisions on allocations within a department’s budget.

While the spending review generally covers only expenditure which can be reasonably planned in advance, the Treasury has always set aside contingency, called the reserve, for genuinely unforeseen, unabsorbable and unavoidable pressures. The Treasury then controls how this contingency is allocated.

Catherine Little also explains the funding arrangements for the devolved nations in annex G of her statement, and similarly to the UK departments the devolved administrations receive multi-year funding settlements at spending reviews. The amount of funding provided is largely determined by the long-standing Barnett formula. Devolved administrations can seek access to the reserve and access is judged on largely the same criteria as the United Kingdom government departments, but also considering the additional tools and powers open to them.

In the context of its risk management role the Treasury also wishes to assure the Inquiry that it, as no doubt all government departments do, carefully considers the equality impacts of its decision-making in accordance with its legal obligations and its strong commitment to equality issues.

My Lady, I now turn to summarise the role that the Treasury played in respect of pandemic preparedness in the period covered by Module 1.

Before the Covid-19 pandemic, as you know, pandemic preparedness was led by the Department of Health and Social Care together with the Civil Contingencies Secretariat in the Cabinet Office. The Treasury was not a lead department regarding pandemic preparedness. However, it did participate in and respond to influenza pandemic planning and the related exercises carried out by those departments with the lead responsibility and when asked to do so.

At various points and in accordance with the expert advice at the relevant time, the Treasury undertook economic analysis to understand the impact of a pandemic flu scenario. For example, in 2006 the Treasury produced internal analysis of the impact of a future human flu pandemic on the economy following the avian influenza outbreak.

Exercise Winter Willow in 2007, the Treasury actively supported this exercise, and in 2009/10, the swine flu outbreak, the Treasury was involved in reviewing the potential costs that could be associated with the varying degrees of that outbreak. And again, Exercise Cygnus in 2016, the Treasury focused on ensuring that government finances were resilient to the impact of a pandemic on the workforce and amending its processes accordingly in such an event.

My Lady, the Treasury’s attempts to gauge the potential scale of the economic impact of a pandemic serve to highlight the significant uncertainties in the analysis, such as the severity of the illness, the proportion of the workforce affected, the amount of time individuals might be affected by the virus, and the behavioural response of individuals. These were all identified as factors that resulted in a high degree of uncertainty.

This uncertainty highlights both the difficulty associated with the preparation of specific contingent plans for dealing with potential economic shocks and the importance of being able to respond quickly and flexibly when economic shocks crystallise.

This economic analysis by the Treasury was plainly not directed towards a global pandemic of the scale which struck the world in early 2020. It did help provide an analytical framework through which the Treasury could rapidly assess, based on very limited or initially very limited scientific and economic data, the potential impacts of the Covid-19 pandemic as it emerged in early 2020.

Catherine Little’s statement also details the consideration given by the Treasury to funding requests related to pandemic planning. The evidence indicates that the Treasury has been receptive to and supportive of such requests. The evidence also indicates how the Treasury has been receptive to and supportive of requests for funding to develop the United Kingdom’s scientific research and development capability, which became is so important during the pandemic for the purpose of developing a vaccine and has been acknowledged by the TUC as at least something that we got right.

My Lady, in terms of lessons learned, as Catherine Little’s statement explains, the Treasury, along with other departments, has learned much from the pandemic, and is seeking to drive change and improvement, and will listen carefully to the recommendations of this Inquiry.

To date, some of the lessons that we’ve learnt include a need to strengthen and improve the consistency of the Treasury’s risk reporting. In autumn of 2021, the Government updated the charter for budget responsibility to require the OBR to produce an annual report on sustainability of and the risks to the public finances, and that permitted the OBR to take a more flexible approach to determining its content and reporting to the Treasury and to government.

Thirdly, we’ve learnt that we need to manage fraud risk, such as through the launch of the Public Sector Fraud Authority in August of last year.

Finally, we have learnt the need to make improvements regarding the risk management framework, with a focus on the need to address challenges associated with cross-government decisions and responsibilities, and we seek and will continue to seek to improve our ways of working to discharge our function and protect the United Kingdom economy as best as we are able.

My Lady, finally, we’re grateful for the opportunity to assist the Inquiry in respect of Module 1 and to address you, and we wish to conclude these submissions by assuring you of our assistance in your future modules and work. Thank you.

Lady Hallett: Thank you, Mr Block.

Ms Murnaghan.