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.
PASC are a committee of Members of Parliament appointed by the House of Commons and drawn from the three largest political parties.
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 concluded that 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 involving the Bank of England and the Financial Conduct Authority as well as the Treasury.
They also concluded that 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.
Finally, they argued that the Treasury 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.
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.”
