CORRECTED TRANSCRIPT OF ORAL EVIDENCE To be published as HC 1625-ii

HOUSE OF COMMONS

ORAL EVIDENCE

TAKEN BEFORE THE

PUBLIC ADMINISTRATION COMMITTEE

STRATEGIC THINKING IN GOVERNMENT

TUESDAY 24 JANUARY 2012

RT HON PETER RIDDELL, JILL RUTTER and JULIAN McCRAE

PROFESSOR JOHN KAY and DAVID STEVEN

Evidence heard in Public

Questions 74 - 179

USE OF THE TRANSCRIPT

1.    

This is a corrected transcript of evidence taken in public and reported to the House. The transcript has been placed on the internet on the authority of the Committee, and copies have been made available by the Vote Office for the use of Members and others.

2.

The transcript is an approved formal record of these proceedings.

Oral Evidence

Taken before the Public Administration Committee

on Tuesday 24 January 2012

Members present:

Mr Bernard Jenkin (Chair)

Charlie Elphicke

Kelvin Hopkins

Greg Mulholland

Priti Patel

Lindsay Roy

Examination of Witnesses

Witnesses: Rt Hon Peter Riddell, Director, Institute for Government, Jill Rutter, Programme Director, Institute for Government, and Julian McCrae, Director of Research, Institute for Government, gave evidence.

Q74 Chair: May I welcome our three witnesses to this second session on strategic thinking in Government? We are particularly looking at how strategy emerges within Government rather than how it is imposed. In our first inquiry, the response we got was that the Government very much did not want to be seen to be imposing a top-down strategy on the country. Could you first identify yourselves for the record?

Peter Riddell: My name is Peter Riddell, and I am the Director of the Institute for Government.

Jill Rutter: I am Jill Rutter, and I am the Programme Director of the institute’s work on better policymaking. I should also admit that I am a former Director of Strategy and Sustainable Development at the Department for Environment, Food and Rural Affairs.

Julian McCrae: I am Julian McCrae and I am Director of Research at the Institute for Government. I should also admit that I have worked at the Prime Minister’s Strategy Unit in the past.

Peter Riddell: May I add to the modest descriptions given by my colleagues? Julian also had some time at the Treasury and a long period at the Institute for Fiscal Studies. Jill worked at the Treasury and in No. 10, and has also had private sector experience at BP. There is a wealth of experience to my left and right.

Q75 Chair: Thank you. We were very much following up, in our inquiry 18 months ago, the work that the IFG had done on a report called Shaping Up, which identified a strategic gap in the Government’s capability. What evidence do you see that the Government are closing this gap in response to our work?

Julian McCrae: I think Government have put in place a number of things, which follow, as you said at the start, very much the philosophy that they came in with, which was not attempting to do an overarching strategy, but trying to pull various strands of reform together, very much in terms of the sets of actions that they wished to pursue. The business plan process is something that has allowed them to articulate exactly what they think Departments are doing and how they proceed on that. If you are interested, we published a report quite recently on the business plans and how we think they can be developed, which I can elaborate on.

Chair: We will come to that.

Julian McCrae: There have also been reasonably well publicised changes in the structures of No. 10 and the Cabinet Office, which have moved Government in particular directions towards a much clearer articulation of the need for a corporate centre and some controls there, while at the same time removing and possibly replacing, and in some people’s minds reinventing, some of the structures that had allowed the No. 10 machine to operate and get a grip across Government. Again, if the Committee is interested, we can talk more about some of those changes around the Policy Unit and the evolution and change in the Strategy Unit functions that took place there.

Some of this can concentrate a lot on the centre of Government. Departments are making great moves to develop their own strategies for implementation of various things. There is evidence of a variety of how things have progressed there, but we should not just concentrate on the centre of Government.

Q76 Chair: Can we just be clear about one thing? There are strategy units in all sorts of Departments. There is a new chap at the Ministry of Defence, Jonathan Slater, who does strategy, but he is doing strategy for the Department, not strategy for policy.

Peter Riddell: His job is more the reorganisation of the Department. His job is essentially an organisational one, not in any sense what you were discussing in the first report.

Q77 Chair: Exactly, but is not that a confusion in Whitehall still? People confuse national strategy and strategic thinking about the direction of Government with the strategy of where the coffee machines should go in the Department or headquarters.

Jill Rutter: Julian is rather more expert than me on what is going on in the Ministry of Defence, but my understanding was that Jonathan was explicitly there to do the Department’s own transformation strategy, and Tom McKane, who was the Director General of Strategy, was still there; but Whitehall turnover is at such a rate that that may not be the correct position.

Q78 Chair: But Tom McKane was not doing political, military or policy strategy. He was doing departmental management.

Jill Rutter: That is interesting.

Q79 Chair: Do you disagree?

Jill Rutter: I know Tom only from when he turned up at a series-

Chair: It is nothing personal against Tom.

Jill Rutter: No, it is quite interesting. I thought he had a wider remit to do exactly that sort of thinking and link the MOD machine into the national security apparatus. Certainly when we organised a series of seminars before the election at the Institute for Government-we submitted some evidence on that to your previous inquiry on national security-about organising for national security, which was a series of private, safe-space conversations, Tom was there representing the MOD’s interest in the future organisation of national security arrangements, so I had assumed he had a wider brief and did plug the MOD’s wider strategic thinking in things like the SDSR into that, but I am not an expert in the internal organisation of the MOD.

Q80 Chair: It is a very important distinction to make, which I think Peter touched on. We are not interested, in this inquiry, about the rather narrow meaning of strategy as in "business plan" that is ubiquitously used in the business world now. The word "strategy" is too loosely used. What we are talking about is how the Government identify national interests and act upon them. That is the strategy we are interested in.

Julian McCrae: Just to go back to your original question about Jonathan Slater’s role, it is very much a role that comes out of a cascade that should start with a strategic defence review that cascades into the Levene review, which was about the operation of the Department in the context of that, and Jonathan’s job is very much the director in charge of making sure that Levene is implemented. It is quite a different role.

Peter Riddell: We know exactly the point you are making. One of the problems, which was shown in the dilemmas you addressed in your first report and all the evidence to it, is that the word "strategy" is used terribly loosely to mean any thinking beyond-well, one is tempted to say next week. It is a wonderful portmanteau phrase and one of the problems is pinning it down. A particular political issue at present is that a number of members of the current Government do not like that word, but they are still doing strategy. That is one of the problems-a definitional one. The three of us have a quite clear idea of the questions that you are raising, but we are also very clear on business plans and the organisational and the structural, particularly because we are very involved in looking at capabilities and skills, as you know. There is a reluctance to use the term "strategy" because of exactly the question you are asking.

Q81 Priti Patel: I want to develop the thinking slightly wider. Obviously, we know that the Prime Minister’s Strategy Unit was disbanded in 2010, but I think this comes back to some of the earlier evidence we took at this Committee, when we probed the sorts of resources around the wider strategy-not strategy with a small s, but rather the national interest, macro-policy and so on. I would welcome a response from all three of you on what kind of infrastructure you think is needed at the heart of Government to facilitate a more strategic approach-not just resources in terms of the facilities and infrastructure, but from the point of view of individual capability and capacity building with Ministers.

Julian McCrae: I do not think that there is a single structure that you have at the heart of Government. We did some work last year that looked across the support functions to Prime Ministers in six or seven different countries. What you find is that, although there is actually a very large variation in how those are structured, the functions that go on at the centre of Government are usually replicated somewhere in each of those structures. The interesting point for the UK was that we seem to have a very light function at the centre that was capable of questioning departmental policy and the work that was emerging from Departments, and asking, "Does this fit with a cross-government view?" Policy issues, as you know, are often cross-departmental, so two or three Departments have views.

Q82 Priti Patel: When you say "light function at the centre", which centre do you mean?

Julian McCrae: In the Cabinet Office, the economic and domestic affairs secretariat would be the nearest to that at the moment.

Q83 Priti Patel: Is it light in terms of scrutiny and oversight across the board?

Julian McCrae: Compared with a lot of other countries, it is light in the ability to question the content of what is coming to it as opposed to creating the processes that ensure that paper flows through the machine. What you do not find in a lot of these places is ultimate sources of policy generation. That is very small. You do not find large units that are developing policy outside the main Ministries. There is an interesting question for us, which we have not been able to delve into further, but because in the UK you cannot rely on a machinery that can really enforce a cross-Government view without it having to think up its own views-it is a challenge function, not an initiation function-do you, by missing that function, create a hole for yourself that you attempt to fill by creating alternate strategies outside the departmental alignment? It is an interesting question. I do not think that we have an answer to it, but it seems to be a missing bit for the UK.

Q84 Priti Patel: On that point, do you think that is potentially why many strategic approaches ultimately fail or just lose momentum?

Julian McCrae: To go back to the Chair’s point, "strategic" is a very dangerous word. If you-I have done this in my time-are involved in processes that have an awful lot of thinking around them but are not actually connected to what they are trying to change in a real sense, so you are working with the people who are involved in that, you end up very quickly with approaches that fail. If you end up with "strategic" thinking locked into Government at its centre, but unconnected to the Ministries that ultimately deliver that, likelihood of your failing will be very high.

Jill Rutter: I think the really interesting question, having worked in the strategy unit in DEFRA, is that there is only any point in working in a strategy unit if there is demand for strategy. If there is no demand from your political masters, you resort to being an extension of the private office-doing a bit of mopping up, co-ordination and various other things, such as rustling lists together and dealing with issues that no one can find an obvious owner for in the Department. You are the complete reverse of strategic. When you do get somebody who has a real appetite to ask some fundamental questions, "What are we trying to do here? What does the evidence analysis tell us the big issues are? Do we need to re-orient what we are doing? What will work? What will not? How do we connect that whole thing from where we want to go through to what interventions we can bring to bear? How do we re-resource the Department?" then there is a wealth of difference and some real point to doing strategy. The demand side matters as much as the supply side. There is no point having some people badged, "We are doing strategy" if nobody is asking for them to come to the table.

I think at the centre, as Julian said, there is a real risk if strategy is "over there" and the real conversations are happening somewhere else. There is something really interesting about the Government’s approach. We picked up on some of these themes in a document we produced last year called One Year On, when the Government were in the process of beginning to build back a bit of central capacity, having taken the decision on coming in to build down capacity-it seems to be a characteristic of most Prime Ministers coming in to build down capacity and then go through this cycle of building it back up. It was interesting that the logic that led them to create the National Security Council and to produce a revamped and more extensive national security strategy than the previous Government had done, bringing in the issues of energy security, climate security and resource security, did not extend in the same way to the domestic side.

Yesterday, we were saying that one of the interesting things about the development of strategy under the previous Government and the formation of the Performance and Innovation Unit and then the Forward Strategy Unit was that there was a bit of a vacuum about the question, "What do we want to achieve domestically?" I think that the one thing that you could not accuse the current Government of having is a vacuum of policy or of ideas and approaches on what they want to do on the domestic side. There is a massive reform agenda going through, as well as the dominant narrative of the austerity and the four-year deficit reduction plan, so I do not think there is that same vacuum as there was. It was not until Blair II-the second term-that you got strategy coming in to its own on the domestic side.

Peter Riddell: May I take it over from Jill? If you look at it historically, it is very interesting. The key point is that it depends what the politicians and Ministers want-their taste and interests. It is possibly about personality, and it is also a matter of cycles-everything goes through a cycle. If you look at the history of the CPRS, set up Ted Heath with Victor Rothschild, and its demise, it was partly an interaction between Margaret Thatcher and her not liking the product and so on, but a lot of it is about whether that strategy unit is performing its function.

There are some wonderful accounts of meetings at Chequers between the Rothschild unit and the Heath Government and, slightly later, the final Wilson Government, with some uncomfortable points being drawn out and the politicians not wanting to hear it. You then get into another issue, which you probably want to come to, which is how much of this is kept inside Whitehall and how much other people are engaged with it. That is an important point. I well remember the leaking of the CPRS report on long-term public spending trends, which was at the height of Thatcherism just after the Falklands. It went via Andrew Neil-some people are always on the stage-to The Economist, where, improbably, he was then working. It was an interesting report, because it drew out certain conclusions and one of the options-I emphasise the word "options"-was switching to a national insurance system for health. Margaret Thatcher, at the height of her time, virtually had to deny the report, which came from a member of her Cabinet to Andrew Neil. The famous phrase she used was, "The NHS is safe in our hands," but that was at a time when she could have done anything that she wanted. Uncomfortable truths come out in that way.

I want to bring out another point which I think is important. Your question is about capacity at the centre. For politicians, it is a problem. How do you address a problem? Sometimes there is capacity at the centre and at other times you set up reviews; sometimes it is convenient for strategic thinking. Look at two examples from the past few years. One is the review of pensions that Adair Turner did, which was very successful. Jill ran a series of seminars and various policy reunions at the Institute on this, looking at why it succeeded, and we have just produced a report on policy success. Another recent example, whose future is still in the balance, is Andrew Dilnot’s report on long-term care. That is a difficult problem for Government to address, so in a sense the strategic thinking was subcontracted elsewhere.

Another current example, which affects some of you in your constituency role, is airport capacity around London. That is being done internally, because it is a fair hunch that if it was done externally, it would produce a result that was politically unacceptable to Government, which is a third runway at Heathrow. Virtually anyone looking at it externally would say that-that is the answer to the hub problem in London, leaving aside Boris Island, which is a rather long-term project. A lot depends on what the political question is.

Chair: Those are very full answers, but we must ask you to be brief. I will go to Lindsay, and then I will come to Kelvin.

Q85 Lindsay Roy: On the point about strategy, somebody once described that to me as trying to swim through cotton wool. For the purposes of clarity and in holistic but lay terms, are we talking here about strategy as corporate direction of travel?

Julian McCrae: People define this in all kinds of ways. I try never to use the word "strategy" in isolation if at all possible. If you have an issue you are dealing with, you have a strategic approach to it if you can answer three simple questions: where are you now, where do you want to get to and how are you going to get there? If you can answer those questions-

Q86 Lindsay Roy: How will you know you have arrived?

Julian McCrae: That is part of understanding how you are going to get there, because if you do not know what route you on, you cannot do it.

Q87 Lindsay Roy: Is there anyone overviewing-let us not call it strategy-Department business priorities to ensure compatibility?

Julian McCrae: Across Departments, you mean?

Lindsay Roy: Yes.

Julian McCrae: It is something that we touched on in our report on business plans that the Government brought in. At the moment, that is a very underdeveloped area, especially since the cross-cutting PSAs have been removed, for various reasons. This is still a big question at the moment as to exactly how you bring together the various pieces.

Q88 Lindsay Roy: If that is not happening, does that not reinforce a silo approach to Government?

Julian McCrae: I do not think we have moved away from a long-standing silo approach to Government in the UK. That is definitely still a critique of Whitehall that is very common and still running.

Q89 Chair: This strategy depends on political leadership-the appetite for strategic thinking from the very top. Is it divisible in any way from the personalities of our political leaders? Is David Cameron strategically minded, and if he is not strategically minded is there any point in trying to create machinery that will make him be more strategically minded?

Julian McCrae: The interesting question for a civil servant is not, "What is the personality of the Minister involved?" because that is something that is decided for you rather than that you would decide on; it is really, "What the civil service does in the situation where it has a decision maker who is not inclined to think in that particular way?" The civil service at the moment has a tendency to react almost exclusively to the decision maker it is working to, so as Jill said, you see strategy functions established when a Minister is interested in them, but then very quickly deteriorate.

Q90 Chair: Let me offer three very brief examples. I do not think that the Prime Minister or the Government intended to finish up exercising the veto on 9 December over the new fiscal union treaty, but that could be a tactical decision that has massive strategic consequences. Did the Prime Minister intend to stir up a maelstrom of hatred and resentment in Argentina last week when he commented on the Falkland Islands by describing them-the Argentines that is-as the real colonialists? Did he intend to produce a White Paper on a referendum in Scotland before he had done the Andrew Marr programme two days beforehand? Is this what militates against a strategic approach to the Government’s challenges?

Julian McCrae: I have to say that I am not sure that any of those should affect what a civil service should be doing in terms of-

Q91 Chair: That is a civil servant’s view, but from the point of view of our national interest, is this the best way of deciding strategic issues?

Jill Rutter: I think that you can flip the question round. On Europe, I have no idea what happened: I just could not work out why they finished the session so early that night; I thought they would be having a session another day. I was really surprised, because usually they have the dinner the night before and it is all very friendly. If there had been an overt strategic document about the Government’s approach to Europe, would that have militated against what might be heat-of-the-moment decisions about that? I do not know. That is one of the questions.

One of the things I think strategy is potentially useful for is that you have thought in advance of where you are trying to go, which then gives you a benchmark against which you can judge all those decisions. Prime Ministers and politicians have to make those immediate judgments all the time. That at least gives you a bit of a lodestar to weigh that against. Coming back to Parliament, perhaps one of the reasons why politicians do not see the need to be so strategic is that their peers do not hold them to account in quite the same way by asking whether they are being strategically consistent. If they felt it was necessary to have an underpinning clear narrative that they were judged by over the longer term, there might be more demand to think in that way in Government.

Q92 Chair: That is an interesting thought-that strategic thinking is not there to bind politicians to a particular course, but is there to ensure they are informed when they make their snap judgments.

Peter Riddell: In a sense, ’twas ever so. I do not think it is just a creation of the Andrew Marr programme, or 24-hour news. A lot of major political changes have occurred as a result of contingency. When the Hawarden kite was flown by Gladstone’s son on Irish home rule-the most massively important change, which changed the face of British politics for 20 years-was he thinking of a strategy in relation to Ireland? Knowing Gladstone, he probably had a strategy in his head without consulting others, but there is an element where political tactics mean that is always going to happen.

Take a more recent example that was very important in the previous Government. You mentioned the Andrew Marr programme. I do not know whether it was Andy Marr or David Frost then, but it was the interview that Tony Blair did on health spending. That had a significant effect on the level of spending on health, what happened subsequently to taxation, the size of the public sector and on general relations with his Chancellor at the time, as we know. Was that a strategic judgment? In a sense, what lay behind his commitment in the interview to the European percentage of spending on health had been a gradual discussion, a realignment of where the Government were strategically on health. On the Falklands example, what lay behind it were discussions about what we do about the Falklands and what was happening there with oil and all that. There is a danger of assuming that because something was said in a particular media context, there was not something behind it.

Chair: Understood. Mr Hopkins, you have been very patient.

Q93 Kelvin Hopkins: On that point, I remember very well when Tony Blair decided to spend more on health. That was driven by public opinion, people getting angry about Labour not spending enough on health.

Peter Riddell: There had been discussion before, as we now know, with Alan Milburn.

Q94 Kelvin Hopkins: Indeed. I met Alan Milburn and had a fierce debate with him, I may say. But there we are.

I find the idea of strategy without defining a clear objective very nebulous. Just talking about strategy implies we all know what direction we are going in and we just have to discuss how to get there. We have to decide on the objective. I am not talking about micro-objectives and particular policy things. Is the macro-political objective the promotion of human welfare, social equality, full employment, economic growth? I would suggest that the implied objective over the past several decades in Britain, followed by every Prime Minister from Thatcher to Cameron, is to dismantle the post-war democratic state and transfer as much power as possible to the private corporate world. The evil genius behind all that is von Hayek. That is what the direction has been, if you look at everything that has happened. As soon as one starts to challenge that-as a left social democrat I have a completely different objective; I want to recreate the social democratic post-war world, which I think worked very well. Until we discuss objectives, you don’t get any real feel for what strategy is about.

Julian McCrae: Yes. Certainly never in my career have I had that articulated as a strategy that we are engaged in. In a sense it takes you straight into the political sphere which, as Peter said, is what is Parliament holding politicians to account for? What is the public holding politicians to account for, for the direction they wish to take the country? In my experience, sometimes in the political world it is easier not to lay out some of those very big visions and ideas, simply because change occurs in a far more practical way. It does not occur through grand strategy and speech; it occurs through making changes. That can make a distraction and possibly-I leave you to judge this-because you do not want to reveal your full hand. On the opposite side though, a set of clear objectives is essential-outside a strategic approach to anything; forget the word "strategy"-to changing anything. If people do not have very clear ideas about what this means for my job as I am doing it now, in a few very short ways that really make sense to them, you will not change anything. That is what I think this Government has been struggling with. It has a very clear strategy and approach to changing the structure of the state-

Q95 Chair: Does it?

Julian McCrae: It does.

Q96 Chair: It says some very clear things, but are they strategically thought out? Are they strategically connected to each other?

Julian McCrae: I think that it possesses a strategy, as in it has a set of things whereby it thinks it knows where it is and where it wants to go. Those are very silo-based-to go back to an earlier question-and they are much clearer in Departments than at a cross-government level. You could challenge whether it should have a much clearer strategic approach to the cross-government element, but it has a strategic approach, and that is very much based around wanting to get on and change things. The underlying theory of how you change things is generally that you change things on the ground and keep moving-do not spend too much time thinking about the direction, because we did that in Opposition and we are moving forward. That is a perfectly reasonable approach.

Chair: Sorry. We must have shorter answers.

Kelvin Hopkins: I disagree fundamentally. I think that there is a continuum between new Labour and the Cameron agenda, to which Cameron keeps referring-"This is what you said in Government."

Q97 Chair: I think that something else is coming out in this conversation that is very important, which is that, being a civil servant, it is in your psychological DNA now that strategy is about how to implement things that other people give you to do, whereas we are thinking about how the Government identifies the national interest and is an incoming Government acting strategically or is it just a connection of impulses that it collected to put in a manifesto to get elected?

Peter Riddell: Some of it is to do with time. As any organisation finds, the most difficult thing is to have time to reflect. Governments under pressure are more likely to react instinctively to immediate pressures, because that is inevitably what happens. One of the great difficulties is not just whether you have capacity-people-but do Ministers give them time to discuss the challenges that have been put to them? Both Julian and Jill have said that a lot of it is a matter of challenge. Do they allow time-not just time in the agenda, but time to think-for that to happen?

Chair: We are talking too much as well. We do not have enough time. Mr Hopkins, do you want to press any further?

Kelvin Hopkins: I have another question. That one was a supplementary to the previous one.

Chair: Yes, as quickly as you can please.

Q98 Kelvin Hopkins: The Cabinet Office tells us that strategic thinking is a valued skill in the civil service. Do you see evidence to support that view? If yes, what have you seen?

Julian McCrae: I think that it is a reasonably valued skill, but other skills are potentially more valuable. If you went through the list, the key thing if you want to understand what an organisation values is to look at how it promotes and who it promotes to its top ranks. The ability to work in ministerial private office, Treasury policy skills and so on tend to be associated with the people who get closer to the top. Jill might like to say something.

Jill Rutter: The people who came out of the Prime Minister’s strategy unit, who had more experience of doing formal strategy, did quite well in Government, and a lot of them are in senior positions now. Quite a lot of people have the capability to do that, but in some ways the more interesting question, which goes to our reports on policy making, is that one of the key components of effective strategy is, as Julian said, to understand what is going on. One question is: do we really have the depth of analytic skills and knowledge to do that?

If you read, Good Strategy/Bad Strategy, the starting point of good strategy is diagnosis. One of the interesting questions is, do you actually have those real diagnostic skills to combine with the political skills-small "p" political-that civil servants need to give some unpalatable messages to Ministers? For example, perhaps the diagnosis revealed by that is not quite the same as their diagnosis.

Within two years of an election is an odd period for strategic thinking in Government, because you assume that the Government’s immediately revealed strategy, at least on the domestic side, has come out of the process of manifesto making, and the immediate activity is about making that happen. That is the focus of the first two years. Interesting stuff: Peter is about to set up a project on government renewal, which I think is a really interesting project for a Government of any party.

Q99 Kelvin Hopkins: Is there a difference between the strategic thinking capabilities of officials in Departments at the centre and those working in large delivery departments?

Jill Rutter: They are answering different sorts of questions. Going back to this Good Strategy/Bad Strategy idea, the critical thing for strategy is that you have to have your diagnosis and guiding approach-what you would recognise as a strategic approach. That has to be turned into coherent actions. One of the eternal challenges is to make the translation from what you want to do-a strategic level-into, "Can it actually happen?" I may want to cut carbon emissions, but can I design a regime that allows me to do that cost-effectively while maintaining proper amounts of energy generation, or whatever? That is the real thing. One of the big issues-this is why there is a lot of interest in bringing in outsiders to the policy process-is to make sure that what you commit to and what might sound very good on paper can be delivered in practice.

Julian McCrae: It goes back to the question: what is a strategic approach to operating? People who are best at operational leadership in the civil service-indeed, those I have met in any other sphere-are the people who can answer clearly, "Where are they now? Where do they want to get to and how do they get there?" If you are operating as a civil servant, part of that is making sure that it links with the higher level political world.

Q100 Lindsay Roy: The acid test of investment in strategic thinking time is the "So what?" factor. What is the outcome? Do you agree?

Jill Rutter: In terms of, "Did you do anything differently?"

Lindsay Roy: The outcome, yes.

Jill Rutter: If you are going to invest in a lot of strategic thinking, the interesting question is: do you do anything differently at the end or have you at least thought through a frame for doing so? One of the values of strategic thinking is a chance to step back and play out some of the scenarios. It is interesting that if you have a clear view of where you want to get to-this all has to start from clarity on achievable objectives-having that frame allows you to play out different ways in which you might achieve it. It allows you to think about what you will do if events happen to you and how you might react. It is not going to happen exactly like that, but if you are in the negotiating room at 4 am, what exactly do you do? It is useful to have thought about that in advance. The Prime Minister may well have done that-I don’t know.

Q101 Lindsay Roy: That is very helpful. In System Stewardship: the future of policy making?, you drew attention to the changes that the Government’s localism agenda would require and how policy is made in a less certain world. What new strategic capacities and skills will officials and Ministers need to develop to make this work?

Jill Rutter: I will pick this one up, as it is our work on policy making. What we are trying to say is that policy making is moving. Jeremy Heywood gave an interesting interview to Civil Service World before he was made Cabinet Secretary. I think we quote it at the start of System Stewardship. He said that the whole system has to change. If you have got used to having direct levers and targets, you are not in that world any more. It requires a different approach, and the civil service is trying to work out what it is.

We are saying that the role of the policy maker-blended Minister and civil servant-is setting the rules of the system, such as some of the boundary rules. It is giving some idea-this is where clarity on objectives matters-of where you want that system to go, but not trying to micro-manage every move within it and target each input. That is where we come to your views on emergent strategy. John Kay is on next. I know that Mike was very influenced by his Obliquity book.

You want to be able to ride the innovation and adaptation within the system, but not go off course. For civil servants, if you want to benefit from that, it is impossible to have everything going back through Whitehall, with any vague deviation having to come back-you need much shorter feedback loops. That is where this fits closely with the decentralisation agenda. As a civil servant, rather than looking inward and upward, you must be out there understanding what is happening on the ground. You must have a different set of skills. You must operate much more through persuasion, using a variety of techniques, and you must be able to connect to people. We had a session yesterday at IFG about crowd-sourcing, and we will come on to that. You must be able to access multiple information and make sense of what is going on in a very messy external world, rather than say, "What I want to achieve is x."

Q102 Lindsay Roy: Are you seeing a change in culture?

Jill Rutter: We think a very big change in culture. One of the things we say in System Stewardship is that the pretence that policy is flawlessly delivered from ministerial thought, looking at your chair, through to exactly the same result on the ground is always a fallacy. It is even more of a fallacy there, because the effective policy is made and remade every time it filters through a level at which people are making prioritisation decisions.

I was at a thing on drugs policy that was quite interesting. The Government clearly have not legalised a lot of drugs, for example, cannabis is still illegal. What that means on the ground depends on the policing priority decisions of every local chief constable. Are they going to arrest you for low grade possession or not? Many of them will not. You have to recognise that your policy is being remade. You as a policy maker need to think, "That is happening. Am I aware of what’s happening? Am I happy with what’s happening, because if I’m not, that’s an area on which I need to intervene? Or is there some really brilliant innovation going on there and my role is to catalyse the spread of that innovation somewhere else to make the system adapt faster?" We can contrast building the Olympic stadium with designing the Olympic ticketing system, where people’s satisfaction with the outcome depends not just on the system, but whether they got their tickets and how all those people interact.

Chair: I must ask you to give shorter answers I am afraid, but that was a very, very full answer. Thank you very much.

Q103 Charlie Elphicke: Turning to Departments and the departmental business plans that have been introduced, do they provide Departments with a clear strategic direction? Are they useful at all?

Julian McCrae: Departmental business plans contain quite a lot of things. People tend to think about structural reform plans, which are the set of actions that the Department has committed itself to. We think that, in principle, they are a very useful innovation in that they force Departments to write down what they are intending to do in taking forward the Government’s agenda. They produce a timeline to that and there is an accountability as to whether that is happening or not. That is a good move forward. The reality as it lies on the ground has been variable. Some Departments have them built into what they are doing and how they are running the whole Department, but, for some Departments, they are more reporting tools on the side of what they are doing. If they are the latter, it is clearly not necessarily driving change; it is merely an exercise in ticking boxes. That is not really where the Government want to take it.

Q104 Charlie Elphicke: Jill Rutter, Mr McCrae has a positive view of all these things, but you used to work in the Treasury. Is this not a classic Treasury plot that is all about the money and nothing to do with any kind of direction?

Jill Rutter: On business plans, I used to do spending rounds in the days when we really just cared about inputs. That is all we measured. So there has been some progress from inputs to outputs to outcomes. It is quite useful for Departments to set down what they are trying to do and to be held to account for whether they have done what they are trying to do. In so far as business plans do that, they are quite useful.

Going back to my time in DEFRA, that was the sort of Department that, critically, depended on lots of other Departments contributing to its policy objectives. The bit that is lost through business plans is the joint action approach. That is a potential future improvement because Departments are really just conveniences used to badge people, like houses at Hogwarts. The question is: do they really matter more than that? The Government have to solve loads and loads of problems that do not fit neatly into Departments. Business plans are very important for holding Departments to account, but they need to be refined through a process of meshing together.

Peter Riddell: Could I add one point? The key thing is monitoring. We do some monitoring ourselves and we produce something called the Whitehall Monitor, which does look at them. That is something one of our colleagues looks at very closely. There is a role for Select Committees-obviously, more the departmental Committees than this one-to look and follow it up.

On your basic point, what is inherent in the whole discussion we have had this morning is the role of the Treasury. If you look at what happened with defence, instead of things being sequential between having a national security strategy and then the review, they were coincidental. But, it was quite clear what was driving the process. If you look at the evolution of the business plans, the connection with the CSR of that year was clear. The very interesting question is how much of the spending round comes prior to any strategic consideration of what the priorities are for any Department.

Q105 Charlie Elphicke: Jill Rutter, let us just take a Department at random-you mentioned DEFRA, so let us take DEFRA. Do you see it as a Department that is a beacon of quality and strategic thinking and direction?

Jill Rutter: I have made a decision not to think too much. That sounds very unfair. I do not want to judge what my colleagues are doing. I think that they have quite a big agenda. They have done one piece of work that I think is quite strategic and interesting, which is the natural environment White Paper. It built on and used a lot of stuff that was commissioned under the previous Government, so I think that was a really good example of continuity; but like every Department it is coping with significant cuts and reductions, massive streamlining of its arms’ length body landscape. It has a lot on its plate.

Q106 Charlie Elphicke: Mr McCrae, what do you think? You were at No. 10, observing the Prime Minister’s strategy unit. What did you think? Take a Department at random.

Julian McCrae: I think the capability reviews, which Gus O’Donnell brought in, were quite a good innovation in trying to say objectively and publicly what was happening in the capability of different Departments, along with, of course, the agendas. The fact that we do not have successors to that, which have direct robustness and an external challenge, is quite a big gap, because you cannot objectively answer your question, and for a civil service that is concerned with taking forward some of the biggest challenges any Government have faced, actually that is a big gap: to not know whether you are on track to increase your capacity or not. Was that what your question was?

Q107 Charlie Elphicke: No, my point is when you were in No 10, were you personally convinced that they could see the wood for the trees?

Julian McCrae: I think there is a tendency in all organisations for people in a different organisation to think the other people cannot think; which is usually to confuse the fact that they are thinking a lot and you just do not understand what they are trying to achieve. Civil servants in DEFRA are very intelligent and clever people. The questions they are being asked by the politicians in the circumstances they have found themselves in, and the way their capabilities are being used, can vary hugely.

Members of Parliament will be in much better positions to judge whether civil servants in the Departments you come across are capable of answering the types of questions you give than I am with my random observations, but I think there should be a way of looking at this objectively, and being able to say which Departments are strong in these capabilities, and which are not.

Q108 Charlie Elphicke: Jill Rutter, you mentioned that cross-departmental working is a really important area. The PSAs were intended to promote cross-departmental working. In their absence, what assessment do you make of the extent of so-called joined-up Government?

Jill Rutter: There are some areas where they put in place mechanisms to deliver things. For example the national carbon plan has every Department committing to what it is going to do to meet the Government’s carbon reduction commitments, so that, clearly, is a piece of joining-up machinery. The PSAs were working to an extent. I think it is wrong to overstate how much the joint delivery plans were really developing.

Some of the feeling I get from talking to my colleagues is they feel that that is a bit harder nowadays, without that bit of infrastructure; so that degree of joint working is not necessarily there in the same way as it was; but that is also compounded by the fact that there is a lot of churn going on-a lot of change, a lot of internal distraction, with people taking out very large numbers of staff, and a lot of people quite new to post. I think you would have to make a real judgment, maybe a year or two down the track, when you saw how the new arrangements were bedding out, and how those relationships were rebuilding.

When I was in No 10, which was a lot earlier than Julian, I always thought that the Cabinet Office should play a much stronger role in pushing Departments to understand what they were doing within a bigger picture; so I have a lot of sympathy with the Committee’s approach that there needs to be a strategic drive-that Departments can then see how they fit in and where they fit in. It may be different at the start of a Government, but I was there mid-way through a Government, and you felt a bit of benchmarking that you could hold Departments to-

Q109 Chair: But isn’t the Treasury rather jealous of that role? Doesn’t the Treasury think that it does that?

Jill Rutter: One of the least productive outings under the last Government was the complete fissure between the Treasury and the Cabinet Office. One of the worst exercises I was involved with was a process called the five-year strategies, when we were asked to produce a five-year strategy for DEFRA, shortly after I joined. We were asked to do it very quickly and the Treasury made clear that this was absolutely unlinked to the comprehensive spending review and actually was not a document that it was going to pay any attention to. That was not, I think, classic government.

Peter Riddell: That was essentially a political thing, Jill.

Jill Rutter: I know, essentially, but it was not a classic of good government, I think.

Peter Riddell: No, it was a political thing with Tony Blair trying to produce a legacy to influence his successor.

Q110 Charlie Elphicke: Mr McCrae, Jill Rutter speaks of a fissure between the Treasury and other parts of Government, which leaves me shocked. All of us are stunned. For you in No. 10, did that make it harder to promote joined-up government, and would you say that between 2000 and 2010 joined-up government was a successful enterprise, or not really?

Julian McCrae: The lack of joining up across Departments is a long-standing feature of UK Government. It is also a long-standing feature of virtually every Government you look at.

Q111 Charlie Elphicke: Does that make it all right, then?

Julian McCrae: It doesn’t make it all right. It means it is something we have to look at. We need to think about the fundamentals. I mentioned business plans. I have a positive view of business plans, but I do not think that by themselves they are any solution. They are a small part.

On the Treasury question, the Treasury is a Department that has a number of functions combined inside it. The primary one at the moment is its spending control function. That is where our Treasury’s emphasis is focused. It is always difficult, even without the political overlay, to move people who have very clear and specific objectives to start saying, "Well, let’s think about this in the rounder sense of how the Government can move forward." The Treasury’s usual answer would be, "It’s for Departments to figure out the strategy."

Q112 Charlie Elphicke: So what you’re saying is that politicians love to talk about joined-up government, but really it is just some spin.

Julian McCrae: I think that politicians struggle very heavily with it because it’s deeply frustrating for everyone in the system. How you sort that out, I think we referred to shaping up. We suggested some things such as setting budgets on a cross-cutting basis, because budgets equal power and influence, to get to the heart of this matter, because while you keep the budgets all in their silos you will have problems such as the Treasury reinforcing those silos.

Peter Riddell: There are defences to some of the issues in relation to the Foreign Office and DFID that classically come in to that, where there are certain clear, strategic objectives. No one would say they are happily resolved. I might suggest that one of the interesting issues for the Committee to look at is the departmental boundaries, because an interesting question for the Government, as they seek to achieve further savings in the next CSR and so on, will be departmental structures and lines. So far, the current Prime Minister has been pretty reluctant to do machinery of government change, for reasons we would applaud, because there is plenty of evidence that the savings are offset by the disruption and upheaval. However, there are questions, as Jill raised earlier, about departmental structures, particularly when you are addressing cross-cutting issues, which, as the Government go on, they will clearly have to address.

Julian McCrae: May I make one very quick point? One of the fundamentals we haven’t touched on is that the UK has an incredibly centralised state, especially in England, and some of the problems we find in joining up are an example of just that. To join up an employment service with a skills service where the two lines of accountability meet, if at all, in the Prime Minister, and the Cabinet Secretary possibly, is a crazy thing to attempt. Some of our lack of more localised control structure, which most other states have, is at the root of some of the difficulty we have in this joining-up space.

Q113 Chair: The Government’s strategy really is the CSR, isn’t it? That’s the Government strategy. Nothing else matters in this present climate, does it?

Julian McCrae: Anything strategy that is not linked to your budgets is not strategy.

Q114 Chair: So how is the Treasury, as an institution, bound into this overall Government strategy except by the Chancellor’s relationship with the Prime Minister and the other Ministers? Isn’t the mistake here to believe that we can create some institutional underpinning, when in fact it depends upon the will of the politicians to think and act strategically?

Julian McCrae: If you look at the examples of people who have run spending reviews in major times of austerity that have led to successful consolidations, in that they cut the spending and it stayed cut, you tend to find that your spending review processes focus not so much on just sorting out the spreadsheet and making the numbers add up, which is a traditional Treasury way of thinking about spending reviews, but on building the alliances and coalitions that are necessary to implement what are very tricky decisions. So, they focus on the political side, on how you build up the Cabinet consensus around the set of challenges, and they focus on the operational side, on how you get leaders in place who feel they own the plans that are coming out and which they have to implement.

Q115 Chair: But the Treasury seems incapable of distinguishing between £20 million off the World Service, which has enormous strategic implications, and £20 million off the out-of-work benefits bill. Okay, one is a demand-driven programme and one isn’t, but the problem is that it stretches into billions on the out-of-work benefits bill, so why are we bothering about £20 million off the World Service, when that will do so much damage? Does the Treasury make a distinction?

Julian McCrae: The spending reviews that we have run in the UK are notoriously bilateral. If you are running a spending review, from the Treasury’s point of view the most important thing is how you settle a political fight for resources. The last thing you want is Departments talking to each other, because they might gang up on you, so you get an extremely bilateral process. A spending review that you do in a time of austerity-where you really need to challenge yourself on some of those questions, join up the different things and make savings across departmental boundaries-looks very different from what we have traditionally run over the past 10 or 15 Sessions.

Peter Riddell: The spending review in 2010 was done in a very short period of time. It was produced in the third week of October, but it was launched only in June, after the Budget. It is a different opportunity. We assume that there will be a spending review in 2013-the next instalment. This is undoubtedly a pious aspiration, to meet exactly the point you are making, but there is actually time now to address the points that Julian is making. If there is a will, there is the opportunity to address exactly the points that Julian is making now, but it does not need to be so rushed.

Q116 Chair: Lastly, unless Jill has an urgent point to make, we need to address the question of public engagement and how strategy emerges from democratically elected politicians who think they know the minds of the people they represent, who put them into power. In this, I have in mind a virtuous or un-virtuous circle where public aspirations, interests and perceptions of interests inform strategic leadership in Whitehall, which in turn drives policies that are successful or unsuccessful. That success or lack of success then reinforces or undermines the sense of public identity and the values and aspirations. Do you see the circle that can work positively or negatively? One would argue that recently it has been working negatively, and that economic failure has undermined public confidence, which reduces aspirations or makes politicians think more short term. In that context, given the critical role of people and organisations outside Government feeding into the Government’s strategy, how should the Government more rationally engage the public and provide strategic leadership to the public as a whole?

Jill Rutter: I will start by saying one or two things about that and then colleagues can come in. At the moment, there has been a lot of public engagement about what the Government have been doing, but it has been after the event. We have had an announcement, followed by a mobilisation against and some sort of reaction. We had a session yesterday with Will Cavendish, who runs the Red Tape Challenge, which is a sort of micro bit where they are trying to get public views. There is a really interesting piece about opening up some issues to try to take the public with you.

Q117 Chair: You are talking about what politicians call rolling the pitch?

Jill Rutter: A bit of rolling the pitch, but a bit of potentially not just rolling the pitch but throwing balls around a bit, and letting some other people on to the pitch to play.

Q118 Chair: But I am asking you about something different. I am asking you about how politicians know what sort of country the British people want this country to be.

Peter Riddell: I think they do.

Chair: Yes, they do.

Peter Riddell: My sense from a lot of contact with politicians over three or more decades is that they have a belief, which may be correct or otherwise, that they know what the public want-particularly on tax issues, which are crucial to this.

Q119 Chair: Well, our place in the world, and whether we should have nuclear weapons, or wars, and so on.

Peter Riddell: They have a core assumption. All right, they do lots of focus groups and lots of polling, but that partly depends on how you phrase it. I think the real inhibition here is being afraid of posing potentially what they regard as politically difficult options. If you look particularly at, say, tax issues, there has been a reluctance to have an open debate on strategic choices, because of some of the implications for taxation. It is interesting to look at what happened to the previous Government, which led up to the increase in national insurance contributions-this goes back to the earlier point we were making on health. There was a sense that, yes, health spending should rise, which was the strategic decision, but how could it be financed? The process of engaging the public was to have Derek Wanless to do these reviews, which all pointed in one direction-to have someone outside legitimising the decision that Gordon Brown and Tony Blair had already taken-so the involvement was how you minimise the political risk of doing something that they initially felt was unpopular. It turned out to be unpopular with a long time-lag, not initially-it was initially successful. The politicians feel that they know all too well what the public think, so they narrow the debate or seek to influence the debate by having reviews that produce the results they want.

Jill Rutter: Most of the evidence is where you do proper deliberation and bring people in, and a lot of things that, ex ante, are deemed to be unthinkable are actually a lot more thinkable when you put the options out to people. A tax commission in Australia called the Henry commission asked people what they thought the future of the tax system should look like. That is not something that the Treasury has been very pro doing here, but it is interesting that the permanent secretary to the Treasury has done it. It was done over a year or a year and a half with quite a lot of deliberation. The Turner commission ran lots of road shows saying, "These are the choices on pensions. What do you want? Can we do that?" Julian was involved in a small exercise before the spending programme, asking citizens in Coventry how they would make spending choices. They probably weren’t a million miles from where the Government ended up with their spending choices, apart from the fact that whenever you ask people to do an interpretive exercise, they never want aid spending.

Q120 Chair: But such public consultation exercises can be very subjective. We all know the dangers of push polling.

Julian McCrae: Exactly. They probably tell you more about how people think and approach subjects than what the answer is.

Q121 Kelvin Hopkins: What Governments do not do in Britain is present coherent alternative views of how we should run our world. If the two parties represented, on the one hand, America, the free market and inequality, with all the problems that come with that, and, on the other, Scandinavian social democracy, with full employment, a high degree of equality, a very peaceful society, very high spending and very high taxation, those are coherent alternatives, but they are never presented, because the politicians do not want the population to choose the latter, I would say.

Peter Riddell: I don’t think it’s as straightforward as that, if you look at the trends of actual spending and tax.

Q122 Lindsay Roy: Jill, you mentioned crowd-sourcing, and I think you want us to refer to Iceland and the way in which it is trying to create its new constitution. Do you think that social media and activities such as crowd-sourcing have a place in the development of a strategy and an understanding of the national interest?

Jill Rutter: I think it is interesting whether they have a place in the development of strategy. They are potentially more useful, and have certainly been used so far, around quite focused questions. The big Government example so far is the red tape challenge, where they put out a bunch of regulations and ask, "What do you think of them?" We were debating last night whether it was just a fancier-schmancier form of consultation, and it seems to me that the real use is where it allows people to feed in different ideas.

The Chairman asked whether these things are all fixed, and one of the really interesting questions in developing some of this crowd-sourcing is allowing different framings of the question to emerge. At the moment, you get framing by Government and you are nudging-we are all experts in behavioural economics now-people and priming the answer. It is really interesting. Can you actually get different issues emerging from crowd-sourcing?

We had somebody from Redbridge last night who had done some interesting stuff about presenting-it’s the sort of thing that you are doing-budgetary choices of what sort of borough we want to be, whether we want to spend more and how we want to do that. They did that online, but of their 150,000 or so citizens, 5,000 participated, so there is always a question of whether you are just getting the people who love playing around on computers or whatever. They went out and nabbed people in libraries to try to deal with that. It is an emerging area in which people are feeling their way at the moment.

On the red tape challenge, they would say that they have managed to reach the sort of people who conventional consultations never reach, like bed-and-breakfast owners. There is an interest in engaging more people in the policy debate, but you then have to understand-this is really interesting-whether you can move beyond sucking up ideas to actually help people co-create solutions, as we call it in the jargon. If you have two sets of people saying x and y, can you actually provide a platform where the Government will say, "We don’t mind whether it’s x or y, or ½ x or ½ y. You go and sort out a regime you can both live with"? That is an interesting, new way of thinking about it. As Peter said, one of the ways we have done that before has been through these commissions, asking three or five wise, semi-representative people to think longer term. One of the huge advantages of those commissions is that they are able to bring some real focus and real depth of analysis and to actually think beyond the normal political boundaries. That is an area where the coalition has created some reviews, and it is not an unuseful part of the policy process when you need to go beyond the day-to-day and the extremely tactical.

Q123 Lindsay Roy: How do politicians and officials have a clear idea of the public views on major issues? Indeed, do they have a clear idea and robust information?

Peter Riddell: They often have very strong prejudices. As Jill has just been saying, the various kinds of outsourcing at other times can often refine those in an interesting way. The problem is a representational one-your 5,000 in Redbridge, compared with the whole population. How do you get that balance?

Oddly enough, I have never met politicians who do not think they know what their constituents think about issues. The issue is much more how widely based things are, and that sometimes leads to risk assessments. That is why I think the idea of commissions and reviews is interesting. It is difficult for Governments to put out risky options. By definition, my old trade will always pick the riskiest-the flesh creeper. It is easier for reviews to put the unpalatable out there and stimulate a debate. There is an issue of distance-not deniability, but distance.

Q124 Chair: My concern is that politicians are endlessly asking the public what they think about things in order that they can just repeat what they think people want to hear. Very often, what people think they want to hear is not actually what they want after they have thought about it. The dichotomy in this process of public engagement is that you can be diverted down sidetracks. Yes, the public would like tax cuts and lower immigration, but if you campaign overtly on those subjects, they just think you just want their votes, and they do not think you are serious.

Jill Rutter: There is a lot of difference, though, with putting an issue out there and then having a campaign against it. Seen just an issue at a time, if you pick issues off one at a time, people will mobilise against the sale of forests, and they will mobilise against this and against that. The more interesting, constructive, big deliberative process would say, "Do you accept that we’ve got to make some unpalatable choices if we are going to do this? Given that, can we engage you better on ways of setting priorities?" On the Redbridge site, the moment you want to spend some money, you are forced to go and raise some taxes as well.

Q125 Chair: That is the interesting thing; it is where public engagement becomes an act of leadership, which is actually what politicians are elected to do. Do you think we should ask in the polling we are going to conduct whether the public think that strategic thinking is a waste of time?

Julian McCrae: Others will know more about polling. Do the public have a clearly formed answer to that question, or is it simply that asking the question is eliciting a response?

Chair: I think that is exactly it.

Peter Riddell: My view would be it is a pointless question to ask, because I did polling for the best part of two decades, and the public haven’t the faintest clue what it means. They might have a view what lies behind it, but phrased anything like that, it is not something that people focus on at all; it is not a concept they focus on.

Q126 Chair: So just because strategic thinking does not have an immediate, political, positive impact, it does not mean that it is not an important thing-

Peter Riddell: That is a different thing. It can be very important, but it is not the way your constituents conduct political discourse.

Julian McCrae: If you possibly rephrase the question and ask whether they think Government should know what is actually happening, what they want to achieve and how they are going to achieve it, you might get a totally different answer to the question than if you talk about strategic thinking.

Jill Rutter: Or even, "Do you think the Government has a clear sense of direction?" You could ask about that-the output from the strategic thinking-rather than the strategic thinking per se.

Chair: Thank you very much indeed for a most interesting session. We are looking forward to our next act that is to follow. Do stay if you would like.

Examination of Witnesses

Witnesses: Professor John Kay, visiting Professor, London School of Economics, and David Steven, Director, River Path Associates, gave evidence.

Q127 Chair: Welcome to our two new witnesses. Please identify yourselves for the record.

Professor Kay: I am John Kay, author and economist.

David Steven: I am David Steven. I spend half my time at NYU, where I work at the centre on international corporation. I spend the rest of the time as a consultant with River Path Associates.

Q128Charlie Elphicke: Mr Steven, welcome. In May 2010, I think I am right in saying you warned that strategic thinking in the UK has to reflect the fact that "the UK is far from being in control of its own destiny." Do you think that events since then have reinforced your idea that we are flotsam in the global ocean going back and forth, or that we have more control?

David Steven: No, we have little control. This is one of the central strategic challenges. What do you do when events are moving very fast around you? You have a few cards, but you have no choice but to try to act. In Government, we are still a long way from accepting the nature of that strategic conundrum. In 2008, I spoke at a small summit for heads of state shortly after Northern Rock had collapsed. Most of the summit was taken up with congratulating the world on having escaped the financial crisis and talking about how to recover from it. Of course, it had barely begun at that stage and we have continued to have waves of crisis since then. If we believe that we are in a systemic crisis-and a systemic crisis that is not only economic, but has resource dimensions, environmental dimensions and increasingly a social dimension-we should start to behave quite differently as a Government.

Q129 Charlie Elphicke: Are you aware of the book written back in the 1970s about how world civilisation, as we know it, is going to collapse by the end of the century? What do you make of the conclusions of that?

David Steven: If you are talking about the work on the population done in the early ’70s, it is really quite interesting to compare the two periods; 1973-74 was the last time when we had a burst of the kind of volatility that we have seen recently. We had an inter-linked oil, food and economic crisis, and leaders at the time were quite seized by the need to respond to it. In part, a supply response kicked in and we should not ignore the possibility that that will happen again.

In 1974, the food price spike was much more serious than in 2008. Food prices in real terms went much higher, but food prices then fell almost every year until 2008. Volatility is cyclical; it is episodic. Once you get locked into an era of crisis, it tends to reinforce itself. It is possible that you move into calm water after a period of time. I suggest that we have some quite complex transitions to get through before that can happen. I am just looking at the ways that new powers are rising up out of the system. That has to bed down in a way before we can get out of this period of crisis.

There are still some hard limits, if you accept what climate scientists are telling us. The vast majority of climate scientists are telling us there is only so much greenhouse gas that you can put into the atmosphere before the climate starts to behave in ways that are really quite hard to predict. Volatility is cyclical. You can get out of it. You have to work hard to do so. We should not neglect the fact that there was a huge policy response in 1973-74 as well, but we also need to look at some of the hard constraints.

Q130 Charlie Elphicke: So would you argue that, while we are flotsam and jetsam in the global ocean, that does not mean that we should give up on strategic thinking? We should think about the environment and build lots of nuclear power stations.

David Steven: I think it would be useful to have some strategy for our future consumption of energy, certainly. I think it is even more important to have a strategic vision at a time of uncertainty and change; it is just that you need a different kind of strategy.

I think it was Palmerston who talked about foreign policy being a process of floating down a stream and putting out a bargehook every so often to correct the course. For the strategic challenge, a better metaphor would be something like shooting the rapids. You have to have some sense of where you are going, but a lot of what you need to do is about the immediate challenges ahead of you, and an enormous amount of what you need to do is about co-ordinating with the other people in the boat. If you can start moving the boat in the same direction-that is strategy-then you have a chance of getting out of the situation alive.

On the energy point, we are currently in the early stages of a substantial change in the UK’s energy endowment, as shale gas is discovered in much larger quantities than experts predicted. We have not even begun to work out what that might mean for our long-term strategy. We are allowing that battle to be fought on very small terms. We have allowed it to be subsumed into a fairly sterile argument about whether a couple of earth tremors are the critical question, and we are far from asking the big questions about what is likely to happen to the UK’s energy security if we suddenly have much more gas than we expected. That is a perfect example of where the Government are failing to develop a long-term strategic vision and follow it.

Q131 Charlie Elphicke: So the Prime Minister calls you in and says, "Look, our energy strategy: should we build some nuclear power stations-yes or no?" Would you say yes or no? [Interruption.] You say no. Now, the Prime Minister calls you in and says-

Chair: To be fair, I don’t think that that question is at the heart of this inquiry.

Charlie Elphicke: Its relevance will become clear.

David Steven: For the record, I would probably say yes, but I wouldn’t regard myself as having the evidence to make that decision.

Q132 Charlie Elphicke: I understand.

Say the Prime Minister calls you in and says, "Look, there’s lots of shale gas and shale oil on the North sea bed. No one particularly minds about fracking offshore particularly, so should we do that? Should we explore this resource and have energy security?"

David Steven: Absolutely-it’s a no-brainer-but are we going to do it in such a way that it is genuinely a transition fuel? Are we going to use it as an opportunity to restructure the way we use energy, or are we simply going to put another big slab of carbon on the table, allow gas to lower energy prices, drive consumption up and eventually lock ourselves into another dynamic that we would be better off not being in?

Q133 Charlie Elphicke: The reason I alight on energy is that I think it is a particularly interesting area. You have so many of the issues pulling in different directions and pushing you into different types of energy resourcing. That is why I am particularly interested in it. In identifying a strategy out of those competing issues, what approach and tools would you say are necessary to do that and to pick through the path?

David Steven: My area of expertise is international policy. Energy is pushing countries in vastly different directions. Very broadly, in the West, we have a stable consumption path. In some countries it is falling, but let’s call it broadly stable. Some countries have very low endowments; some countries such as the US, because of shale gas, have increasing endowments.

For the emerging powers, their access to energy as their demand continues to grow quickly, as it will do if they have anything like the economic growth that they have had in the past, is the core of their geopolitical challenge. The way we work with China and India-I believe the figures for India say that, over the next 20 years, it will see something between a 60% and 95% increase in energy use, depending on the scenario-on these issues is a critical foreign policy challenge.

We run the risk, at the moment, of getting into a quite nasty zero-sum, tit-for-tat dynamic-you can see it beginning to happen around naval power in the South China sea, for example-but given that we have many advantages in this piece, we also have room for leadership and room to start creating frameworks in the international system that will manage these problems effectively. Domestic policy then has to be aligned with that. We cannot any more be the country that makes a lot of noise in, say, the climate change talks, but does not have a very good story to tell at home.

I think that things are changing here. These changes are tough, but if we can begin to show that we have a long-term strategy for energy, we can then begin perhaps to work constructively with some of the key powers on this issue and we can also look at the countries that are being crushed by energy insecurity. Pakistan is a perfect example and we have seen the turmoil in Nigeria. These are countries with weak institutions. If we allow energy markets to have the kind of volatility that they have at the moment, they are going to find it difficult to maintain their security and stability.

Chair: Two brief supplementaries of my own-

Q134 Charlie Elphicke: Can I ask Professor Kay for his reaction?

Professor Kay: To which question?

Charlie Elphicke: Your observations on the dialogue that has just taken place.

Professor Kay: I will make two observations, both of which can lead into a more general discussion. The broad observation is that I think we need to start by talking about what we mean by strategy. In the 20 minutes I have been in this room, I have heard "strategy" being used in a variety of senses to mean a variety of things.

The area of energy policy, on which you have just been having that exchange, is relevant because one interpretation of strategy is planning, and in the energy sphere endless 30 and 40-year plans have been made at various times in the past, none of which have borne the remotest relationship to the reality of what actually happened. That kind of exercise has, largely in business, discredited the idea of strategy as planning in that sort of numeric, detailed sense, although it still has quite a lot of influence over the way Governments behave. We might talk about that.

In relation to the specific issues about what our energy policy should be, my view, which follows from what I have just said, is that one should start by understanding the two big problems of energy policy: one is that lot of things we do are on very long time scales; and the other is that we do not know-and cannot know-much about what the world will look like in 20 years’ time in ways that will be relevant to these choices.

When one thinks in these terms, it is not a matter of making up numbers or assumptions to resolve the uncertainty; it is a matter of thinking about robust strategies that will enable things not to work out too badly, whatever events occur. So, to answer your specific questions, my instinct would be that we want to do all these things-a bit.

Q135 Chair: I want to make two supplementary observations to which the answer is yes or no in both cases. The less we control the global environment, the more we are at the mercy of events. Doesn’t that increase the requirement for us to think strategically about how we are going to respond?

David Steven: Yes.

Q136 Chair: Just because we don’t control events, is that an excuse for not trying to harness them for our own interests?

David Steven: Absolutely not.

Q137 Chair: In the way that a ship will navigate across a sea that it doesn’t control.

David Steven: Absolutely. That is why we use the "shooting the rapids" metaphor.

Q138 Chair: Finally, a previous witness told us that the Treasury always showed unwillingness to think through negative scenarios. Do you think that Whitehall is good at confronting Ministers with downside scenarios to plan for the worst eventualities, such as windmills not producing enough constant electricity to be much use, the euro collapsing and so on? We now have a Prime Minister who likes being optimistic and we do not like these bad things being leaked, such as the health service running out of money, which was what the previous Prime Minister was confronted with.

Professor Kay: One of the problems of Government and of all large bureaucracies is the desire of subordinates in them to tell the people at the top the things that they want to hear.

Q139 Chair: Is it possible to institutionalise that very necessary negative challenge more effectively than we have it in Whitehall, or is it sufficient?

Professor Kay: No, I am sure it is necessary to institutionalise it, but institutionalising it and using it depend on the willingness of the people at the top to listen to negative challenges. I have sometimes thought that if I had a pound for every time someone in business had said to me something like, "What we really want is someone like you to challenge our thinking," I would be a very rich man-and it’s never been true.

David Steven: I had a similar experience. I was talking to a permanent secretary, who is now long retired, and he said, "We need to set up a network of outsiders who will act as an awkward squad and ask difficult questions," and the official escorting me out said, as we went to the exit, "I have to explain to you why we’re not going to let that happen." So there is an enormous amount of resistance to this.

It comes back to something quite fundamental in the way we frame our understanding, certainly of international policy. I have a big problem with the term "the national interest", which I think is often a cheap rhetorical device that allows the speaker to say whatever they want to say.

Chair: That is a very important point.

David Steven: I am absolutely sure that the Foreign Secretary did not say this, but he was reported as saying to the Prime Minister, "When we compare the break-up of the euro to the break-up of the Conservative party, the national interest is with the Conservative party."

Q140 Chair: That is not quite what he was reported to have said. That is not quite accurate.

David Steven: That is the quote as I recall it, but I will check.

I think that this shows that we are a country of competing interests and competing interest groups, and the idea that as soon as we pass over the borders that can be distilled into some platonic ideal of the national interest is, I think, wrong. It stops us from focusing on what I think is a more modest and realistic approach for Government: to look at the risks internationally that threaten British citizens and see-again, with a weak hand-what the Government can do to try to mitigate those risks, and to increase the resilience of their own strategies and the resilience of their citizens in the face of those risks. If you are looking at risk, you are pressed to look at bad news and you really have to look at some of the downside scenarios.

Chair: I am loth to cut you off. That was a very long yes, but a very interesting one.

Q141 Kelvin Hopkins: I want to follow that point, briefly. I have made the point many times in this Committee that in recent decades a view of the world-a paradigm, if you like-has been decided at the centre and all opposition to that view has been stripped out. Keynesian views have been stripped out of universities, the civil service, the Treasury and even politics. My own party went to great lengths to stop people who might challenge it from getting into Parliament. The party failed in that, but it was what Blair wanted to do.

That has led to the problems that we have now. There is not a serious challenge within the Treasury, above all, to the way of thinking about how we deal with our economic problems. If Keynes came back, he would be quite horrified to see what is going on.

Professor Kay: But it can be done, to some degree. My hero, in terms of what strategy means in politics, is actually Roosevelt. If one thinks about what he achieved, there are two or three characteristics. One is that he had some very broad, general, important ideas, which were loosely formulated-roughly speaking, they were to save American capitalism and defeat German and Japanese aggression. We admired him because he so plainly achieved those objectives. He had no very specific ideas about how those things were to be accomplished. In the process of operating, however, he was willing to listen to advice from everyone; challenge wasn’t a problem, in part because he didn’t have any overriding, overarching ideology. He was also interminably willing to experiment, and not only was he willing to experiment, but when the experiments did not work, he would drop the experiments and try something else. These are the skills of the truly great politician, but we do not find them that often.

Q142 Kelvin Hopkins: He was regarded as a dangerous leftist by orthodox classical economists, I think.

Professor Kay: Of course he was, yes.

Kelvin Hopkins: I agree with you about Roosevelt.

David Steven: May I make one very brief point about the media? The media is not conducive to having disagreement within any structure-it senses the blood in the water and attacks. I do not think that is an excuse, but it is a reason why political parties and Government organisations have done their best to have a consensus-driven approach.

Chair: Strategy is more about media handling than long-term national interests.

Q143 Kelvin Hopkins: I was taught economics by a former Treasury official at university. He said that, in the past, there would be alternative views expressed in the Treasury and if ever there was a change of policy, such as a devaluation or whatever it happened to be, there would be somebody around who would say, "We’ve got one we prepared earlier", and it was slotted into place straight away. That does not happen now, and the collapse of the ERM was an example of how badly we got it wrong, because we did not have alternative views in the Treasury saying, "Hang on; we may have got this wrong."

Professor Kay: I think that that is right, from conversations I have had with people in the Treasury on the same kind of lines. There are probably two large things that have happened. One is the process you describe, in which the people at the top do not welcome challenge, and there is a single view, as it were, imposed on the organisation and people feel they will damage their careers by disagreeing with it. The other is the way in which politics relates to the media. If you start examining unwanted options, as it were, you do potential damage when that is leaked to the press, as it probably will be.

Q144 Lindsay Roy: Good afternoon, gentlemen-it is past 12 o’clock. What is your assessment of the UK’s strategic capability from an international perspective, and what are the strengths and weaknesses of that capability?

Professor Kay: To be honest, Mr Roy, I am not sure I feel able to answer that question. In some respects, I am not quite sure why I am here, but I think it is because I have done quite a lot of thinking about strategy issues in a business context. I am very interested in thinking about what one means by a strategy and how one approaches it.

Q145 Chair: We will come on to obliquity later on. Let Mr Steven answer the question about international comparisons.

David Steven: I think the UK is often as good as it gets. In many circumstances, the UK has leadership and is recognised as being better at doing joined-up thinking across government than its peers, but the bar is low-very low, often. We have an opportunity. Something that I would really like to stress is that I actually do not think it is that valuable, in the international field, for us to get that much better, unless other countries are making similar strides and similar investments. We effectively need to work with other countries to increase our mutual ability to deal with the complex risks that we often grapple with and fail to understand.

We also need to continue to take the opportunities that we have in the international system to set an example of how some of this work can be done. The time when we are best is when the pressure is really on. If you compare the London G20 summit with other G20 summits, the difference in the level of contribution the UK made is a completely different picture, because the pressure was really on and the focus was really on, which drove a high degree of synthesis. We need to continue to take those opportunities, but move some of that practice to a more everyday way of working.

Q146 Lindsay Roy: Are you aware of other countries that have a better reputation for national strategy development? If so, where would we look? Is it smaller countries?

David Steven: What is happening in the US at the moment is interesting. Their quadrennial diplomacy and development review, QDDR, was a brave, visionary attempt-somewhat before its time in the American system-to think through some of the problems that you have been looking at here. There is a move in the State Department to look at some of these big cross-cutting global issues and use them to try to drive coherence. However, as we know, the US system is incredibly hamstrung in the way that it is funded and operated. It has very little long-term security and it is working from a low ebb. It is interesting that the American Government are taking a more assertive and expansive view of managing global risk, at a time when I think the UK has drawn in its horns slightly.

Q147 Lindsay Roy: A previous witness suggested that smaller countries have an advantage in terms of national strategy development. Do you agree?

David Steven: Not really, no.

Q148 Lindsay Roy: Singapore, for example?

David Steven: Sure, but it does not really matter. No, that is totally unfair. It can matter. Small countries can take leadership positions and make change happen. A lot of the big changes that do happen internationally, middle powers have got together, often in a fairly unobtrusive way, and created the conditions from which change becomes possible. However, it is the big, complicated, messy players who are dealing with big, complicated, messy problems, where the game is really at, and it is much, much, much harder to make strategy and make it stick in those systems.

Q149 Lindsay Roy: But big countries in your contention are not too complex to have a coherent national strategy.

David Steven: I think they are too complex to have a single coherent national strategy; they are not too complex to have the kind of resilient strategies that Professor Kay is talking about, where you have an understanding of the risks that you face, high-level, long-term objectives and a series of emergent strategies that try to take you there. Again, big systems don’t like that big vision; they don’t like the critique and they find the innovation very uncomfortable often.

Q150 Lindsay Roy: So it is about recognition of issues. For example, in the eurozone, trying to develop a strategy in case this, that or the next thing happens. Would that be a scattergun approach?

David Steven: What do we want for the eurozone? I am bemused from the outside.

Q151 Chair: The UK?

David Steven: Yes.

Q152 Chair: I have my own views, but that’s not the issue. I am interested: when you asked that question, what do you expect the Government to be able to say?

David Steven: It seems to me that the Government believe that the eurozone needs to persist in some form, and believe, I suspect, that it is unsustainable in its current form, and I also suspect-I am guessing-that many of the steps currently being taken will not give us the eurozone that we need. If that is the underlying analysis of our position-with the acceptance that we have only a few cards to play-are we trying to create the shared awareness, the joint platforms that could take bad policy towards good policy and achieve the objective? That is important for us. I sense we are making it up a bit as we go along.

Professor Kay: We are bound to make it up as we go along.

Q153 Chair: We will come to that. Strategy is about making the best use of your strengths. National strategy would be about bending all the available resources of the state towards achievable and desirable ends. Does that mean that, as we become a smaller and more vulnerable country, we have to be more conscious in choosing and husbanding those assets that are central to our national interest? I am thinking particularly of our technological and industrial bases, which are relatively shrinking. What means do we need to sustain our foreign, military and domestic policies?

Professor Kay: You started by saying that strategy is about making the best use of your strengths. In large part, in business, that is true, but there is a difference between business and the state in this sense, because business is operating in a competitive environment technically, whereas states are, at least nationally, monopolies. Our foreign policy is not in the modern world being operated in competition with other people’s foreign policy. That is a big difference between the way one should think about strategy and business and the way one should think about politics.

Q154 Chair: I must press you on that. Is not the strength of American foreign policy that they take a competitive stance on everything and they want to be the best in the world at everything? Do we not need to take a competitive stance in at least some areas and be the best in some things? Otherwise, we have no unique selling points, to use a business jargon phrase. What are our USPs and how do we make sure that we can exploit them?

Professor Kay: In foreign policy, why are we asking that question?

Q155 Chair: Because it is a competitive world out there and we are in competition with lots of countries that are not very nice.

Professor Kay: In competition in what sense? We want to keep the nasty countries from coming and bothering us and we would ideally like to help the nasty countries sort themselves out-although we do not seem to be very good at that-but that is not a competitive exercise. Our aspiration is not to be better at doing that than the French.

Q156 Chair: Let me give an example. We probably have the most advanced sonar industry in the world. We are global leaders. That gives us leverage with all sorts of countries, including our most important ally, the United States. Maintaining that competitive advantage against the United States is in our national interest.

Professor Kay: At this point, we are moving on to talking about business and economics. There are economic areas-

Q157 Chair: That is a strategic asset from a defence point of view. We are able to have some leverage over American technological development because we have some unique advantages of our own.

Professor Kay: Yes, at that point, the politics and the business get tied up together.

Q158 Chair: To what extent do we need to do that more effectively and more consciously-picking winners, if you like?

Professor Kay: I think "picking winners" is a rather absurdly bad name. Picking winners is actually focusing on your strengths, which is a good business strategy. The reason picking winners is such a bad name in this country is we picked industries and sectors that were not winners, but we hoped that they might be-or they were losers we were trying to keep around. Asking what our competitive advantages are nationally in the economic sense and framing our industrial economic policies towards those is a very sensible policy. If we want to call it picking winners, so be it.

Q159 Chair: Do you think that we are good at it?

Professor Kay: No.

Q160 Chair: How would we get better at it? What do we need to do in order to get better at it?

Professor Kay: This goes back to how one ought to think about strategy. We need to start by asking basic questions. What are our areas of competitive advantage? Why? What are the ways in which we can strengthen these and what are the ways in which we can develop them? Strategy, for me, starts with the intelligent diagnosis of issues. That sounds banal, but it is not what people in politics or business typically do. They tend to start with policies.

Q161 Chair: Mr Steven, do you have anything to add?

David Steven: Primarily, this is an aspect of domestic policy. The tail often ends up wagging the dog internationally, and there is concern about that. It is easy for our foreign policy to become skewed by the need to protect what we think are the favoured industrial interests. I am not sure that the Americans’ competitive approach, as you call it, has always served them well in many of the key problems that they are most interested in solving.

Q162 Chair: I think the Government’s reaction would be to run a mile from picking winners. They would say that that is dirigiste, expensive, likely to be wrong and would maybe restrict other opportunities that arise.

David Steven: We do live in the era of commercial diplomacy, so called, so that does suggest that the Government does feel that it can pick winners and then somehow promote those winners through its foreign policy overseas. I have a lot of doubt about whether we will achieve results by doing that.

Q163 Chair: Can you pick winners in a free country? Singapore can pick winners. China can pick winners.

Professor Kay: The picking-winners policies I am talking about are not of constructing a national plan for what sectors we are going to be best in; it is saying that in Britain, for one reason or another, there are actually things we seem to be rather good at, such as, for example, professional and business services, defence electronics, pharmaceuticals and so on. What are the ways in which Government industrial policies can be supportive of these areas of demonstrated British industrial strength in international competition? That would be my picking-winners approach to industrial policy.

Q164 Chair: Do you think that Whitehall has the skills to do that?

Professor Kay: I think, given the problem as defined, probably yes.

Chair: Interesting.

Q165 Kelvin Hopkins: I have a slightly different philosophy from the Chair. We agree on some things, but on this we do not. The great comparison is with Germany. From the beginning after the second world war, Germany decided that it wanted to become a manufacturing power and they worked hard at doing that. We increasingly went for open economic liberalism. Our model has relatively failed. Theirs has succeeded. They are the strong power. We are much weaker. We started to go in that direction with Neddy, which was set up by Heath and abolished by Thatcher, but we were moving in this direction before Thatcher.

Everything that you say shrieks to me that we need to manage our economy better. The really successful capitalist economies are the ones that have managed their economies-Taiwan or wherever. The ones that do not do well are the ones that allow the market complete freedom to do what it likes, such as ourselves. That is a strategic decision, and the policy has been pursued by successive Governments. The last thing that they want is intervention in, management of and guidance for the economy. I even challenged Gordon Brown over the exchange rate, which was far too high throughout the new Labour period. I suggested that we ought to intervene to bring down the exchange rate and he said, "No, no, no. We don’t intervene to target exchange rates," but the Germans do, and they are successful at it, too. One of the reasons why they want to keep the euro going is that they know that if the euro goes, the new Deutschmark will appreciate rapidly and they will lose their competitive edge. They manage things and control things in the way that we do not. Is that not the case?

Professor Kay: Let us explore the example that you have given a bit further. Germany, for example, has competitive advantages in high-level mass production engineering and speciality chemicals. You can see that those advantages are quite heavily embedded in German economic history. They have been true for a long time, and they are both reflected in and supported by systems of technical education in Germany that are designed to help train people for these kinds of activities at both production-line level and elite level. Those things have grown up together, and that is why Germany is a winner is these areas and will continue to be.

If you look at areas in which Britain has competitive advantages, you point to things like professional and business services, and a wide variety of them, not just financial services, which are what we easily think of. We have advantages in media. We have international competitive advantages in defence electronics and pharmacology. If you explain why, I think you see that it is a big advantage being an English-speaking country for some of those businesses, and we have been pretty good at elite education, even if we have not been very good at more mass education. Those are things that feed into those sources.

What we have in both countries is a set of institutions that support the particular industrial competitive advantages we have. I do not think Governments can or should invent structures like that from scratch, but you can see the ones that have emerged, and think of things that will help them and things that will hinder them. That would be my approach to industrial policy. It is not one that believes that the Government can plan the economy, but it is one that believes that there are areas like education and training, and trade negotiations that are Government policy areas whether we like it or not, and in which Government policies ought to be directed to supporting the competitive advantages of British firms.

David Steven: Financial services are seen by many to be at the heart of our competitive advantage, and I would strongly prefer the Government to try to make markets work than to expend their energy supporting our firms in the City. I think both objectives are important, but they are often not compatible around the same table, and if markets continue to be broken, we are all in big trouble, whether or not we have managed to protect one of our core industries.

Professor Kay: I think Mr Steven makes a very important point about the way we think about industrial policy, which is that we routinely confuse the interests of the development of an industry, and the interests of established firms in that industry.

Q166 Greg Mulholland: Professor Kay, I turn to you and your idea of obliquity. First, can you briefly explain that to us? It seems to me that you are suggesting that this is where goals are pursued indirectly, but can you elaborate on that for us?

Professor Kay: I have described some of the ideas behind that in what I have said already, and this is simply intended as a critique of the planning structures that we have been describing of the belief that we can determine what our objectives are, put down a set of steps by which we can achieve them, and that having a strategy is thinking about issues and problems in those terms. I think real strategies have to be looser and more adaptive, and responsive to changes in environment. Not only do we not know much about their evolution, we cannot know much about their evolution.

Q167 Chair: Does that mean there is no point in trying to know?

Professor Kay: We should try to know, but we should acknowledge that there are things we will not know. What we do so often-we are very bad at doing it in Government-is to work out all the information we would want in an ideal world to make a particular decision. We did that in the energy policy cases. We work out all the information we ideally need to make a decision. We know we do not know any of it, so we build a model and make it all up, so that every cell in the spreadsheet gets filled in.

After this meeting, I am going on to talk about some of the modelling that is done in Government, in this case particularly in relation to transport modelling-the kind of modelling that supports the so-called case for the high-speed train, for example. It may or may not be a good idea, but the notion that I can appraise this by having some number, and there is a number in it, for what the value of time in 14 different uses will be in 2053 is just ludicrous. If you need to know that, you have not formulated the question in a sensible way, and that is what we have to learn.

Q168 Greg Mulholland: Thank you. I am conscious that parts of your answer sounded a little like the Don Rumsfeld quote about what we know we know and what we know we don’t know, and so on. May I ask you a specific question? In our last report, which we did last year, we criticised the Government’s approach as muddling through in the absence of a clear strategy. It really sounds as if you are saying that we probably got it wrong and that muddling through is the best, and indeed possibly the only, way to approach it. Is that really your attitude?

Professor Kay: There has to be an element of muddling through. That does not defend not having goals, but goals that are loosely defined in the Rooseveltian sense that I described, rather than goals that are targets, of which we have had so many: we are going to reduce child poverty by 50% by 2017, or we are going to ensure that 90% of ambulance calls are answered within eight minutes. It is not goals like that; it is loosely formulated ones that then get translated into specific policies and actions. I am not against rationality and organised thinking in politics and business-far from it. I am very much in favour of that, but at the moment we do a great deal of what I call bogus rationality, which is pretending we know things we don’t and erecting elaborate models and structures of argument roundabout them, quantifying things that are not sensibly quantified.

Q169 Greg Mulholland: In the Cabinet Office submission to us for this inquiry it says that "in the international sphere we require flexibility and adaptability to respond to continuously changing circumstances", so do you think that the Government already are practising obliquity, and if so, can you give us any examples of that approach?

Professor Kay: In the sense in which you describe it, that is obliquity. Let us go back to the discussion we had earlier about energy policy. There is the notion that a lot of people argue, that we need a 30-year energy strategy, and you know what they mean by that and that it would have lots of numbers in it and would project what fuel prices of all kinds would be in 30 years’ time and what the structure of British electricity and other generating capacity would be. These models, and I have spent part of my life building models like them, are basically rubbish.

The right way to think about it is to say, "Let us think about the things we don’t know and can’t know, and ensure that although there’s a wide range of possible developments about fuel prices, greenhouse gas emissions, nuclear security and so on, whatever happened we would have relatively robust outcomes." I think that in that area, that involves trying lots of different things, so that if the future does turn out to be a mainly nuclear one, we have the capabilities to do that. If there does turn out to be amazing quantities of shale gas, we will be well placed to exploit that. It is not saying that we know the answer to these questions and therefore that shale gas, or nuclear or something else is the route we should go down. We did that, of course, in Britain in the 1960s in that area, with rather disastrous results.

David Steven: May I say briefly, that I think we are muddling through, and I don’t think that is what we should be doing? I have a very similar view to Professor Kay of what strategy is, but once you have a broad idea of what you want, the striving that you need to undergo to get there is completely different from the kind of passive process of muddling through. So adaptability is enormously important, but we need a much more proactive, campaigning type of mindset if we are to move towards these objectives. Often we are adapting, but very often we are more or less just sitting there waiting to see what happens, and those are two different things.

Q170 Chair: Is the Government’s definition of our national interests, which is our freedom, security and prosperity, granular enough to enable the Government to frame their objectives and operate, or is it too general? Or should I table a parliamentary question?

Professor Kay: I do not think that is too general, because a high-level goal, something like that, is perfectly appropriate. Obviously, if you go beyond saying, "We are in favour of freedom, of security"-

Q171 Chair: Is it not a bit too much motherhood and apple-pie? Is it not meaningless?

David Steven: Yes, I think it is fairly uninteresting. What is interesting is the next level down-

Q172 Chair: They will not do a White Paper on our national interests; I have asked.

David Steven: What are the risks to prosperity? What are the risks to security? And how are we actively going to try and respond to those risks and increase resilience in the face of those risks? Those are the interesting questions for me, and I think seldom have we asked them.

Professor Kay: I completely agree with that. It is right to start from there, but it is only useful to start from there if you go on to the phase Mr Steven has described-what are the threats to that, and how are we going to advance these goals? You have to translate your goals-so it is goals, in this very broad sense, diagnosis, what do we need to do to achieve these goals better, what are the threats to achieving them? Then it is policies that we adopt. That is in a sense muddling through. It is not saying, "By 2030 we are going to be the freest and most secure country in the world," which are, indeed, the kind of terms in which these projections typically, very frequently, get taken forward, both in government and business.

Chair: We must draw our deliberations to a close, but let us have one final question.

Q173 Kelvin Hopkins: Can I suggest that I think, Professor Kay, there is a contradiction in what you have been saying? Your view is Panglossian-that we live in the best of all possible worlds, all is for the best and we muddle through. And yet your appraisal of Roosevelt does not accord with that. Roosevelt did the opposite. He saw a country falling apart as a result of cuts imposed by Hoover and so on, and he reversed that and started spending on public works to drive employment up. That was a completely different approach.

Also we were muddling through in the 1930s, before the second world war, until we suddenly woke up to the fact that we were really under threat from Germany. Then we went into overdrive and did a superb job in war production and winning the war-with the help of others, obviously, but in terms of war production we did the opposite of muddling through; we took hold of the economy and drove it very hard. Countries can do that. You cannot have muddling through and the best of all possible worlds on the one hand, and yet praise Roosevelt on the other. I am with Roosevelt; I am with the war production. I think we can do things and we should do them.

Professor Kay: I think muddling through is exactly what Roosevelt did, in both economic policy and foreign policy. I do, however, think you are right that moving, in both Britain and America, over to a very largely planned and directed economy once war began was an appropriate thing to do. There is a particular reason for that, which is that when you are fighting a desperate war, as we were then, you have a very limited, well-defined number of objectives and everything is subordinated to that. Planned economies can achieve a small number of objectives very well. What they conspicuously failed to do was to achieve the multiplicity of conflicting objectives that there are in a complex, modern, consumer-oriented economy. That is what market economies have succeeded in, and what the centrally planned economies failed to do.

Q174 Chair: May I observe, to test our understanding, that one interpretation could be that there is a disagreement between you-that, Professor Kay, you are more in favour of muddling through and, Mr Steven, you are more in favour of what one might call strategic consciousness? Is there, in fact, a difference? Good strategy is not about closing down your options and sticking rigidly to a plan; good strategic thinking, Professor Kay, is about being as adaptable as you would like Government to be, but in an informed context.

Professor Kay: Exactly.

Q175 Chair: Is there a disagreement between you?

David Steven: I do not think there is a huge disagreement. If we talk specifically about some Departments, I would like to see the Foreign Office in London become a platform for strategic synthesis across these complex issues-that should be its function.

Q176 Chair: And the Treasury.

David Steven: And the Treasury. The Treasury actually does try and drive change in a systematic way-much more than the Foreign Office does. The Treasury and the Foreign Office are two parallel platforms. I would like to see DFID continue to be pushed in the direction of becoming a Department that specialises in working in fragile and complex environments and in trying to achieve change in them. I really like this term strategic consciousness. Departments require high levels of strategic consciousness, but they also require high levels of adaptability, because of the levels of uncertainty and the few cards we often hold, which we began this conversation with.

Q177 Chair: Do you agree, Professor Kay?

Professor Kay: I think good strategy is organised thinking about problems. I think we are all in favour of that. What I want to leave you with is that I am against two things that strategy often gets turned to, including in government. One is detailed quantitative planning.

Chair: Yes, we have got that message.

Professor Kay: The other is assertion of large goals, in the absence of clearly specified, or specifiable, paths as to how they could be achieved.

Q178 Chair: Or as Sun Tzu described it, strategy without tactics is the slowest way to victory. However, I fear that we have too much tactics without strategy, which he described as the noise before the defeat.

Very briefly, can we engage the people and organisations outside Government more effectively than Whitehall currently does?

Professor Kay: Yes. To go back to the example I mentioned, one consequence of bogus rationality is that it has been a method of excluding people from intelligently debating some of the issues. If you frame your debates in terms of particularly complicated models that are not really the basis of your decision making, it is a very effective way of, in effect, locking people out of sensible discussion, and it is used in that way.

Q179 Chair: Should that be the last word, Mr Steven?

David Steven: Yes, I agree with that.

Chair: Thank you both very much indeed. You questioned for a moment why you might be here, and you have certainly given us plenty of reasons. Thank you very much to both of you.

Prepared 9th February 2012