The Downing Street Years (112 page)

It was entirely consistent with this rigorous approach that Nick considered it illogical to retain capping powers, except perhaps during
the transition to the new system. But I felt we needed this safeguard. He also wanted to introduce the community charge more quickly than Ken Baker had envisaged, believing that the sooner local authorities could be made truly accountable the faster we could go in bringing local government back onto the right lines. Nick had always opposed dual running and in the end he persuaded the rest of us to abandon it — though, as I shall explain, not without a little help from the Party in the country. The political arguments against dual running were powerful. Having two local taxes instead of one, even if only for a time, would have been a gift to our opponents; it would have been expensive and difficult to administer; and it would have postponed the very accountability our reforms were about.

During the winter of 1986–7 Parliament legislated to introduce the community charge in Scotland from April 1989. In February 1987 Malcolm Rifkind won our agreement to drop dual running in Scotland, though a safety net was retained, and it was on this basis that the Party north of the border fought the 1987 election. The community charge was an important issue during the campaign there. Our results were disappointing but Malcolm Rifkind wrote to me afterwards that the community charge had been ‘neutral’ in its effect and that it had at least defused the rates problem. In England and Wales the community charge was hardly an election issue at all.

Nevertheless, immediately the new Parliament met it became clear that many of our back-benchers had got the jitters. On 1 July the whips estimated that while over 150 were clear supporters, there were nearly 100 ‘doubters’, with 24 outright opponents. There was a real danger that over the summer recess many of the doubters would commit themselves against the charge altogether. Nick’s response was characteristically robust: to propose that we drop dual running, drastically cut down the safety net and attack the London problem by direct action to reduce ILEA’s costs. But he met strong opposition from colleagues, particularly Nigel, and in the end we compromised on dual running for four years with a full safety net phased out over the same period.
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It quickly became clear that this had not done the trick. At the Party Conference in October speaker after speaker attacked dual running and back-bench opinion was also very strongly opposed to it. All this made a strong impression on us. We argued it out at a ministerial meeting on 17 November, and decided that dual running should be
abandoned except for a very few councils, all but one of them in inner London. We also ended the full safety net, setting a maximum contribution of £75 per person from the gaining authorities, so that their gains came through more quickly. (In June 1988 we abandoned dual running altogether: by that time we had made the decision to abolish ILEA, which seemed likely to reduce community charge bills in London significantly in the long term. There were serious doubts too whether the authorities scheduled for dual running were administratively competent to do the job).

It is worth noting that the changes we made in local government finance originated in and continued to reflect opinion in the Conservative Party, notwithstanding these arguments about transitional arrangements. Both the English and the Scottish Party demanded fundamental changes in the rates. It was the Scottish Party which insisted upon the early introduction of the community charge in Scotland: and if, as the Scots subsequently claimed, they were guinea pigs for a great experiment in local government finance they were the most vociferous and influential guinea pigs which the world has ever seen.

It is true that in April 1988 we had to fight off an amendment put forward by Michael Mates MP, a lieutenant of Michael Heseltine, which would have introduced a ‘banding’ of the community charge — that is, income would be taken into account in setting the charge. This would have defeated the whole purpose of the flat-rate charge, as well as creating damagingly high marginal rates of tax at the level of each ‘band’. The proper way to help the less well off was through community charge rebates, and Nick Ridley won round many of the rebels by announcing improvements in these, making them a good deal more generous than rate rebates had been. But the most consistent pressure was from Tory MPs anxious to see that the benefits of the new system came through faster to their constituents.

The bill received its Royal Assent in July 1988. The new system would come into operation in England and Wales on 1 April 1990.

The discussions about dual running, the safety net and transitional relief which so preoccupied us in the period before the new system’s introduction all reflected one fundamental point. The new system of local authority finance would be ‘transparent’. That is, its clarity and directness would bring financial realities home to everyone. This, in my view, was one of its inestimable benefits. As I used to put it in my speeches explaining the community charge, it provided everyone with a ‘ready reckoner’. The differing needs of any particular area would be taken into account in the central government grant. Then a standard level of community charge would be set and published. If local
authorities chose to spend more than the standard level of service required then the community charge would go up. The effect would not be concealed either by complex formulae or by draining more money from business. Every elector therefore would have the information and the incentive to insist on efficiency and low levels of spending.

But the other side of this was that because the total contribution from businesses was to be held to the rise in the RPI any increase in local authority spending above the level allowed for in central government grant would be concentrated on the individual community charge payer. Each 1 per cent of extra spending would add 4 per cent to the community charge — the charge covering about a quarter of total local authority spending. Such high ‘gearing’ meant that if local authorities pushed up spending — using the opportunity of the introduction of a new system to do so and then blaming central government — the increase in the bills to the individual charge payer would frequently be dramatic. In many badly run (usually Labour-controlled) authorities families were stunned by the size of the estimated bills and blamed the Government. In these cases, the deep unpopularity of the community charge was in a sense proof that it was likely to work, but the political opposition rapidly began to get out of hand.

Looking back, it may have been a mistake to do away with the dual running of rates and community charge. And perhaps we were relatively too sensitive to the needs of business — as well as too willing to accept the large transfer of resources from the South to the North which was entailed by the replacement of the old business rating system with the new nationally set business rate. Business might have been expected to pay for at least some of the overspending.

Two other changes would also have helped. First, wasteful as it might have seemed, there would have been something to be said for allowing a rating revaluation under the old system to occur in England before the community charge was introduced. This would have reminded people how painful it would be to carry on with the rates and how unfair the rating system was. The gainers under the new system might have been more appreciative and the losers less vociferous if they had seen the alternative. Second, I believe that we should have legislated before the introduction of the charge for much wider and stronger powers to cap local authority spending. Of course, there is an apparent contradiction between bringing in a new system of local authority finance in order to strengthen local accountability and then taking more powers to the centre. But the contradiction is apparent rather than real. The beneficial effects of the new system could not be
expected to come through immediately. We should have been more alert to the cynical abuse of their power which left-wing authorities would practise, going to any lengths to blame us and the community charge for their own overspending.

In considering all this we were assisted less than might have been predicted by what was happening in Scotland. In the first year of the new system Scottish local authorities pushed up their spending, increasing their budgets by 14 per cent in 1989–90. But Malcolm Rifkind, the new Scottish Secretary, argued strongly against capping these authorities. Because the timetable was very tight and the legal advice we received was against, I agreed somewhat reluctantly with this. In the second year of the operation of the community charge in Scotland, though, there was evidence that the benefits of increased accountability had begun to restrain local authority spending. So the indications were mixed.

It was very important that the first year’s community charge in England (1990–91) was not so high as to discredit the whole system. In particular it was crucial that good authorities be able to announce community charges at or below the level we deemed necessary to achieve the standard level of service (known as the Community Charge for Standard Spending, or CCSS). But ensuring this was easier said than done.

In May 1989 Nick Ridley, Nigel Lawson and John Major (as Chief Secretary) began discussions on the level of the local authority grant settlement for 1990–91. There was a wide gap between the DoE and the Treasury. Each side had good arguments. The figures suggested by Nick Ridley were, he argued, the only ones which would lead to actual community charges below £300 (significantly, a far higher figure than we had envisaged a year before when the community charge legislation was passed). The Treasury view, with which I agreed, was that the 1989–90 settlement had been very generous — deliberately so to pave the way for the community charge. But the only result had been to lead to greatly increased local authority spending, which was up 9 per cent in cash terms. Local authorities had kept down the rates themselves in 1989–90 through the use of reserves, merely deferring increases. The lesson, the Treasury argued, was that providing more
money from the Exchequer did not mean lower rates (or a lower community charge). On 25 May I summed up the discussion at a ministerial meeting by rejecting both Nick Ridley’s and John Major’s preferred options and going for something in the middle, which I thought would still give us a tolerable community charge while not validating the large increase in local authority spending in 1989–90. But I said that I wanted to see exemplifications of the likely community charge in each local authority area.

We were not to know it at the time, but these decisions contributed to the undoing of the community charge. At this time the Treasury was still using an inflation measure (the GDP deflator) of just 4 per cent. In fact, inflation and — most important — wage settlements were turning sharply upwards. Combined with a pretty tight grant settlement and with the determination of many local authorities to push up spending for political reasons, we were now on course for much higher levels of community charge in 1990–91 than any of us foresaw. If we had had better control over local spending we could have been sure that extra money from the centre would be used to reduce community charge bills rather than increase spending.

I moved Chris Patten to become Secretary of State for the Environment later that summer. By now Conservative back-benchers were becoming extremely restive. In July they had given Nick Ridley’s last major statement as Environment Secretary — announcing the grant settlement — a rough reception. Many of them did not really understand the new system and the changes that they wanted were often mutually contradictory. Nick had at least been able to meet one of their most pressing concerns by announcing a £100 million scheme to ease the transition in areas with low rateable values, which faced large increases under the new system. But there was no doubt that the back-benchers wanted more, and their worries grew during the autumn. I received regular and depressing reports from the whips.

In early September Chris Patten, with my approval, began a review of the operation of the charge. A couple of days before, as I was about to leave for the Prime Minister’s traditional autumn visit to Balmoral, Ken Baker (now the Party Chairman) had sent me in great secrecy research conducted by Central Office in ten Conservative marginal seats. This confirmed the scale of the political problem we faced. On the assumption of a 7 per cent increase in local spending the following year, 73 per cent of households and 82 per cent of individuals would lose from the introduction of the charge in 1990 compared with the rates in the previous year. If spending increased by 11 per cent the figures would rise to 79 per cent and 89 per cent respectively. Though
these figures did not take account of extensive rebates, on any calculation they were pretty bad.

Now that dual running had been dropped, the only way in which we could limit the losses of individuals or households generally — as opposed to the losses of areas, which it was the function of the by now extremely unpopular ‘safety net’ to iron out — was by a new scheme altogether. Chris Patten and the Treasury accordingly worked up a proposal for ‘transitional relief’.

Chris favoured a massive programme of transitional relief for households to limit losses to £2 a week — that is £2 a week on the basis of what we thought local authorities should spend (the CCSS), which many of them of course would exceed. Even in this limited form the scheme might cost as much as £1,500 million. Ken Baker — never backward when it came to public spending — wanted a very costly scheme too. The Treasury argued for something much more modest, targetted on the worst losers. All of this was against a difficult public expenditure round and a worsening economic situation with rising inflation. I told Chris Patten that transitional relief on the scale he was proposing was out of the question, but I also pressed the Treasury hard to take a positive and co-operative attitude. I held a meeting at the end of September to try to get agreement. I brought the two sides closer together and concluded by saying that it was essential that the scheme should be sufficiently generous to defuse genuine criticism but that it must be clear that this was indeed the last word and that the Government would not make further money available for 1990–91.