The Downing Street Years (54 page)

The Council decided to leave negotiations on the future financing of the Community to the Foreign and Finance ministers, initially at least; they would report to the next full Council in December. The Commission had already produced its own proposals, some of which we favoured and others we did not. A refund was agreed for Britain
to cover the year 1983. But the real decisions were postponed for another six months — six months nearer the time when the Community would find itself broke.

I was not disappointed with this outcome and I subsequently took every opportunity to praise Chancellor Kohl’ handling of the Council. The results were rather better for Britain than they first appeared. The 1983 refund was less than we might have hoped. But when you took the four years to 1983 together we had obtained a refund of about two-thirds of our unadjusted net contribution, which was the goal we had publicly set ourselves. Considering the strong opposition we met from France, I felt that was a useful achievement. There was some speculation in the British newspapers that I had weakened the British position as regards the increase in the VAT ‘ceiling’, but this was only a negotiating ploy and a close reading of the communiqué — as well as any reading of my own mind — would demonstrate that I had done no such thing. (This was, indeed, to become very publicly apparent before the end of the year.)

There was one other aspect of the Stuttgart Council. The Council issued what was called — in the grandiloquent language which had been used about this subject since before we joined — a ‘Solemn Declaration on European Union’. I took the view that I could not quarrel with everything, and the document had no legal force. So I went along with it.

When I was questioned later about the declaration in the House of Commons, I replied: ‘I must make it quite clear that I do not in any way believe in a federated Europe. Nor does that document. ‘Certainly it did not transfer powers to a centralized Europe in the way that the Maastricht Treaty was to do. But the high-flown language of the declaration has become familiar from later developments: the linguistic skeleton on which so much institutional flesh would grow was already visible.

It sometimes happens in politics that relatively small matters, with no obvious connection between them, combine to create a political atmosphere in which the Government seems to do nothing right. I have suggested earlier some underlying reasons why such an atmosphere developed at the start of our second term. But there were other problems. There continued to be misunderstanding and resentment of the
new system by which the retirement pension was uprated in line with inflation. Many of our best supporters were angry that proposals to reintroduce capital punishment were thrown out on a free vote by a Conservative-dominated House of Commons, some of whose members had undoubtedly dissembled their views (or worse) to those who had selected them. Also, shortly afterwards Members of Parliament decided to vote themselves a pay rise considerably greater than the Government had recommended, at a time when unemployment was rising and many people could expect little or no increase.

But this malaise would have had little importance had it not been for the economy. The underlying economy was sound: indeed, as we pressed ahead with further structural changes, especially privatization, it would steadily become sounder still. When I spoke in the House of Commons on 22 June 1983, introducing the Queen’ Speech, I could point to the lowest rate of inflation since 1968, to higher output and to record levels of productivity. But part of the trouble was that after an election a government’ past achievements are immediately discounted. As one of my advisers put it, paraphrasing La Rochefoucauld: ‘the only gratitude in politics is for favours still to be received.’ And we had been so lucky in choosing the date of the election (though it was not all luck) that expectations about the rate of future progress had risen too high. Inflation started to move up from the low point of 3.7 per cent in May and June to reach 5.3 per cent in December, though it would stay at that level or lower for the next twelve months. Unemployment also began to rise again, remaining above three million, and it seemed very difficult to predict when the higher economic growth which was now apparent would begin to bring the total down. Although the interest rate actually fell, mortgage rates rose to meet the extra demand for mortgages — in itself a sign of the progress we were making towards a property-owning democracy, but naturally unpopular with borrowers. All this led to accusations that the Government had ‘cooked the books’ on the economy before the election.

It was public spending which became the focus of this attack. Indeed, there had been tell-tale signs of trouble in the weeks before the election. In April, the first month of the new financial year, the PSBR was well above target and it soon became clear that the provisional outturn for the PSBR for 1982–3 – a figure we regularly published — would be £9.2 billion, £1.7 billion higher than the budget estimate. It was possible that lower than expected revenues were part of the problem. But there had been an earlier misjudgement about the extent to which cash limits would be underspent, and much of the problem arose from the action we took to correct this. The previous
winter we had had such strong evidence that capital programmes were being underspent that we had taken positive action to encourage spending up to target. (In principle, it is right to spend up to planned levels, otherwise you pile up spending for future years, damage the construction industry and increase unemployment.)

I had discussed the problem with the then Chancellor, Geoffrey Howe, on Thursday 21 April. As so often, it seemed that the Ministry of Defence had been the main villain. The last instruction from the Treasury to the MoD before the budget had been to minimize their underspending. The MoD had complied with unwonted energy. Having been predicting a substantial underspend, they turned out to be overspending with a vengeance. Geoffrey and I were appalled and decided to give the MoD a much-needed rebuke. But the damage had been done.

After the election the new Chancellor had another look at the borrowing figures. Nigel Lawson found himself in an unenviable position. The Treasury’ summer forecast had just been completed and it suggested that the PSBR for the current financial year would be overrun by &3 billion. Inevitably there was a large margin of error in these figures — as always with the PSBR which is constituted by the difference between two enormous sums of money, public sector income and expenditure. But the signs were bad. To add to the problem, the money supply figures for May were poor and we knew that sterling, though high at the time, might soon come under pressure if American interest rates kept on rising. In any case, if we were really on course for a huge overshoot in the PSBR, something had to be done.

When on Wednesday 29 June I received a note from Nigel setting out how he wished to act I too became distinctly worried and emerged no less so from the discussion I had with him the following evening. It is never an easy matter to rein back public spending part way through a fiscal year, but the argument for early action was overwhelming. The earlier you make a cut the less drastic it has to be and the more chance you have of sustaining your credibility with the markets, which is a useful bonus. The obverse of this, however, was that to announce further public expenditure cuts just weeks into a new Parliament would be extremely unpopular and politically embarrassing. The public would think that we had deceived them at the election and spending ministers would feel bounced. Nigel fully understood this and it was a mark of his courage that he recommended immediate action.

He made three proposals. The first was to raise more money for the Government by selling an extra tranche of BP shares. But while
this might help fund the PSBR it did not allow escape from the need for real cuts in spending. It was not possible to take action on the non-cash-limited programmes in mid-year, so that we had to concentrate on cash-limited spending. But should the cash squeeze apply to all of this spending or just some of it? Nigel’ initial view was that it should only apply to the non-pay element of central government spending because pay was extremely difficult to hold down successfully. My advisers and I queried this and after Nigel and I talked the matter through at Chequers the following Saturday we settled on a package that included the pay bill within the squeeze. Alan Walters shared Nigel’ view that immediate action had to be taken and urged a 3 per cent reduction in cash limits, greater than Nigel originally proposed. In fact, we settled on a 1 per cent reduction in the pay bill and a 2 per cent reduction in other cash limits.

Nigel had one further ingenious proposal, originally suggested by Leon Brittan earlier in the year: the introduction of ‘end-year flexibility’. By Treasury convention, departments which failed to spend up to their allocation during the financial year were not allowed to carry over the unspent sum into the following year; they lost the money, in effect. The result, of course, was that departments which found themselves underspending as the end of the financial year approached tended to put on a spurt to use up their allocation and public spending would surge. ‘End-year flexibility ‘sought to diminish this effect by permitting them to carry over a proportion of that underspending into the next year.

Altogether these proposals for asset sales, public spending cuts and an improvement in the technique of public expenditure control would, we believed, reduce that year’ public expenditure by more than &1 billion.

Nigel and I expected trouble at Cabinet. It would have been helpful if we could have briefed ministers in advance, but we knew that if papers were circulated the proposals would probably leak. In the end some ministers were briefed individually, as were the Permanent Secretaries of their Departments, but despite our precautions when Cabinet met on Thursday 7 July to discuss the proposals, they had already appeared in print, splashed across the front pages that morning. This did not make the meeting any easier. But Cabinet faced up to what had to be done and Nigel was able to announce the decisions to the House of Commons that afternoon. We emphasized that these were not cuts in planned public spending but rather a package of savings necessary to remain within it. It was perhaps too much to hope that this distinction would be widely grasped.

I spent most of August on holiday in Switzerland, getting over an awkward and painful eye operation that I had had at the beginning of the month. On Friday 29 July I had been at the passing out parade at the RAF College at Cranwell. When the parade and the fly-past were over I turned and walked up some steps into the College for lunch. All of a sudden something happened to my right eye: black spots floated across the field of vision. I rubbed, but they wouldn’t go away. Later when I was back at Chequers I bathed the eye. But it did not improve.

On Sunday I rang my doctor. I went over to his house, not far from Chequers, and he examined the eye — having heard my description of what had happened he already had an eye specialist there. He told me that he thought I had a torn and detached retina and suggested laser treatment, followed by two days lying down until we could be sure that it had worked. Lying still for very long was something I found difficult, but I filled part of the time enjoyably enough listening to novels on tape. On Wednesday I went to his surgery to receive the verdict. I had packed an overnight case, as an insurance policy, half-thinking that I would not need it. But the news was bad. He examined me again and said that there had been no improvement at all; if anything, my eye was worse. As a precaution he had already booked an operating theatre for later that day and I went straight to hospital where the operation was successfully performed.

By the time I returned to England from my Swiss holiday I felt fully recovered, which was all to the good since I had to make several important foreign visits in September.

The first of these was to the Netherlands and West Germany. The two issues which dominated my talks in both countries were the deployment of Cruise and Pershing missiles and the approaching European Council in Athens, which was due to be held in December. On Monday 19 September I arrived in the Netherlands to be met by the Dutch Prime Minister, Ruud Lubbers. I liked Mr Lubbers, a young practical businessman who now applied his talents to good effect in Dutch politics. Although his instincts were federalist, like the leaders of other small countries in the European Community, in day-to-day Community business we often found ourselves on the same side. This
was very much a short working visit with no formal speeches. Over lunch, I discussed the general political scene with Mr Lubbers and his Foreign minister, Hans Van Den Broek — another Dutchman whose company and conversation I enjoyed, even when I did not agree with him. The Dutch Government, being a coalition, was in its usual somewhat fragile condition, with problems over its budget and in the background the question of nuclear arms exercising a general destabilizing influence.

The summit’ plenary session in the afternoon was entirely devoted to European Community matters. There was a large measure of agreement between us on the fundamental practical questions, but the Dutch urged compromise in the run-up to Athens and I was not going to give the impression that our stance was weakening. We seemed to be getting nowhere in our campaign for a tough guideline on future CAP expenditure. Moreover, I was concerned that the Community should not drift further into protectionism. As regards the future financing of the Community, there was no question of my agreeing at Athens to an increase in the Community’ ‘own resources’ in isolation from the other essential conditions we had laid down. I also sought to draw Dutch attention to something which is still not properly grasped: if the Community expected the Germans to go on paying an open-ended share of its costs this would store up political trouble for the future. He who paid the piper would eventually wish to call the tune.