The Downing Street Years, 1979-1990

The introduction of the community charge to replace the domestic rates turned out to be by far the most controversial of the changes promised in our 1987 general election manifesto. Whereas the other elements of those reforms — in education, housing and trade union law — took root, the community charge has since been abolished by a government consisting largely of those who framed and implemented it.

The charge became a rallying point for those who opposed me, both within the Conservative Party and on the far left. Had I not been facing problems on other fronts — above all, had the Cabinet and Party held their nerve — I could have ridden through the difficulties. Indeed, the community charge, having been modified in several ways, was beginning to work at the very time it was abandoned. Given time, it would have been seen as one of the most far-reaching and beneficial reforms ever made in the working of local government. Above all, the community charge offered a last chance of responsible, efficient, local democracy in Britain. Its abandonment will mean that more and more powers will pass to central government, that upward pressures on public spending and taxation will increase accordingly, and that still fewer people of ability will become local councillors.

PROBLEMS WITH THE OLD SYSTEM

We did not enter lightly upon the path of radical reform of local government finance. I shared much of the traditional Tory caution about turning existing financial or administrative systems upside down. If it had been possible to carry on as before I would have been quite prepared to do so. But by almost universal agreement it was not. The person who knew this best was Michael Heseltine — in fact, as it turned out, the most vocal Conservative opponent of the community charge. Michael, as Environment Secretary in the early 1980s, had tried to make the old system work by resorting to more and more complicated devices. He took a whole battery of new powers in an attempt to deal with the problem: that we lacked the means to control local government spending, though it made up a large fraction of overall public expenditure. He brought in the block grant system and ‘grant-related expenditure assessments’ (GREAs), ‘targets’ and ‘holdback’, limits on local authority capital expenditure, and the Audit Commission, as well as beginning a general squeeze on the central government grant — all designed to hold down local spending and to give ratepayers an incentive to think twice before re-electing high-spending councils.[84]

The system became so complicated that scarcely anyone understood it. It was like the ‘Schleswig-Holstein question’ of the last century: Palmerston joked once that only three people ever had a real grasp of it — one of them was dead, one was mad and he himself had forgotten it. The system was also highly unpopular, wayward in its application and inexplicably unfair to historically low-spending authorities, many of whom were set targets below their GREAs. Worse still, it did not work. Ministers might exhort, bewail and threaten but local government spending grew inexorably in real terms, year after year.

So in 1981 Michael came up with new ideas. He proposed that if local authorities spent more than a certain amount over and above their GREAs all the extra would have to be paid for by domestic ratepayers. The Government also agreed that a local referendum should be held before a council could go ahead with the extra spending. This proposal had something new and important to be said for it because it at least marginally reinforced local accountability which — as I shall explain — was at the root of the problem. But, in spite or even because of that, it drew howls of protest from local authorities and the Tory back-benchers whom they so easily influenced. The proposal had to be withdrawn.

So Michael’s successors at the Department of the Environment — Tom King and then Patrick Jenkin — were left with no alternative but to apply more and more complex central controls, while the local authorities went on spending. In 1984 we took powers to limit directly the rates of selected local authorities, with powers in reserve to limit them all. This procedure — known as ‘rate-capping’ — was one of the most effective weapons at our disposal. Much of the overspending was concentrated in a small number of authorities, so that capping fewer than twenty could make a considerable difference. It allowed us to offer some protection from very high rates to businesses and families who were trying to make their own way in profligate Labour authorities — particularly those families on incomes just above the benefit levels, who could not rely on the state to pay their rising rates bills. But rate-capping was a complicated business: it stretched the capacity of the Department of the Environment and could be challenged in the courts. The fundamental problem remained.

I had always disliked the rates intensely. Any property tax is essentially a tax on improving one’s own home. It was manifestly unfair and un-Conservative. In my constituency and in letters received from people all over the country I witnessed a chorus of complaints from people living alone — widows for example — who consumed far less of local authority services than the large family next door with several working sons, but who were expected to pay the same rates bills, regardless of their income. I had, of course, been Shadow Environment spokesman at the time of the October 1974 election when we promised to abolish the rates altogether. In fact, this was a last-minute pledge insisted upon by Ted Heath about which I had considerable doubts for we had not properly thought through what to put in their place: but I had witnessed the anger and distress caused by the 1973 rate revaluation and believed strongly that something new must replace the existing discredited system.[85] When I became Prime Minister I stopped any further rate revaluations in England. (In Scotland the system was different and a domestic rate revaluation was required by law every five years, though extensions were possible and we took powers to put off for two years a revaluation due in 1983.) But the counterpart of this decision was that the potential disruption which a rate revaluation would have caused in England grew by the year. And we could not put it off for ever.

The reliance on property taxes as a principal source of income for local government went back centuries. Rates made sense, perhaps, when the bulk of local authority services were supplied to property — roads, water and drains, and so on — but in the course of the present century local authorities have increasingly become providers of services for people, such as education, libraries and personal social services.

Moreover, the franchise for local elections has been widened dramatically. Originally, it was limited to property holders: now it is almost identical to that for parliamentary elections. The old business vote has gone too. The only serious argument for the rates — business and domestic — was that they were relatively easy to collect: people can abscond, houses and factories cannot. The rates became a painless tax for the large number of local electors who were not liable to pay them. But this was what made the old system so defective, ultimately even dangerous. Of the 35 million local electors in England, 17 million were not themselves liable for rates, and of the 18 million liable, 3 million paid less than full rates and 3 million paid nothing at all. Though some of those not liable contributed to the rates paid by others (for example, spouses and working children living at home), many people had no direct reason to be concerned about their council’s overspending, because somebody else picked up all or most of the bill. Worse still, people lacked the information they needed to hold their local authority to account: the whole system of local government finance worked to obscure the performance of individual authorities. It is not surprising that many councillors felt free to pursue policies which no properly operating democratic discipline would have permitted.

This lack of accountability lay behind the continued overspending. Although central government steadily reduced the share of local government spending met from the Exchequer, the result was more likely to be higher rates than lower total public spending. That was unsatisfactory for the overall economy. But it was ruinous for local businesses and — ultimately — for local communities. In the summer of 1985 when we began seriously to look at the alternatives to the rating system, some 60 per cent of the rate income of local authorities in England was coming from business rates. In some areas, though, it was a far higher percentage. For example, in the Labour-controlled London borough of Camden it reached 75 per cent. Socialist councils were thus able to squeeze local businesses dry and the latter had no recourse except to press central government to cap the council concerned or to move out of the area. It might be imagined that the devastating effect of such policies of overspending on employment would discourage Labour authorities from such action. But I never forgot that the unspoken objective of socialism — municipal or national — was to increase dependency. Poverty was not just the breeding ground of socialism: it was the deliberately engineered effect of it.

Popular discontent with the rates surfaced strongly in the motions submitted by constituencies for our 1984 Party Conference. Conservatives in local government were unhappy at the apparatus of central controls — particularly on capital spending — and within the Department of the Environment there was concern that these controls gave rise to so many anomalies and political difficulties that they could not be sustained for many more years. Nor was it yet clear how effective rate-capping would prove. Accordingly, in September 1984 Patrick Jenkin sought my agreement to announce to the Party Conference a major review of local government finance. The Party Chairman, John Gummer, gave him strong support. But I was cautious. There was a danger of raising expectations that we could not meet. After all, there had been two previous reviews — under Michael Heseltine and Tom King — and only the most modest of mice had emerged. Unlike October 1974, we must be absolutely clear that we had a workable alternative to put in place of the present system. I authorized Patrick to say no more than that we would undertake studies of the most serious inequities and deficiencies of the present system. There would be no publicly announced ‘review’ and no hint that we might go as far as abolishing the rates.

Later that October I held a small meeting at Chequers to listen to a presentation of the intricacies of the Rate Support Grant system. When it ended I was more convinced than ever of the fundamental absurdities of the present system. Afterwards I discussed the proposed studies with the Junior Local Government minister, William Waldegrave, and suggested that Lord Rothschild — the former head of the CPRS in Ted Heath’s time and someone for whom I had the highest regard, having worked with him on science policy when I was Education Secretary — should be brought into it. William had also worked with him at the CPRS and jumped at the idea. Much of the radical thinking which resulted was Victor Rothschild’s.

By the time that the studies were complete, the political imperative for change had been dramatically demonstrated by a disastrous rate revaluation in Scotland. In Scotland there was a legislative requirement for rate revaluation every five years, though if George Younger and Michael Ancram at the Scottish Office had alerted us to the full consequences in time we could have introduced an order to stop it or mitigated its effects by making changes to the distribution of central government grant. The Scottish Conservative Party Chairman, Jim Goold, came to see me in the middle of February 1985 to describe the fury which had broken out north of the border when the new rateable values became known. The revaluation had led to a large shift in the burden from industry to domestic ratepayers and — with the high level of spending of Scottish local authorities — this was combined with large overall increases in the poundage. By the time that I chaired a proper ministerial discussion on the evening of Thursday 28 February to see what could be done about the problem it was really too late. Scottish ministers, businessmen and Tory supporters began with one voice to call for an immediate end to the rating system.

For us, south of the border, it was powerful evidence of what would happen if we ever had a rate revaluation in England. There was no legal obligation to undertake a revaluation in England by a particular year, but it could fairly be argued that without any revaluation the rates would contain more and more anomalies. As noted above, the whole basis of rating valuation by reference to rental values was dubious anyway. Of course, we could have used capital values for revaluation. But capital values can go down as well as up, so a system based on them would have been highly disruptive, unpopular and a very uncertain basis for local government finance. This was the option which Nigel Lawson and — from time to time depending on which spokesman was asked — the Labour Party favoured. But I was firmly against it, because it was still a tax on the value of someone’s home and the improvements made to it.

ORIGINS OF THE COMMUNITY CHARGE

So it was that when Ken Baker, then DoE minister responsible for local government, his junior, William Waldegrave, and Lord Rothschild made their presentation to a seminar I held at Chequers at the end of March 1985 I was very open to new ideas. It was at the Chequers meeting that the community charge was born. They convinced me that we should abolish domestic rates and replace them with a community charge levied at a flat rate on all resident adults. There would be rebates for those on low incomes — though rebates should be less than 100 per cent so that everyone should contribute something, and therefore have something to lose from electing a spendthrift council. This principle of accountability underlay the whole reform.

The second element of the approach was that business rates would be charged at a single nationally set level and the revenue redistributed to all authorities on a per capita basis. The reform of business rates would also make it possible to end one of the most unsatisfactory features of the old system: ‘resource equalization’. One problem with the rating system was that taxable capacity varied enormously from one authority to another, since the value and amount of property itself varied — particularly commercial and business property. ‘Resource equalization’ was the name given to the process by which central government redistributed income between authorities to even out the effect. As a result there were major variations across the country in the amount of rates paid on similar properties for a given standard of service, generally to the disadvantage of the South, where properties were usually valued much more highly. A great deal of money was involved, though like much else in local government finance the average voter had never heard of it. Such a system, of course, made it still harder for voters to judge whether they were getting value for money from their authority. But with the abolition of domestic rates and the distribution of the national business rate on a per capita basis, taxable capacity would no longer vary between authorities and so the need for ‘resource equalization’ disappeared. Obviously some authorities had greater needs than others, but this would be compensated for by giving them more in central grant. For the first time it would be possible for every council to provide the same level of service at the same level of local taxation anywhere in the country, so that much more transparent comparisons between councils could be made.

In the discussion which followed there was a lot of tough questioning but general support for the DoE approach and in particular a commitment to the strengthening of local accountability. The only alternative was to go further in the direction of centralization, for example by having Central government take over specific local authority functions like education or teachers’ pay, and yet tighter controls on spending. We wanted to avoid this if we could.

Nor was there any enthusiasm for the two other options which had long been canvassed — local income tax (LIT) or a local sales tax. The former would have undermined our efforts to lower income tax at the national level and would have put in the hands of Labour authorities a powerful weapon to drive out even more people of talent and energy from their areas. A sales tax would have been a recipe for absurd distortions in a country as small as Britain: prices would have varied from authority to authority, with high spending authorities driving shoppers to lower-spending neighbours only minutes away. And there would have had to be massive redistribution of revenue from one area to another to compensate for variations in the distribution of shops. Finally, both taxes would have been highly bureaucratic.

Of the ideas now put forward by the DoE team, the only proposal which I rejected was that we should consider changing the whole of local government to single-tier authorities. Then and later I was to be attracted by this on the grounds of the transparency it would have brought to the community charge figures. But we could not do everything at once.

After the Chequers seminar William Waldegrave and DoE officials went away to prepare more detailed proposals. Nigel Lawson had already expressed reservations through his Chief Secretary Peter Rees at the seminar. But it was only afterwards that it became clear just how deeply opposed he was. The DoE proposals were to come before a Cabinet committee at the end of May. A few days before the meeting Nigel sent in a Cabinet memorandum strongly challenging the community charge and urging the consideration of alternatives.

Nigel’s dissenting Cabinet memorandum showed prescience in one crucial respect: he foresaw that local authorities would use the introduction of the new tax as an excuse to increase spending, knowing that they stood a good chance of persuading the voters that the Government was to blame for higher bills. I too had worries on this score, and the main aspect of the DoE’s early thinking of which I was doubtful was their optimistic suggestion that enhanced accountability would make it possible to abandon ‘capping’ altogether. In an ideal world perhaps this would have been true. But the world which years of socialism in our inner cities had created was far from ideal. I was determined that capping powers would remain and, indeed, before the end I would find myself pressing for much more extensive community charge capping than was ever envisaged for the rates.

When the committee met I asked Nigel to work up his alternative proposals. If this was to be done it would have to be done quickly: I had it in mind — if we went ahead — to get a green paper published by the autumn of 1985, with a view to legislating in the 1986–7 session, which was a tight timetable. But his idea for a ‘Modified Property Tax’ was not to win any support from colleagues outside the Treasury when it was circulated in August 1985. It had most of the defects of the existing system and some more as well.

In September 1985 I promoted Ken Baker from Minister for Local Government to Secretary of State for the Environment, with responsibility for refining and then presenting the proposals. During autumn and winter that year we slogged away in Cabinet committee. Figures from the DoE made it clear that moving in a single step to a community charge would create many losers from the change, particularly (but not only) in the profligate inner London boroughs. How sharp these changes would be would depend very much on the level of the charge itself: at this stage — 1985–6 — we were advised that the average level would be under £200. But I fully realized that even with these figures there would be real difficulties in transition for which solutions had to be found.

With the abolition of ‘resource equalization’ and the pooling of business rates there would be large shifts in the domestic local tax burden between areas. Areas with high rateable values and low spending levels would tend to gain. Those with low rateable values and high spending would tend to lose. London had its own special problems. Inner London had received specially generous subsidies; a number of London authorities were very high spenders; there was — until we eventually abolished it — the burden of high spending by the Inner London Education Authority; there was also the fact that business rates, which socialist authorities had in the past been able to increase more or less at will, would now be limited and pooled, with the result that extra burdens would fall on domestic ratepayers. In order to deal with these changes between areas a system called the ‘safety net’ was devised to smooth the transition. The safety net was designed to be self-financing: it slowed down one area’s losses by delaying another area’s gains. This was unpopular with the gainers, but unavoidable unless the Exchequer stepped in to meet the difference. Nor could the safety net deal directly with the most politically sensitive question which was the changes in the burden between individuals and between households.

The problem of limiting individual losses raised the question of whether the community charge itself should be phased in, and if so, how. Ken Baker — always canny and cautious — wanted a very long transition period during which the rates and community charge would run alongside each other (known in the jargon as ‘dual running’). Indeed in an early draft of the green paper we were to publish in January 1986 he wanted to leave open whether the rates would ever be abolished. I intervened: it had to be clear that the community charge would replace the rates entirely and not in the very distant future. The final position which Ken Baker announced to the House of Commons on Tuesday 28 January 1986 was that the community charge would start at a low level, with a corresponding cut in the rates. But the whole burden of any increased spending would fall on the community charge from the start so that there was a clear link between higher spending and higher community charges. In subsequent years there would be further shifts from the rates to the charge. In some areas the rates would disappear within three years: they would be eliminated in all areas within ten. The green paper made it clear that we were retaining capping. On the strong advice of Scottish ministers, who reminded us continually and forcefully how much the Scottish people loathed the rates, we also accepted that we should legislate to bring in the community charge in Scotland in advance of England and Wales.

THE ABANDONMENT OF DUAL RUNNING

In May 1986 I moved Ken Baker to Education and brought in Nick Ridley to replace him at the Department of the Environment. Nick brought a combination of clarity of thought, political courage and imagination to the questions surrounding the implementation of the new system. His vision was that local authorities should enable services to be provided but, unless it was truly necessary, local authorities should not provide those services themselves. The main business of modern local government should therefore be regulation — and not too much of that — rather than owning assets and competing with private sector businesses. One way of ensuring this was through the community charge which, by bringing home to people the true cost of local government, would maximize the pressure for efficiency and low spending. Complementary to this was the expansion of competitive tendering of local government services which would result in more contracting out to the private sector. Nick’s 1988 Local Government Act required that refuse collection, street cleaning, the cleaning of buildings, ground maintenance, vehicle maintenance and repair and catering services (including school meals) be put out to tender.

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.[86]

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.

PREPARING FOR THE INTRODUCTION OF THE CHARGE

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.

Discussions continued up to the eve of the Party Conference where David Hunt, the Local Government minister, announced a scheme costing £1.2 billion over three years. The scheme would ensure that former ratepayers (and ratepayer couples) need pay in community charges no more than £3 a week extra over and above their 1989–90 rate bills, provided that their local authority spent in line with the Government’s assumptions. Pensioners and disabled people would be entitled to the same level of help even if they had not previously paid the rates (and of course many of them were entitled to rebates as well). At the same time David Hunt announced that the taxpayer would finance the safety net in England and Wales after the first year and that all gains would therefore come through in full from 1 April 1991. In spite of this, back-bench pressure increased. There was even doubt as to whether we could win the crucial Commons votes in January 1990 to authorize payment of the 1990–91 Revenue Support Grant. We met to discuss whether concessions needed to be made. Even if we had wanted to make concessions, it would not have been easy to do so because there was really no common thread to the rebels’ concerns. In fact, I decided that we should hold our ground, and through the efforts of the whips and with the help of a superb speech from Chris Patten — always an able debater — we won the votes by a good margin. But I was under no illusion that victory in the House of Commons would be sufficient to convince public opinion, which had now turned strongly against the community charge.

THE POLITICAL CRISIS MOUNTS

By now the bad news about likely future levels of the charge was coming through thick and fast. By January 1990 the DoE had yet again raised its estimate of the average community charge to £340. We were heading for double the original estimate. That had been bad enough. Now in February, with local authorities likely to increase their spending by some 15–16 per cent, the latest indications were that it could be £20 or more higher.

Another piece of bad news was that the Retail Price Index Advisory Committee had in its wisdom decided that the community charge should be included in the RPI — treating it like the rates, but unlike other direct taxes. But the massive reliefs to individual charge payers should not be taken into account. This administrative fiction gave another expensive upward twist to the RPI and greatly increased the political damage which we were sustaining.

The political atmosphere was becoming grim. All my instincts told me that we could not continue as we were. On Thursday 22 March we sustained a very bad by-election defeat in Mid-Staffordshire, losing a seat in which we had had a majority of over 19,000. The press was full of outraged criticism of the community charge from Conservative supporters. I was deeply worried. What hurt me was that the very people who had always looked to me for protection from exploitation by the socialist state were those who were suffering most. These were the people who were just above the level at which community charge benefit stopped but who were by no means well off and who had scrimped and saved to buy their homes. Our new scheme of transitional relief did not protect them against overspending councils. Something more must be done.

My thoughts were crystallized by the discussion I had with Ken Baker, Tim Bell and Gordon Reece over supper at Chequers on Saturday 24 March. Their message was clear. It was vital to achieve lower levels of community charge. If this were not done the political consequences would be grave. This matched my analysis entirely.

There was widespread support for the principle that everyone should pay something towards the cost of local government, which only the community charge could ensure. When people complained about its fairness they were not usually rehearsing the hackneyed — and spurious — point about the hypothetical duke and dustman paying the same. Unless the duke were very poor or the dustman very wealthy this could not be so, because about half of local authority expenditure was met out of general taxation which did reflect ‘ability to pay’. The problem was the levels at which the charge was now being levied and the fact that it was sudden and unexpected in its impact, frequently bearing down on our own people. That was what the authors of all those letters of complaint which I received were really driving at. But what could now be done?

The essential point, I felt, was to ensure that central government stepped in to protect the victims of what was essentially an arbitrary abuse of power by irresponsible local authorities. Arguments about accountability and the prospects for long-term improvement simply had to take second place.

So on Sunday morning, before I began work with my advisers at Chequers on drafting my speech to the Central Council, I rang the Chancellor, John Major. I told him that I had been reading the papers relating to community charge capping for 1990–91. I had a number of fundamental concerns. The first was political. When the community charge system had been developed we had assumed that if authorities persisted with high levels of spending, the blame for the resultant high community charges would fall on them rather than the Government. But that was not in fact happening. The public were blaming us and indeed the spending levels of a number of Conservative-controlled councils as well. Second, the impact of high community charges was falling on those in the middle income groups — what might be called the ‘conscientious middle’. Those on low incomes were well protected by the various rebate arrangements. Indeed, we were having to meet a much higher public spending bill than expected for community charge rebates because the charges themselves were so high. This would be given a further twist because, since the levels of community charge were pushing up the RPI, that would carry through into a higher than expected uprating for all social security benefits next autumn. The new system was not yet bringing about increased accountability. Nor did it seem to me that this was likely to materialize in the second year either. We could give some modest protection to charge payers in 1990–91 if we went ahead with the current proposals for charge capping, and indeed we must do so. But the effect on average bills would be marginal, at best. We therefore needed to consider radical further measures in relation to 1991–2.

The main option seemed to be the introduction of a direct central control over levels of local authority spending; for example, laying down that expenditure by each authority could be no more than a certain percentage above a Standard Spending Assessment (SSA) — that is the level at which the authority needed to spend to deliver a certain nationally uniform standard of service. That, however, would need to be matched by a substantial increase in the level of government grant to local authorities, perhaps with a larger proportion of the total in the form of specific grants for particular services. I saw no reason why it should not be possible for this dual approach to reduce total public spending by local authorities. We would then have to consider whether to continue with the community charge as the sole means of financing expenditure above the level allowed for, given that at present all the extra expenditure fell on the charge. An alternative would be to place some of the burden of higher spending on the business rate. All this pointed to the need for a major internal review which would have to be carried out very speedily. It would be necessary to indicate publicly that some kind of review was under way, although the terms and manner of such an announcement needed careful thought.

John Major did not dissent from my judgement that a radical review was necessary. He also agreed that the changes we came up with must control total public expenditure. I finished by saying that I would speak very soon to Environment ministers to tell them what I wanted done.

In one form or another I was to pursue this approach over the months ahead — until, as I shall describe, unexpected legal advice caused me to revise my views about the best practical way forward. I did not, though, even then alter the view which I had now come to about the future of local government finance. I still believed that the local accountability which the community charge did so much to strengthen would have a salutary effect. It would, not so incidentally, help ensure that low-spending councils — generally Conservative — were elected. But I had also seen — and did not intend to forget — the perversity, incompetence and often straightforward malice of many local councils. High-minded talk of local democracy must not be allowed to obscure the low-level politics of the people we were up against. That meant that central government must have adequate powers — and be prepared to use them — to protect the individual citizen against rogue authorities.

But the most public opposition to the community charge came not from the respectable Tory lower-middle classes for whom I felt so deeply, but rather from the Left. From 1988 a number of Labour MPs, mostly in Scotland, had proclaimed their determination to break the law and refuse to pay the community charge and the far Left were agitating effectively in England too. They found little sympathy from the law-abiding mass of Labour supporters. But there were enough people ready to take the lead in organizing violent resistance. On Saturday 31 March, the day before the introduction of the community charge in England and Wales, a demonstration against the charge degenerated into rioting in and around Trafalgar Square. There was good evidence that a group of troublemakers had deliberately fomented the violence. Scaffolding on a building site in the square was dismantled and used as missiles; fires were started and cars destroyed. Almost 400 policemen were injured and 339 people were arrested. It was a mercy that no one was killed. I was appalled at such wickedness.

For the first time a government had declared that anyone who could reasonably afford to do so should at least pay something towards the upkeep of the facilities and the provision of the services from which they benefited. A whole class of people — an ‘underclass’ if you will — had been dragged back into the ranks of responsible society and asked to become not just dependants but citizens. The violent riots of 31 March in and around Trafalgar Square was their and the Left’s response. And the eventual abandonment of the charge represented one of the greatest victories for these people ever conceded by a Conservative Government.

The trouble was that, because of the size of the bills now being sent out, the new system had the very same law-abiding, decent people — on whom we depended for support in defeating the mob — protesting themselves. The riot did not, therefore, shift me from my determination to continue with the community charge itself or to see the criminals of that day brought to justice. But it did reinforce the conclusions I had reached about the need to take effective action to limit the burden it was placing on what I had described to John Major as the ‘conscientious middle’.

In fact, unbeknown to me, the rioters were on their way up to Whitehall as I was addressing the Central Council in Cheltenham.

I began my speech with what was to be the first of a number of increasingly risky jokes about the political threat to my leadership. Cheltenham’s reputation as the traditional retirement centre for those who governed our former empire provided the peg. I began:

I then went almost immediately to the heart of the issue about which the Party was agonizing.:

But I did go on to announce a number of limited special reliefs. Even this modest package had necessitated my tearing up a feeble draft from the Treasury and writing it myself. Given the weak draft, the absence of colleagues and the late hour, however, I was not able to write into my speech assurances of the weight and substance I would have liked. So I had to content myself with hinting at my ideas about further capping powers to deal with overspenders.

My main message, therefore, had to be that the way to have low community charge bills was to vote Conservative in the forthcoming local elections. I pointed to some of the figures for the charge to illustrate my point.

But I also drew a wider lesson, and in doing so I deliberately sought to move the political argument back to the greater questions of politics which distinguished the Conservative from the socialist approach — and back to the values for which I personally stood:

The reception was good. But for them and for me the worries remained.

TO CAP OR NOT TO CAP?

Now I had to ensure that my colleagues threw themselves as wholeheartedly as I would into the job of protecting our people from the kind of problems we were experiencing in 1990–91. There was not much we could do as regards this year’s bills. The lawyers advised that anything like the scale of capping I wanted to see was unlikely to be sustainable in the courts. Consequently, Chris Patten could only announce the capping of twenty councils. This was very disappointing. But a defeat in the courts could have put the whole system in disarray if, for example, the judges had found not just against a decision about a particular council but against the fairness of the system of SSAs which were crucial to the community charge.

All this reinforced the case for seeking new ways of holding down local government spending — and so community charges — the following year. I pressed with the Treasury and the Department of the Environment my ideas for wide-ranging direct controls over local authority spending combined with more extensive use of specific grants. I had also come round to the idea of single-tier authorities which — though the abolition of county councils would create a furore with Tory councillors — would mean that the identities of the culprits of overspending and high community charges were much clearer in the eyes of local electors.

Chris Patten was strongly opposed to any kind of comprehensive capping of local authorities. He argued against it both on the ground that it would undermine the principle of local accountability and because he thought such a system could not be got up and running in time for 1991–2. But I insisted that the DoE should work up the options. I wanted to see cuts in expenditure in some local authorities.

The local election results on Thursday 3 May 1990 strongly suggested that where Conservative councillors and candidates used the community charge in order to point up the differences between them and the Labour Party and then worked to get out the Conservative vote — rather than indulge in recrimination against the Government — they could do very well. (Indeed, some of our councillors opposed wider capping in 1990–91 on the ground that it would protect profligate Labour councils from the electoral coup de grâce.) Conservative successes in Wandsworth and Westminster were the results of that approach. Where the Conservatives were in control of an authority, the lower the charge it set, the better we did. The reverse was true where Labour was in office. In this respect the community charge was already transforming local government. There was the prospect that, even in a bad year for the Conservative Party nationally, local government elections could now be fought and won on genuinely local issues and the local record, rather than the political control of councils swinging according to national trends — something which had always demoralized conscientious councillors of either party.

These successes, however, did not diminish the urgency of ensuring that next year’s charge levels throughout the country were kept down. Throughout May and early June papers were produced and discussions between ministers and officials held. Chris Patten and I were still at odds over the question of a general capping power. He was demanding a substantial increase in central grant, sufficient to allow us to say with credibility that responsible authorities would be able to set charges in 1991–2 no higher than in 1990–91. I put some pressure on him by refusing to allow any discussion about the level of next year’s central grant until we had reached a decision on spending controls. John Major was in two minds. On the one hand, as Chancellor, he wanted to see effective controls on public spending. On the other, perhaps as a former whip, he was worried about getting the Parliamentary Party to pass the necessary new legislation for stronger capping powers. And this was a fair point. A number of our back-benchers were now in a mood not far short of outright panic and it was difficult to know how they would react to any new legislation which appeared to give them a chance — through amendments — to overturn key aspects of the community charge on which they thought their own electoral fortunes would founder. Quite how the argument would have ended up in government I do not know.

But suddenly the whole basis of our discussions was changed by new legal advice. When we had met on the morning of Thursday 17 May the lawyers advised that even new legislation on capping could be undermined by judicial review. This seemed to me to be extraordinary. It suggested that Parliament would not be allowed by the courts to fulfil its duty to protect the citizen from unreasonable levels of taxation: it cast doubt on our ability to control public expenditure and manage the economy. At that point I asked for urgent advice about how these difficulties could be overcome.

It is easy to imagine my surprise — and initial scepticism — when as I worked through my boxes overnight on Wednesday 13 June I came across a note from my private secretary reporting a telephone conversation with government lawyers earlier that evening. Their view now was that the present legislation — let alone any future legislation — might be more robust than their earlier advice had indicated.[87] They told us that we would be in a position to cap large numbers of authorities as long as we made clear at an early stage in the budgetary cycle what we would regard as an excessive increase in spending — and we could achieve this without the difficulties which new legislation would have brought. This legal advice was strengthened as a result of the Government’s victory in a court case several days later against a number of local authorities appealing against capping.

On the evening of Tuesday 26 June I held a meeting of ministers to sort out exactly where we stood. The lawyers confirmed their advice that it was unlikely that we could have any greater certainty about capping under new legislation than under the present. I was reluctant to drop the idea of introducing a general capping power. I would have liked to combine this with the use of local referenda, so that an authority which wanted to spend more than the limit set by central government would have first to win the agreement of its electorate. This would have done a good deal to defuse the accusation that new spending controls would undermine local democracy. In the light of the revised legal advice, though, I accepted that unless the courts came up with some new judgement which changed the position it would be best to cap in 1991–2 under the existing law. It was crucial, however, to achieve the greatest possible deterrent effect and so Chris Patten had to announce in July — well before local authorities set their budgets — how he intended to use his powers. The other aspect we had to discuss was the extra money which was needed to be put in in order to limit the burden on individuals. Chris was authorized to announce to the House certain extensions to the transitional relief scheme and other changes.

The relevant Cabinet committee met the following week under my chairmanship to finalize the community charge review and agree the details of the 1991–2 settlement — the amount that we were going to provide for local authorities in the form of grant and business rates, and the amount that we thought they ought to spend. Chris Patten and John MacGregor (the Chief Secretary) had already reached agreement on a package. Our purpose was to endorse this: I also wanted to ensure that it was understood that the extra money for the community charge was not a sign that the brakes had been taken off public expenditure control — far from it. We agreed that the local authorities ought to spend £39 billion, an increase of 19 per cent over the same estimate the previous year and an increase of 7 per cent over what they had actually spent. This would produce a community charge at ‘standard spending’ of £379. The actual community charge in a particular area would of course depend on whether the local authority spent more or less than this figure. It should be possible to keep the community charge down below an average of £400 by vigorous use of charge capping. Yet even so this sum was well over twice the original estimate of the community charge which had been given to ministers. I stressed that the extra money — almost £3 billion — going to reduce the burden of the community charge would mean less for other purposes. That was the priority we had chosen and all ministers must abide by the consequences. Otherwise we would lose control of public spending. Chris Patten announced these measures to the House of Commons shortly afterwards. Some further details and modifications were announced at the end of October.

The system of local authority finance which I bequeathed to my successor remained unpopular. During the leadership contest in November 1990 Michael Heseltine made great play with his pledge to review the community charge and this prompted John Major and Douglas Hurd to promise their own reviews as well. At the end of March 1991 Michael Heseltine, once again Environment Secretary, announced the outcome: the Government had decided to abandon the community charge and to return to a property tax, supplemented by a sharp rise in VAT from 15 to 17.5 per cent.

Few episodes of my period in government have generated more myths than the community charge. It is generally presented as a doctrinaire scheme forced on reluctant ministers by an authoritarian Prime Minister and eventually rejected by popular opinion as unworkable. Mistakes were certainly made in implementing the charge, but this picture is a tissue of nonsenses. As Nigel Lawson has generously conceded, few pieces of legislation have ever received such a thorough and scrupulous examination by ministers and officials in the relevant Cabinet committees as did the charge. Its difficulties arose from a number of factors: the worsening economic and inflationary situation; the fact that the estimates of the charge’s level proved consistently misleading; and the certainty that any reform of local government finance, after seventeen years of nonrevaluation, would have produced many losers and therefore great unpopularity. The conclusion I draw is that whatever reform was chosen, we should have accompanied it with draconian restraints on local government spending from the centre in order to prevent local authorities — alas Conservative as well as Labour — from using the transition to jack up spending and blame it on the Government.

The fact remains that the defects in our system of local government finance were largely remedied by the charge, and its benefits had just started to become apparent when it was abandoned. Those advantages would have become steadily more evident as contracting out of local authority services and improved local authority efficiency took effect. But one further thing would have been necessary. Although the 1990 — 91 community charge capping proved relatively successful in holding down local authority spending, it would probably also have been necessary to introduce the much more far-reaching direct controls over council spending to which my mind had anyway been turning until our legal advice changed. It would have taken time before the disciplines of the new system began to affect the behaviour of the worst overspenders. But eventually they would have done so. However, the community charge was abandoned. The fundamental problems of local government — badly administered services, an obscure relationship with central government, lack of effective local accountability — not only remain: they will get worse.