The Downing Street Years, 1979-1990
Page 6
The oil price rise increased worldwide inflationary pressures. But it also had a perverse and, at least in the short term, damaging effect on the domestic economy because sterling was a petro-currency and it appreciated accordingly. Sterling was strong for other reasons too. Following the election there had been a general increase in confidence in the British economy. We were also pursuing a tight monetary policy, requiring high interest rates (interest rates had to go up by two percentage points at the time of the budget), and this attracted foreign capital. As a result of all these factors, sterling continued to rise.
We were perhaps better prepared for taking the required economic decisions than any previous Opposition. We had, every year, conducted our own internal public expenditure exercises, seeking to identify cuts wherever possible and putting figures on them. We had also, through the ‘Stepping Stones’ group of Shadow ministers and advisers of which John Hoskyns had been the main inspiration, worked out how to combine our policies to achieve the overall objective of reversing Britain’s economic decline.
But no amount of advance preparation could change the unpleasant facts of finance or the budget arithmetic. The two crucial discussions on the 1979 budget took place on 22 and 24 May between me and the Chancellor. Geoffrey Howe was able to demonstrate that to reduce the top rate of income tax to 60 per cent (from 83 per cent), the basic rate to 30 per cent (from 33 per cent), and the PSBR to about £8 billion (a figure we felt we could fund and afford) would require an increase in the two rates of VAT of 8 per cent and 12.5 per cent to a unified rate of 15 per cent. (The zero rate on food and other basics would be unchanged.) I was naturally concerned that this large shift from direct to indirect taxation would add about four percentage points onto the Retail Price Index (RPI).
This would be a once and for all addition to prices (and so it would not be ‘inflationary’ in the correct sense of the term which means a continuing rise in prices). But it would also mean that the RPI, by which people generally measured living standards and all too frequently adjusted wage demands, would double in our first year of office.[13] I was also concerned that too many of the proposed public spending cuts involved higher charges for public services. These too would have a similar effect on the RPI. I recalled at my first budget meeting with Geoffrey that Rab Butler as Chancellor in 1951 had introduced his tax cuts gradually. Should we do the same? Geoffrey stuck to his guns. We went away to consider the question further.
At our second meeting we decided to go ahead. Income tax cuts were vital, even if they had to be paid for by raising VAT in this large leap. The decisive argument was that such a controversial increase in indirect taxes could only be made at the beginning of a parliament, when our mandate was fresh. If we waited, hoping that either economic growth or cuts in public expenditure would do the job for us, we might never achieve the structural shift needed to boost incentives. We must establish the direction of our strategy from the start and do it boldly. By the end of that second meeting the shape of the budget which Geoffrey Howe announced on 12 June had effectively been set.
It was generally agreed to be a dramatic reforming budget even by those opposed to us, like the Guardian newspaper, which described it as ‘the richest political and economic gamble in post-war parliamentary history’. Its main provisions followed closely our discussions at the end of May: a cut in the basic rate of income tax from 33 to 30 per cent (with the highest rate cut from 83 to 60 per cent), tax allowances increased by 9 per cent above the rate of inflation, and the introduction of a new, unified rate of VAT at 15 per cent.
Apart from the budget’s big income tax cuts, however, we were able to reduce or remove controls on a number of areas of economic life. Pay, price and dividend controls had gone. Industrial Development Certificates, Office Development Permits and a range of circulars and unnecessary planning controls were also removed or modified. (Geoffrey Howe’s second budget in 1980 was to announce the creation of Enterprise Zones, where businesses could benefit from tax breaks and rate exemption to attract investment and promote employment in run-down areas.)
But I took greatest personal pleasure in the removal of exchange controls — that is the abolition of the elaborate statutory restrictions on the amount of foreign exchange British citizens could acquire. These had been introduced as an ‘emergency measure’ at the start of the Second World War and maintained by successive governments, largely in the hope of increasing industrial investment in Britain and of resisting pressures on sterling. The overwhelming evidence was that they no longer achieved either of the objectives previously expected of them (if in fact they ever had done). With sterling buoyant and Britain beginning to enjoy the economic benefits of North Sea oil, the time had come to abolish them entirely. They were duly removed in three stages — some at the time of the Budget, a few others later in July, and the remainder in October (with the temporary exception of controls relating to Rhodesia). The legislation itself stayed on the Statute Book until 1987, but no further use was made of it. Not only did the ending of exchange controls increase the freedom of individuals and businesses; it encouraged foreign investment in Britain and British investment abroad, which has subsequently provided a valuable stream of income likely to continue long after North Sea oil runs out.
But not every capitalist had my confidence in capitalism. I remember a meeting in Opposition with City experts who were clearly taken aback at my desire to free their market. ‘Steady on!’, I was told. Clearly, a world without exchange controls in which markets rather than governments determined the movement of capital left them distinctly uneasy. They might have to take risks.
We had also been distracted throughout our budget discussions by the worrying level of public sector pay rises. Here we had limited freedom of manoeuvre. Hard, if distasteful, political calculations had led us to commit ourselves during the election campaign to honour the decisions of the Clegg Commission on those claims which had already been formally referred to it. The issue was now whether to refer the unsettled claims of other groups to Clegg, or to seek some new method of dealing with the problem.
It was quite clear to me that in the longer run there were only two criteria which could apply to pay in the public as in the private sector. The first was affordability: ultimately, it was the taxpayer and ratepayer who had to pay public sector wage bills, and if that burden passed beyond a certain limit, the country’s economy would suffer. The second was recruitment: pay had to be sufficient to attract and retain people of the right ability and professional qualifications. However, the whole bureaucratic apparatus designed to achieve ‘comparability’ between public and private sector pay — not just the Clegg Commission but the Civil Service Pay Research Unit and other bodies — obscured these simple criteria.
We decided to submit evidence to the Commission about the necessity of keeping departmental budgets within reasonable limits and what that meant for public sector pay. But we also decided to keep the Commission in existence for the time being, and indeed refer new claims to it on an ad hoc basis. We thought at the time that the Commission might actually make lower pay awards than ministers themselves might have had to concede. But that turned out to be a highly optimistic assessment and, as a result, we underestimated the public expenditure cost of Clegg.
In retrospect, we made a mistake. Even at the time, the warning signs were evident. Geoffrey Howe told me that, allowing for some success in buying out restrictive practices, average pay could well be at least two to three percentage points higher than the recent June Forecast had assumed. In the end, it was not until August 1980 that we announced that Clegg would be abolished after its existing work had been completed. Its last report was in March 1981. The fact remains, however, that the momentum of public sector pay claims created by inflation, powerful trade unions and an over-large public sector was not going to be halted, let alone reversed, all at once.
CIVIL SERVICE REFORM
Whatever the short-term difficulties, I was determined at least to begin work on
long-term reforms of government itself. If we were to channel more of the nation’s talent into wealth-creating private business, this would inevitably mean reducing employment in the public sector. Since the early 1960s, the public sector had grown steadily, accounting for an increased proportion of the total workforce.[14] Unlike the private sector, it actually tended to grow during recessions while maintaining its size during periods of economic growth. In short, it was shielded from the normal economic disciplines which affect the outside world.
The size of the civil service reflected this. In 1961 the numbers in the civil service had reached a post-war low of 640,000; by 1979 they had grown to 732,000. This trend had to be reversed. Within days of taking office, as I have noted, we imposed a freeze in recruitment to help reduce the Government’s pay bill by some 3 per cent. Departments came up with a range of ingenious reasons why this principle should not apply to them. But one by one they were overruled. By 13 May 1980 I was able to lay before the House our long-term targets for reducing civil service numbers. The total had already fallen to 705,000. We would seek to reduce it to around 630,000 over the next four years. Since some 80,000 left the civil service by retirement or resignation every year, it seemed likely that our target could be achieved without compulsory redundancies. We were, in fact, able to do it.
But the corollary of this was that we should reward outstanding ability within the civil service appropriately. The difficulties of introducing pay rates related to merit proved immense; we made progress, but it took several years and a great deal of pushing and shoving.
Similarly, I took a close interest in senior appointments in the civil service from the first, because they could affect the morale and efficiency of whole departments. I was determined to change the mentality exemplified in the early 1970s by a remark attributed to the then head of the civil service, that the best that the British could hope for was the ‘orderly management of decline’. The country and the civil service itself were sold short by such attitudes. They also threatened a waste of scarce talent.
I was enormously impressed by the ability and energy of the members of my private office at No. 10. I usually held personal interviews with the candidates for private secretary for my own office. Those who came were some of the very brightest young men and women in the civil service, ambitious and excited to be at the heart of decision-making in government. I wanted to see people of the same calibre, with lively minds and a commitment to good administration, promoted to hold the senior posts in the departments. Indeed, during my time in government, many of my former private secretaries went on to head departments. In all these decisions, however, ability, drive and enthusiasm were what mattered; political allegiance was not something I took into account.
Over the years, finally, certain attitudes and work habits had crept in that were an obstacle to good administration. I had to overcome, for instance, the greater power of the civil service unions (which in addition were increasingly politicized). The pursuit of new and more efficient working practices — such as the application of information technology — was being held up by union obstruction. In a department like Health and Social Security where we needed to get the figures quickly to pay out benefits, these practices were disgraceful. But eventually we overcame them. There was even a problem at the very top. Some Permanent Secretaries had come to think of themselves mainly as policy advisers, forgetting that they were also responsible for the efficient management of their departments.
To see for myself, I decided to visit the main government departments to meet as many people as possible and discuss how they were tackling their priorities. I devoted most of a day to each department. In September 1979, for instance, I had a useful discussion with civil servants at the Department of Health and Social Security. I brought up the urgent need to dispose of surplus land held by the public sector. I was keen that where hospitals had land which they did not need they should be able to sell it and retain the proceeds to spend on improving patient care. There were arguments for and against this, but one argument advanced on this occasion, which was all too symptomatic of what had gone seriously wrong, was that this was somehow unfair on those hospitals which did not have the good fortune to have surplus land. We clearly had a long way to go before all the resources of the Health Service would be used efficiently for the benefit of patients. But this visit planted seeds that later grew into the Griffiths[15] reforms of NHS management and, later still, the internal market reforms of the Health Service in 1990.
Similarly, on 11 January the following year, I visited the Civil Service Department (CSD). This was an enlightening, if not an encouraging, experience. The CSD was set up in 1968, following publication of the Fulton Committee Report, with responsibility for the management and pay of the civil service. To the nucleus of the Pay and Management Divisions of the Treasury were added the Civil Service Commission and the newly established Civil Service College. The CSD employed 5000 people, headed by Sir Ian Bancroft, the senior Permanent Secretary. Although as Prime Minister I was in overall charge of the civil service, the duties were exercised by a Minister of State and the CSD had always lacked credibility and power in Whitehall.
Not without cause. When I arrived at the CSD, many of my worst fears about the civil service were confirmed. I met able and conscientious people attempting to manage and monitor the activities of civil servants in departments of which they knew little, in policy areas of which they knew even less. Because the staff of other departments were aware of the disadvantages under which the CSD worked, they took scant notice of the recommendations they received from it. After this visit, the only real question in my mind was whether responsibility for the CSD’s work should be redistributed to the Treasury or the Cabinet Office.
Inevitably, my visits to government departments were not as long as I would have liked. There were other limits too on what I could learn on these occasions — particularly that senior civil servants might feel inhibited from speaking freely when their ministers were present. Consequently, after discussing the matter with Sir Ian Bancroft and having a word with Cabinet colleagues, I invited the Permanent Secretaries to dinner at No. 10 on the evening of Tuesday 6 May 1980. There were twenty-three Permanent Secretaries, Robin Ibbs (Head of the CPRS), Clive Whitmore, my principal private secretary, David Wolfson and myself around the dining-table.
This was one of the most dismal occasions of my entire time in government. I enjoy frank and open discussion, even a clash of temperaments and ideas, but such a menu of complaints and negative attitudes as was served up that evening was enough to dull any appetite I may have had for this kind of occasion in the future. The dinner took place a few days before I announced the progamme of civil service cuts to the Commons, and that was presumably the basis for complaints that ministers had damaged civil service ‘morale’.
What lay still further behind this, I felt, was a desire for no change. But the idea that the civil service could be insulated from a reforming zeal that would transform Britain’s public and private institutions over the next decade was a pipe-dream. I preferred disorderly resistance to decline rather than comfortable accommodation to it. And I knew that the more able of the younger generation of civil servants agreed with me. So, to be fair, did a few of the Permanent Secretaries present that night. They were as appalled as I was, and retreated into their shells. It became clear to me that it was only by encouraging or appointing individuals, rather than trying to change attitudes en bloc, that progress would be made. And that was to be the method I employed.[16]
PUBLIC SPENDING
Such an approach, however, would take years. We were dealing with crises on a weekly basis during the second half of 1979 as we scanned the figures on public spending and borrowing, against the background of an international economy slipping faster and faster into recession. Our first task was to make whatever reductions we could for the current financial year, 1979–80. Ordinarily, public spending decisions were made by government during the summer and autumn of
the previous year and announced in November. Even though we were several months into the current financial year, we had to begin by reopening the public expenditure plans we had inherited from the Labour Government. We would announce our new public expenditure plans with the Budget. The scope for cuts was limited, partly because of this, partly because of our own election pledges, and partly because some changes we wanted to make required legislation.
We had promised to increase resources for defence and law and order, and not to cut spending on the National Health Service. We were also pledged to raise retirement pensions and other long-term social security benefits in line with prices — and to honour Labour’s promised pension increases that year. We might have taken cash from the contingency reserve, but if there was to be any cash to take we would have to resist extra claims by government departments — no easy matter. Another possible device would be to squeeze the volume of public expenditure by holding to the existing cash limits, even though inflation had risen since they were set by the previous government. But that in turn would mean holding the line on public sector pay — again, no easy matter. Receipts from privatization might help us to balance the books. But although government-owned shares in British Petroleum could be sold at once, the sale of state-owned assets on a really large scale would need legislation. Much of the work on public expenditure cuts which we had done in Opposition had been overtaken by events, the most damaging of which was the generosity of Professor Clegg. In short, we seemed to be boxed in.