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 e
xtremely 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.
The Downing Street Years, 1979-1990 Page 86