Margaret Thatcher: The Autobiography

by Margaret Thatcher

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. Local government spending grew inexorably in real terms, year after year.

  So in 1981 Michael 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. But, in spite or even because of that, it drew howls of protest from local authorities and the Tory backbenchers whom they so easily influenced. The proposal had to be withdrawn.

  Michael’s successors at the Department of the Environment – Tom King and then Patrick Jenkin – were left 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. But rate-capping 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 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 witnessed the anger and distress caused by the 1973 rate revaluation and believed strongly that something new must replace the existing discredited system.* When I became Prime Minister I stopped any further rate revaluations in England. (In Scotland 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 election has been widened dramatically. Originally, it was limited to property holders: now it is almost identical to that for parliamentary elections. 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.

  Higher rates were ruinous for businesses. And 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 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.

  Popular discontent with the rates surfaced strongly in the motions submitted by constituencies for our 1984 Party Conference. 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. 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.

  I discussed the proposed studies with the junior Local Government minister, William Waldegrave, and suggested that Lord Rothschild – 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 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. 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 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.

  So it was that when Ken Baker, the 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 cen
tral 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. 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.

  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.

  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.

  William Waldegrave and the 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, 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 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 1986–87 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 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.

  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’). 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 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.

  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. 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.

  During the winter of 1986–87 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 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, when the new Parliament met it became clear that many of our backbenchers 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 the Inner London Education Authority’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.*

  It quickly became clear that this had not done the trick. At the Party Conference in October speaker after speaker attacked dual running and backbench opinion was also very strongly opposed to it. 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. 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. 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.

  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).

  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. The figures suggested by Nick Ridley were, he argued, the only ones which would lead to actual community charges below £300 (a far higher figure than we had envisaged a year before). 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. 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.