The Downing Street Years (111 page)

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.

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.

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.