John Major: The Autobiography

The press widely welcomed the decision. ‘The time was right,’ said the Financial Times. ‘Both politically and economically, entry is shrewdly-timed,’ said the Financial Times. Most other papers also took an approving view:

‘Major plays ERM ace – shares soar as government seize political and economic initiative’ – Independent

‘No soft option’ – Daily Telegraph

‘Thank God – now down to some strong discipline’ – Sunday Telegraph

‘Business hails Britain’s entry into ERM’ – Sunday Times

‘Tories take ERM gamble. Shares rocket in market euphoria’ – Guardian

Two years later, when we were swept out of the ERM by turbulent market conditions, some of these newspapers would take a very different line. Defenders of our entry could scarcely be found, while those who claimed to have warned of the inevitability of disaster bobbed up everywhere. It was the golden age of hindsight.

Neil Kinnock welcomed the decision as ‘momentous’, while John Smith, his shadow Chancellor, attacked the fact that the Madrid conditions were not met (humbug, since he didn’t support them anyway), but heralded ‘the potential benefit that a more stable exchange rate could bring to the process of Britain’s much-needed economic recovery’. Labour supported the rate of entry, but seemed to forget this two years later, when we pulled out. John Smith, who had taunted the government for not entering, called the Tories ‘the only architects, the sole constructors, of our present dismal situation’. It was not what he had said at the time. But there were some dissidents. My PPS, Tony Favell, who had first joined me at the DHSS, resigned in protest – an unexpected departure and no doubt a straw in the wind.

In the Commons I made a statement following entry, and opened a debate on the decision a few days later. In my statement I said: ‘The mechanism has a proven record of success over recent years in producing greater stability of exchange rates and lower inflation. The government believes that Britain, too, will benefit from membership. The Exchange Rate Mechanism will reinforce our counter-inflationary policies, help to provide the stability and certainty that industry needs, and set the right framework for a resumption of soundly-based and non-inflationary growth.’ In winding up the later debate, Norman Lamont reinforced the fact that joining had become inevitable by saying it would have been ‘sheer masochism’ to wait any longer. He was right.

Whilst entry received overwhelming support, long-term European critics in the Conservative Party like John Biffen attacked the decision. Teddy Taylor raised questions about options to withdraw if necessary. Bill Cash said, ‘Thus far and no farther.’ Nick Budgen advocated a floating pound. Norman Tebbit, once in favour, now pronounced himself ‘agnostic’ on ERM entry. Later, ‘agnostic’ would seem a mild way to describe his opposition.

One commentator, the genial Bill Keegan of the Observer – who had been a constant thorn in Nigel Lawson’s side – was very prescient. He said outright that we had entered at too high a rate. When we left the mechanism two years later he, at least, was one of the few entitled to say ‘I told you so.’ He did not set out, however, how we could have negotiated entry at a lower rate.

We entered the mechanism at the market rate – DM2.95 to the pound. There was no real option of much divergence from this, though it later became politically useful for critics to claim that there was. If we had sought to enter at a markedly lower rate we would have been rebuffed by our European partners. They would not have allowed us to gain a competitive advantage upon entry by an artificial devaluation. Even if we had got away with it, the upward pressures on the pound would have been dramatic and we would have had to cut interest rates substantially to resist them, long before it would have been economically safe to do so. Any suggestion that we could have entered at a significantly lower rate is utterly unrealistic. Nor was it proposed by anyone closely connected with the negotiations. The Bundesbank favoured entry at the marginally lower rate of DM2.90, while others actually favoured a higher rate. The Banque de France wanted DM3.00. So did the CBI. And the Prime Minister and the Bank of England wanted a firm rate, so that interest rates could fall. DM2.95 was around the average rate for the previous decade, and, according to the OECD’s calculation of the pound’s ‘purchasing power’, actually a 17 per cent undervaluation of sterling’s worth.

We did ruffle a few feathers by not ‘negotiating’ our entry rate with the Monetary Committee in Brussels. Mario Sarcinelli wanted us to say ‘We are not going against the tide of the market,’ rather than specify an entry rate. This might have been polite, but there was nothing to negotiate, because no real flexibility in our rate at entry was possible. Two years later, after our exit from the ERM, with inflation driven from the system, the pound found its value well within the original margins at which we had entered.

We didn’t get it all right. The decision to cut interest rates at the time of entry was certainly a mistake. It was fiercely attacked by Nigel Lawson in the House and by commentators outside. ‘For reasons best known to himself – one can guess at them –’ said Nigel, ‘my right honourable friend’ – he meant me – ‘did not address the possibility of joining the ERM before reducing interest rates … This is not a small point because sadly the conjunction of the two has led to a degree of cynicism in the financial markets for which we will have to pay a price.’ Ken Baker wrote that the cut in interest rates was Margaret’s ‘fig leaf’ for entry, and there is some truth in this. It is, however, not the whole truth – she was desperately keen to see interest rates fall, and no one was prepared to give her a guarantee that they would do so shortly after entry. The Bank of England expressly refused to commit itself on this, so she took the comfortable option of a cut when she knew she could get it.

I was more concerned when the Prime Minister privately began telling colleagues critical of entry that we could easily realign, and that she wouldn’t use significant reserves to defend the exchange rate. This was not credible: a realignment – in essence a devaluation – would not be easy to obtain, and we would have no choice but to use our foreign-exchange reserves to defend our exchange rate if it began to fall too far. The Prime Minister’s remarks showed a startling lack of commitment (or understanding) of the system she had just agreed we should enter. It was not even consistent with her own objectives: she had urged a high rate of entry to curb inflation (and hasten cuts in interest rates). She could hardly therefore be a ready devaluer, cutting the value of sterling at the first hint of difficulty and undermining our anti-inflation policy. Nonetheless, her remarks did raise a doubt in my mind about whether she would stick with the policy when it began to hurt – which it was likely to do as it squeezed inflation out of the economy – or whether she would distance herself from it and let it be known that it had been forced upon her. I dismissed such thoughts, as the pound remained strong and my concerns seemed academic.

During the year there had been some pleasant interludes. In September I attended the Commonwealth Finance Ministers’ meeting in Trinidad – my first visit to the West Indies. I took the opportunity to visit the Test cricket ground at Port of Spain. Alas, there was no play at the time, but as usual the sight of a cricket pitch put me in a very sunny mood. So did an enjoyable afternoon with David Saul, the Finance Minister of Bermuda, who introduced me to rum punch. ‘The second one is better than the first,’ he joked, and it certainly seemed so.

The main business of the meeting was for me to launch a debt initiative for the world’s very poorest countries that I had been working on for nearly six months. Many of these countries were in dire poverty, and the rise in the price of oil as a result of Iraq’s invasion of Kuwait had dealt them a further blow. I proposed a substantial package of relief: a rescheduling of the whole stock of debt; a doubling in the amount of relief from one-third to two-thirds; the capitalisation of interest due on the debt, with no further payment for five years; and an increase in the repayment period to twenty-five years.

The Commonwealth finance ministers were delighted, and the package was endorsed later by the IMF Conference in Washington and warmly welcomed by the Secretary General of the United Nations. The net effect was to write off over US$18 billion in debt from the poorest and most highly indebted countries at a UK ‘cost’ of US$900 million – which was, of course, largely nominal, as it was highly unlikely it would ever be repaid. Britain had a good record in debt relief. Nigel Lawson had set the trend some years earlier, and later Ken Clarke and Gordon Brown would bring forward further debt alleviation. I hope it gave them as much satisfaction as it gave me: these poor countries need help, and it is unforgivable to let them fall further and further behind the rest of the world.

Despite all the difficulties, political and economic, I was enjoying my time as chancellor. Against a challenging background of high inflation and interest rates, an uncertain pound and a static economy, I felt I had picked up the pieces which had been broken and scattered in October 1989, and had put together an effective economic policy.

I delivered my second Autumn Statement on 8 November 1990, though the event rather lost out, in terms of press coverage, to the guessing game underway about the Prime Minister’s future. If the party was hoping for early tidings of economic spring, it was disappointed. I forecast slightly increased growth for the year ahead, though I suspected that recession might also be on the cards. But this was not certain, and no advantage could accrue to anyone from a forecast that could only make it more likely. Meanwhile the impact of rising unemployment and a slowing economy had pushed up expenditure on social security by £3 billion, while the voracious demands of the NHS reforms added a similar sum.

Twenty-five days after ERM entry Geoffrey Howe resigned from the Cabinet. The combination of dissatisfaction with the Poll Tax and widening splits in the Cabinet over European policy were about to create an explosion that would sweep Margaret Thatcher from Downing Street. By the end of the month I had succeeded her as prime minister.

CHAPTER EIGHT An Empress Falls (#ulink_78954e2d-e763-5c64-9d0f-c1f3056783cc)

WITHIN THE FOLKLORE of the Conservative Party a myth has taken root which so confounds reason and reality that psychoanalysts may understand it better than historians. Its grip has been so strong that a false history has arisen in some Conservative circles and in the media. The myth is that in a moment of inexplicable folly and conspiracy, even madness, Conservative MPs ejected a leader at the height of her powers, presiding over a healthy party, a quiescent nation and a benign set of outside circumstances. It really was not like that.

In the autumn of 1990 the British economy was in deep-seated trouble; huge internal disputes were raging over Europe; the Community Charge, known and hated by millions as the Poll Tax, had proved unworkable and hugely costly; the Prime Minister was barely on speaking terms with the Deputy Prime Minister; a long-standing chancellor had resigned over policy; the party was far behind Labour in the opinion polls; an election was due in eighteen months; and within the parliamentary Conservative Party a sense of exasperation with the leadership was palpable.

I became prime minister because Margaret Thatcher fell. And her downfall was precipitated by two items on this list of troubles: the Poll Tax and Europe. I believe she could have survived either on its own. When they came together, she was trapped.

From the Falklands War onwards Margaret Thatcher had enjoyed an extraordinary dominance in the Conservative Party. Like all prime ministers, she had members of her party who disliked her style and some of her policies, but their opposition was muted by her three successive general election victories against a weak and disoriented Labour Party. Their unease had been a side-issue in the heyday of Tory triumph and Labour woe. But from 1989, as trouble piled upon trouble, their reservations seemed more valid and their numbers grew. In Parliament, they were joined by Members from the loyalist centre-right of the party – worried by the impact of the Poll Tax – and by colleagues uneasy at the Prime Minister’s stridency over European policy. This combination of concerns was the crucial change. Although many still venerated ‘the Iron Lady’, there was widespread dismay that, too often, she was wrongheaded, and a growing belief that her best days were over. These doubts about policy were reinforced by a dire opinion-poll position that suggested many Conservative seats would be lost at the forthcoming general election. Members’ instinct for self-preservation added to the sea of troubles facing the Prime Minister.

But, as the affection for her was strong, opposition tended to be more in sorrow than in anger. ‘If only she would listen,’ was the constant refrain. ‘Why doesn’t she soften?’ Had we but known it, this was the voice of a parliamentary party that did not like its unpopularity and was looking for a change. This sentiment did not make Margaret Thatcher’s removal a certainty, but it made the once unthinkable much more possible.

The signs had been there for some time. The Prime Minister had overwhelmingly defeated Sir Anthony Meyer’s token challenge for the leadership of the party in late 1989, but amidst the cheering most of us missed the significance of the result. A long-serving, hugely successful leader with three successive election victories behind her had been challenged – and sixty Conservative MPs had declined to support her.

Margaret’s campaign had been organised by Ian Gow, Richard Ryder and Tristan Garel-Jones. After it was over Tristan told me that, apart from the sixty malcontents, a further hundred members of the parliamentary party had needed to be ‘worked on’ to keep them on-side. I suggested to Tristan that he should see the Prime Minister to ensure that she knew this. He delivered his message on the Sunday evening following her victory. In his usual colourful style, he told the Prime Minister that pro-European Members were deeply unhappy with the ‘tone’ of her policy, and that dissatisfaction with the Poll Tax was everywhere. ‘Unless you’re careful,’ he warned her, ‘they’ll be back. Hezzie [Michael Heseltine] will run, and they’ll kill you.’ It was vintage Tristan. ‘It will be the daylight assassination of the Prime Minister.’

Margaret Thatcher did not react against the messenger, as she sometimes did. She defended the Poll Tax, and lambasted the Europeans. Tristan simply repeated the message. ‘I’m only the Deputy Chief Whip,’ he said as he left. ‘But I’m telling you – the daylight assassination of the PM.’

I was more aware of her danger in retrospect than at the time. As a former whip, I kept my network across the party, and I heard that there were rumbles. In fact it was worse than that: grumbling was maturing into strong opposition. As a new chancellor I had my hands full with the onset of recession and my first budget, and was having trouble trying to control public expenditure. We were new members of the ERM, and had to prepare for the economic impact of the Iraqi invasion of Kuwait. With these Treasury preoccupations, I was insulated from the scale of the growing distress in the Tea Room. Despite the political gossip that reached me, the Prime Minister had been so powerful for so long that I could not imagine her removal. I discounted much of what I heard as political froth.

The government had just announced its legislative programme in the Queen’s Speech, and the Prime Minister, with the coming general election in mind, was in no doubt that she would be in office to carry it out. She too was preoccupied with the imminence of a war in the Gulf. Talk of a challenge to her leadership, at fever-pitch in the spring, had died away in May after Labour’s opinion poll lead fell back, and Michael Heseltine had appeared to resolve the matter by announcing that he would not challenge her ‘this side of an election’. Anyone who did so, he said, would fail.

I supported Margaret Thatcher as prime minister. I was pleased to serve in her government and I defended her with conviction when criticisms were brought to me. Still, in private, I was uneasy; uneasy at Margaret’s increasingly autocratic approach. Her warrior characteristics were profoundly un-Conservative. In public, her utter certainties were off-putting. In private she was capable of changing her mind with bewildering speed until she had worked up her public position. Often this way of working served her well. But not always. There were occasions when arguments were put to her which were extremely good, but which ran into the slammed door of a closed mind. Too often, she conducted government by gut instinct; conviction, some said admiringly, but at any rate without mature, detached examination of the issues. She lost her political agility; the Poll Tax and crude anti-Europeanism were the policies that resulted.

It was the Poll Tax which sowed the seeds of her destruction. The theory of the tax was impeccable: everyone benefited from local government services, so everyone should contribute towards the cost of them. This had never been the case with domestic rates, where only a minority paid for local government. High-spending local authorities were insulated at the ballot box from the wrath of the few who had to pay by the many who did not. By giving every resident a financial stake in local government, it was hoped that voters would compel rotten boroughs to clean up their act.

Ken Baker, as Environment Secretary, had promised that the Poll Tax would cost many residents less than the rates. But as councils set their Community Charge levels, it became evident that average bills were going to be far higher than before. It was an extremely painful prospect. Tory MPs were coming back from their constituencies in despair, and even strong supporters of the reform were getting edgy.

The twists and turns as we dealt with the ravages of the tax dealt a body-blow to our reputation for efficiency. Some £1.5 billion of public money was lost setting up, administering and replacing the Poll Tax; the total transfer costs to the national taxpayer reached over £20 billion by 1993–94. The Poll Tax also left local government dependent on the Exchequer for 80 per cent of its finance. It was a wretched tale, and one in which, late in the day, I had a walk-on part. Eventually, although I played no glorious role in opposing the introduction of the tax, it was brought to an end under my leadership.

Why did Margaret press ahead with what turned out to be an act of political suicide? Even lemmings have their reasons. So did she, and they were compelling. In the outcry that followed the introduction of the Poll Tax, the unfairness of the old rating system was forgotten. It was riddled with anomalies: the elderly widow paying the same as four wage-earners next door was a much-quoted example. Conservative Members had bulging postbags denouncing the rates, and motions were tabled at every Conservative Party conference demanding their abolition.

Revaluation of rateable liability – which pushed up bills for millions – fanned the embers of this resentment into flame. It came first in Scotland in 1985, and brought public and political outcry, coupled with demands that the rating system should be abolished forthwith. In England, where the system was different, the impact of revaluation was likely to be even greater. The atmosphere of barely suppressed panic left no doubt that something had to be done, and quickly; fear of the impact of rating revaluation turned the Poll Tax from the inconceivable to the unavoidable.

So, in May 1985, when I was just a junior Treasury whip, Cabinet endorsed proposals from Kenneth Baker to replace the rates with a flat-level Poll Tax; Nigel Lawson dissented and was overruled. Ken Baker was a red-hot presenter of a bad case. He was unmatched as a master of black propaganda, and he won many battles in Cabinet by handling Margaret Thatcher with sly skill.

Kenneth Baker’s original plans were well received. His estimate for the level of the Poll Tax was an average of £30 a head in 1990, when the system would be only partly in operation, rising to a fully-fledged £250 in the year 2000. There would be a rebate system to help the least well-off. These low sums were hugely attractive; it was not until much later that we found out they were utterly unachievable. The non-domestic rate, which was a milch cow for many local authorities and was loathed by business, was to be abolished and replaced by a Uniform Business Rate, set nationally and indexed to inflation

It is ironic that the Poll Tax was introduced early into Scotland at the request of the Scots, shocked by the revaluation of their rates; later, its unpopularity – and the inaccurate claim that Scotland was being used as a laboratory to test the tax – was central to the argument for devolution. The Poll Tax cast a long shadow.

After the 1987 election, the government introduced a Bill to apply the Poll Tax across the United Kingdom, with the exception of Northern Ireland. The whips calculated there were twenty-four outright opponents to the Bill on our backbenches, and a hundred doubters. Margaret Thatcher was undaunted: the ‘wets’, she thought, would be seen off again. But in a vote on an amendment to the legislation, tabled by Michael Mates in April 1988, sufficient Tories voted against or abstained for the government’s majority to fall from eighty plus to twenty-five.

I entered the Poll Tax story as chief secretary to the Treasury after the 1987 general election. Within Cabinet, Nigel Lawson continued to oppose the whole idea, and to warn that the tax would be unworkable and politically catastrophic. Although I warmed to the intellectual rationale of the tax, I was persuaded by Nigel’s warnings; and as chief secretary I was often deputed by him to argue the Treasury case in Cabinet committees. Even when I thought I had won the argument, I lost the decision. Defeated on substance, I remained involved in practical questions of implementation.

The Poll Tax brought dramatic changes in the burden of local taxation for millions of people. We faced a crucial decision: should we introduce these changes in one go, or phase them in gradually? Ken Baker had proposed a long period of phasing. Nick Ridley, his successor as Environment Secretary, was determined on a short period or, preferably, no transition at all. Nigel Lawson, so often Nick’s ally, regarded this view as ‘apolitical to the last degree’.

At first, phasing won. But Nick did not lie down. He never did. He launched an energetic lobbying campaign for a clean switch to the Poll Tax. At the party conference in October, speaker after speaker got up to demand the abolition of the rates, with no transition period. At the Treasury, we believed this show of impatience had been contrived by Nick to impress Margaret. When I suggested this to Nick he denied it strenuously: it was, he claimed, a spontaneous uprising by thinking Conservatives. If so, many of them were soon to think again.

Margaret, however, was impressed, and despite the clear opposition of the Treasury team the decision was taken to abolish the transition in all but a few councils. In June 1988 we abandoned dual running altogether. Nick Ridley had won.

The Poll Tax became law in July. The issue then lay fallow until, nearly a year later, we began to discuss how much taxpayer subsidy should accompany the new tax upon its introduction. After the Treasury and the Department of the Environment failed to settle on a figure, Margaret adjudicated and an increase of £2.6 billion was agreed. It was at this point that we really lost control. By now, the estimated average Poll Tax bill had risen to well over £300. Colleagues were aghast. Worse was to come. Inflation and wage costs had begun to rise, and local authorities were increasing their spending and blaming the new tax for the higher bills. By late autumn, headlines warned that Poll Tax bills could be even higher.

Margaret replaced Nick as environment secretary with the more voter-friendly Chris Patten in late July 1989. Chris warned her in private that the tax was a liability, and began the first of many reviews of it – but Margaret made it clear to him that ‘review’ did not mean replacement.

Slowly, the scale of the political problem became clear. Conservative Central Office found out that in ten marginal constituencies, 82 per cent of individuals would be out of pocket as a result of the change from rates – and that was on the heroically optimistic assumption that local authorities increased their spending by just 7 per cent. The rates system had been untenable, but the Poll Tax was turning out to be worse.

Things slid downhill fast. By January 1990, by which time I had succeeded Nigel as chancellor, the Poll Tax monster was rampaging voraciously. As local authorities set their budgets in stormy town hall meetings, headline Poll Tax levels averaged £360, with some much higher: my old borough, Lambeth, set theirs at £560. In March we sustained a massive by-election defeat in Mid Staffordshire. The press blamed the Poll Tax. Our backbenchers blamed Margaret and Nick.