Downing Street Years - Margaret Thatcher [194]
I had discussed the problem with the then Chancellor, Geoffrey Howe, on Thursday 21 April. As so often, it seemed that the Ministry of Defence had been the main villain. The last instruction from the Treasury to the MoD before the budget had been to minimize their underspending. The MoD had complied with unwonted energy. Having been predicting a substantial underspend, they turned out to be overspending with a vengeance. Geoffrey and I were appalled and decided to give the MoD a much-needed rebuke. But the damage had been done.
After the election the new Chancellor had another look at the borrowing figures. Nigel Lawson found himself in an unenviable position. The Treasury’ summer forecast had just been completed and it suggested that the PSBR for the current financial year would be overrun by &3 billion. Inevitably there was a large margin of error in these figures — as always with the PSBR which is constituted by the difference between two enormous sums of money, public sector income and expenditure. But the signs were bad. To add to the problem, the money supply figures for May were poor and we knew that sterling, though high at the time, might soon come under pressure if American interest rates kept on rising. In any case, if we were really on course for a huge overshoot in the PSBR, something had to be done.
When on Wednesday 29 June I received a note from Nigel setting out how he wished to act I too became distinctly worried and emerged no less so from the discussion I had with him the following evening. It is never an easy matter to rein back public spending part way through a fiscal year, but the argument for early action was overwhelming. The earlier you make a cut the less drastic it has to be and the more chance you have of sustaining your credibility with the markets, which is a useful bonus. The obverse of this, however, was that to announce further public expenditure cuts just weeks into a new Parliament would be extremely unpopular and politically embarrassing. The public would think that we had deceived them at the election and spending ministers would feel bounced. Nigel fully understood this and it was a mark of his courage that he recommended immediate action.
He made three proposals. The first was to raise more money for the Government by selling an extra tranche of BP shares. But while this might help fund the PSBR it did not allow escape from the need for real cuts in spending. It was not possible to take action on the non-cash-limited programmes in mid-year, so that we had to concentrate on cash-limited spending. But should the cash squeeze apply to all of this spending or just some of it? Nigel’ initial view was that it should only apply to the non-pay element of central government spending because pay was extremely difficult to hold down successfully. My advisers and I queried this and after Nigel and I talked the matter through at Chequers the following Saturday we settled on a package that included the pay bill within the squeeze. Alan Walters shared Nigel’ view that immediate action had to be taken and urged a 3 per cent reduction in cash limits, greater than Nigel originally proposed. In fact, we settled on a 1 per cent reduction in the pay bill and a 2 per cent reduction in other cash limits.
Nigel had one further ingenious proposal, originally suggested by Leon Brittan earlier in the year: the introduction of ‘end-year flexibility’. By Treasury convention, departments which failed to spend up to their allocation during the financial year were not allowed to carry over the unspent sum into the following year; they lost the money, in effect. The result, of course, was that departments which found themselves underspending as the end of the financial year approached tended to put on a spurt to use up their allocation and public spending would surge. ‘End-year flexibility ‘sought to diminish this effect by permitting them to carry over a proportion of that underspending into the next year.
Altogether these proposals