Downing Street Years - Margaret Thatcher [83]
Early the following morning, Alan came in to see me when I was in the flat packing my hats into boxes for my trip to the United States that afternoon. I told him that I had insisted on the lower PSBR he wanted. But I still did not know quite how Geoffrey would react. Then shortly before I left for America Geoffrey came in to see me. Having consulted his ministerial colleagues in the Treasury that morning he had accepted that we should have a smaller PSBR, below £11 billion. Rather than increase the basic rate of income tax he proposed the less unpopular course of withholding any increase in tax thresholds — though this was still an extraordinarily bold move when inflation remained at 13 per cent. This was the turning point. I was glad that Geoffrey had accepted the argument and I was pleased that he had found a way of increasing tax revenues that did not run counter to our long-term strategy of reversing Labour’s high tax rates. Our budget strategy was now set. And it looked as if we would be able to announce a reduction of 2 per cent in MLR in the budget the following Tuesday.
There was one other change announced in the budget, apparently technical but of great significance: the change to planning public expenditure in cash rather than what were called ‘volume’ terms. Each minister would be given a cash budget within which to keep his expenditure. Since the spring of 1980 we had been considering how this should be done and I discussed it with Geoffrey Howe and others in the Treasury over lunch there on 28 January 1981. It would have seemed distinctly odd to any company finance director, or housewife for that matter, how the government in those days used to work out its annual expenditure. The Chancellor would make his assessment of government revenue in cash, but spending decisions were made in terms of the volume of services it was desired to deliver, and denominated in what commentators used to call ‘funny money’ — neither the prices at the time of the spending decision, nor those when the money was actually spent. The result was that the Treasury never knew until far too late in the day the cash consequences of decisions on spending. Cash limits on some government spending had already been introduced, but paradoxically, this increased the confusion as spending which had been planned in volume ran up against them. From now on everything was to be planned in cash — though, of course, departments would still have to estimate the volume of services which their cash limits would enable them to afford. This imposed the sort of financial discipline on government departments with which the private sector had to deal. The ‘cash limits’ approach had the valuable consequence of bearing down on real public expenditure. It also gave departments a much stronger interest in seeking out the most efficient way of delivering the services expected of them.
Unsurprisingly, however, it was not the adoption of cash planning which grabbed the budget headlines, but rather the severity of the tax increases. The budget was very unpopular. But some of the leader columns were more favourable than the headlines and no one could doubt that this was a coherent budget which had required a good deal of courage to introduce. In the eyes of our critics, of course, the strategy was fundamentally wrong. If you believed, as they did, that increased government borrowing was the way to get out of recession, then our approach