Rt Hon Lord Lilley

    Let me begin by setting the scene.

    The Labour Party has won a landslide victory.

    Despite its enormous achievements the Conservative Party is associated in the public mind with selfishness, greed and high unemployment.

    The Left seems in the ascendant at home and abroad.

    Even those of their policies which are unpopular are widely thought to be inevitable.

    Conservatives seem to be on the intellectual back foot.

    Few commentators give us much chance of winning the next election.

    I am describing the outlook for the Conservative Party, not now, but after Labour?s stunning victory in 1945.

    It was then that RAB Butler was charged with renewing Conservative policy.

    Against all the odds the Conservatives swept away Labour?s huge majority in 1950 and were soon back in power.

    Clearly we can learn a lot from that period and above all from RAB Butler?s success in renewing our policy stance.

    Tories and the Welfare State

    One of the Conservative Party?s first tasks was to reconcile the Welfare State and Conservatism in the public mind.

    Butler was the ideal man to do that since he was the architect of one of its

    pillars – the 1944 Education Act.

    Yet half a century later the public?s greatest area of unease about Conservatives is our supposedly hostile attitude to the Welfare State and particularly to Health and Education.

    That remains our Achilles heel.

    So Conservatives today must renew public confidence in our commitment to the Welfare State – just as RAB did then.

    But we will only do so if we openly and emphatically accept that the free market has only a limited role in improving public services like health, education and welfare.

    Let me explain why.

    For more than half of the fifty years since the Welfare State was established Conservatives have been in government.

    They have had to run the welfare state and in practice they have assiduously preserved, expanded, and improved it.

    To coin a phrase – it has been safe in our hands.

    In fact Conservative governments have very consistently increased spending on both health and education more rapidly than have Labour governments.

    For example spending on health rose by an average of 4% p.a. during Conservative years as against only 3.2% during Labour years.

    Yet the clear message of Listening to Britain is that improving the public services is a very high priority for most people but they think it is a low priority for us.

    And all the opinion polling evidence suggests that the electors still distrust our intentions towards the public services.

    You may recall how the great F.E. Smith was once explaining at somewhat tedious length how the facts of a case could be reconciled with his client?s innocence when the judge interrupted and asked ?Mr Smith, isn?t your client aware of the legal maxim res ipsae loquitur ??

    To which F. E. replied ?Your Honour, in the little village in the mountains of Connemara from which my client comes, they speak of little else!?

    I need not explain for this learned audience that the Latin maxim means ?facts speak for themselves?.

    You understand it.

    But I hope you don?t believe it.

    There is no more disastrously misleading maxim for a politician.

    If only facts did speak for themselves.

    If only actions did speak louder than words.

    But facts are dumb.

    And actions are silent.

    It is by words that we communicate.

    Facts and actions only gain meaning through the words we and others use, or fail to use, to explain them.

    What we and our opponents say about the welfare state is as important as what we have done in the past.

    Part of the reason electors ignore our positive record on improving the public services is decades of Labour black propaganda.

    Year in year out they have asserted that

    ?Tories don?t care about the state health, education or welfare system. They all have private medicine, schools and wealth to rely on. So all they want to do is run it down, sell it off or force others to rely on the private sector too.?

    It is nonsense of course.

    In fact most Conservative voters like most of the general population, rely on the state system and all of us have a material as well as moral interest in its success.

    As it happens William Hague will be the first Prime Minister to have been educated in a comprehensive school.

    And his three Conservative predecessors were all educated in the state system.

    By contrast, Tony Blair is the second Labour Prime Minister and third Labour Party leader to come from a famous independent school.

    But it is not just because of Labour?s constant propaganda that the public ignores all this.

    Their unease about our attitude to the public services has, I believe, been reinforced by the way many Conservatives talk and don?t talk about the welfare state.

    Too often Conservatives? intellectual body language has conveyed a palpable feeling of guilt about support for the public services.

    For fifty years we have expanded, improved and poured public money into the welfare services.

    Yet we have been strangely uncomfortable about admitting that we were doing so.

    And even more uneasy about justifying our actions.

    Why this reticence?

    I believe it is because many Conservatives came to assume that the primary or even only role of Conservatism is the application and extension of the free market paradigm.

    Free markets are seen as not just part of Conservatism but the whole of it.

    This blighted our approach to policy in this area in three ways.

    First, where the free market paradigm cannot be applied Conservatives are assumed to have nothing to say about it.

    Most Conservatives have always accepted that the public services are intrinsically unsuited to replacement by universal delivery through the free market.

    Increasingly that has been assumed to mean we have nothing distinctive to say about them.

    So too many Conservatives say little or nothing about the welfare state and thereby send out a subliminal message that we are simply not interested in it.

    Yet health and education are precisely the sort of subjects people talk about around their kitchen tables.

    From now on we must talk about them too and prove our commitment by making policies to improve these key public services a priority in our policy renewal process.

    A second consequence of assuming Conservatism was exclusively about market solutions was the dressing up of often perfectly sensible reforms in the language of business or economics.

    Patients and pupils were re-labelled as customers and clients.

    It is no longer sufficient to call a plan a plan.

    It has to be called a ?business plan?.

    Hospitals and schools become ?plant? and ?assets? and so on.

    Often the initiative came from the civil service assuming this reflected the spirit of a free market administration.

    I remember the bewilderment of officials when, despite my reputation as a free marketeer, I refused to call benefit claimants customers – the term they had adopted in a desire to please.

    Whoever initiated it, the effect of using business language was to reinforce people?s concern that we were planning to convert public services into profit making businesses.

    Third and most damaging, some Conservatives assume that though no-one has yet even suggested a beneficial way of bringing the free market into the provision of public services was due to lack of free market enthusiasm or sheer electoral cowardice.

    That sort of talk is easily distorted by our opponents to suggest that we nurse some nefarious plans to privatise health, education and almost everything else – when in fact no such plans have to my knowledge ever been formulated.

    These negative messages are the direct result of equating Conservatism with free marketeering and nothing else.

    Unless and until we are prepared to accept that there is more to life and more to Conservatism than defending and extending the free market we will always be on the intellectual back foot where the public services are concerned.

    I am not suggesting that we should give up or water down our belief in the market economy.

    If I have any claim to fame, or at least to consistency, it is to have been a prime exponent of the free market paradigm even when it was out of fashion in the 1960s and 70s.

    I yield to no-one in championing the virtues of free markets on philosophical, moral and practical grounds.

    Freedom is good in itself, it encourages personal responsibility and it promotes prosperity more effectively than any other system known to mankind.

    Moreover, the revival of belief in the market economy and the vigorous application of free market principles in the 1980s were hugely successful.

    But that is not a reason for talking as, dare I say it, some of the late converts do, as if the free market was not simply part of the Conservative philosophy but the whole of it.

    Of course the free market is not our sole belief.

    It never has been.

    And it never will be.

    It is significant that one of the high priests of the free market (about whom I am by coincidence giving another lecture on Friday) firmly concluded that public services, particularly health, were intrinsically unsuited to provision on a pure market basis.

    I want to argue in the rest of this lecture three propositions:

    ? that there are distinct limits to applying the free market paradigm in the public services,

    ? that there are many other values apart from free markets which Conservatives believe in which are applicable to the public services,

    ? that there is a huge task for Conservatives in particular in improving the welfare state.

    Conservatives can and must become the champions of better public services.

    Limits to the free market

    Only the anarcho-capitalists, a little known sect of whom there are probably only a handful at liberty, believe the model of autonomous individuals interacting by voluntary exchange without the intervention of the state can be applied to every aspect of human affairs.

    Their attempts to apply this market model to defense, law, policing, planning, etc provide intellectual amusement to those who like to see people address an impossible challenge.

    But no-one else is convinced that such tasks can be undertaken other than by the state.

    Certainly no Tory feels in the least uncomfortable about supporting the role of the state in defence, law and order, and protecting the environment.

    We should be equally willing to accept that the state must play the dominant role in financing the provision of health and education.

    When I was in the Treasury I often found myself battling with the rigorous minds of Treasury mandarins.

    They would argue that my plan was impracticable.

    I would show that it worked perfectly in practice elsewhere.

    They would reply : ?Yes, Minister. It may work in practice. But it won?t work in theory?

    Some Conservatives seem to have the opposite mind set.

    We all accept, and have done for fifty years, that the public services cannot be left to the free market in practice.

    But some seem to believe that may be they could in theory.

    So it may be helpful to spell out why there are distinct limits to market processes in these areas.

    The underlying reason is that we have obligations to others.

    And, of its very nature, fulfilling an obligation involves a transfer from those who have to those who have not; whereas the market is about mutually beneficial exchanges between self-reliant individuals.

    Tories more than anyone accept that we have obligations to others.

    As I said in my lecture to the CPF winter school ?a sense of obligation is the most fundamental Tory value of all?.

    We believe that the healthy have an obligation to help the sick; the rich to support the poor; the strong to aid the weak; the knowledgeable to inform the ignorant; and each generation has an obligation to preserve, enhance and pass on our heritage to the next generation.

    Because Conservatives value these public services, accept our obligation to provide them and recognise that the state must have a central role in financing them, we want to expand their provision as the public finances and economic growth permit.

    There is no logical reason why any Conservative would want to restrict provision of health care, education or welfare below what the general public want and are genuinely prepared to pay for.

    Within that rising total William Hague has committed us to ensuring that a higher proportion of money spent on health and education goes on professional care and teaching children.

    In fulfilling those obligations universal funding by the taxpayer is essential.

    It is important that we recognise that fact.

    In some public services there may be scope for introducing diversity and choice among providers of the service and for encouraging public/private partnership.

    But we must accept that the taxpayer will pay.

    ?Ah!? say the market purists, ?that conclusion is based on the premise that the market cannot transfer resources from the fortunate to the unfortunate. But there is an exception. The market has developed insurance to do just that.?

    That is true.

    We insure our houses against fire.

    The unfortunate few whose houses are burnt down are then compensated out of the premiums paid by the fortunate majority who did not suffer a fire.

    That is an excellent mechanism.

    Where it can be effective we should encourage it – even making insurance compulsory if necessary as we do for car owners.

    But there are limits to the applicability of insurance.


    Health might at first sight seem well suited to universal financing via private insurance.

    Our obligation is to transfer help from the healthy to the sick: could not compulsory insurance, subsidised where necessary, effectively achieve that?

    There are two problems.

    Insurance will only work where no-one knows who will suffer the risk – in this case the risk of ill health.

    But some people are chronically sick and are therefore virtually uninsurable.

    Others are identifiable, because of their past medical history, as more prone to sickness than the average and will therefore face higher premiums.

    Moreover, ill health is negatively correlated with income.

    That is to say the people with worse health records, who will therefore face the highest premia, tend to have the lowest incomes.

    If insurance were made compulsory for those in work they would face the greatest disincentive to work.

    In theory the state could even out these inequalities by subsidising the premia of the least healthy.

    In practice that would mean the state either offering an open-ended subsidy to insurance companies or trying to double guess the true risk each citizen faces.

    That is something the state is simply not equipped to do.

    The only option left is to require all risks to be pooled and setting the same basic premium for everyone regardless of their health record – while helping those on low incomes to pay the cost by charging more to those on high incomes.

    Well, hey presto! We have reinvented the way we finance the National Health Service.

    We all pay in to a common fund through our taxes an amount unrelated to our state of health but related to our income.

    Doubtless the architects of the NHS could have made the underlying insurance nature of the NHS more self-evident.

    That would have had the advantage of separating out the financing of health from the provision of health care: a step we took when we introduced the purchaser/provider split in the late 1980s.

    Now that that change has been made there is no substantive reason for going through the huge upheaval needed just to make the underlying insurance element, which is already inherent in the NHS, more transparent.

    Given that the state has to be involved in the financing of health care much as at present, does it also need to be involved in the provision of care?

    Could not patients be allowed to choose from a range of medical suppliers, including private doctors and hospitals, so long as everyone can rely on the state to pay the bill?

    However, health care is unlike most other services in one crucial respect.

    We depend on the doctor for advice as to whether we need treatment as well as for the treatment itself.

    If doctors and hospitals were motivated by a desire for profit and they knew their patients were backed by the taxpayers? open cheque book they would have a perverse incentive to err on the side of prescribing inessential and costly treatments.

    Moreover, people who are ill cannot be expected to act as cautious ?consumers?.

    In the USA the level of health spending dwarfs that in this country but it is far from certain that all the extra spending results in improved health and quality of life.

    Indeed it is said that up to half of all health spending is incurred in the last few months of patients? lives.

    Clearly it fails to prolong their lives significantly.

    Maybe in some cases unnecessary medical intervention is even the cause of death.

    Certainly excessive and ineffectual treatment can only add to anguish and destroy the dignity of the closing chapter of peoples? earthly lives.

    In this country people feel – and I share their view- that if they are ill they should have access to disinterested advice and first class treatment.

    The system we have developed in this country provides that as well as any in the world.

    Our task is to improve, strengthen and develop it.


    Social security is explicitly an insurance-based system.

    And the state system has always been designed to work in partnership with private saving and insurance schemes.

    I sought to develop this partnership during my period as Secretary of State for Social Security.

    But even here I found that there is a limit on the scope for involving private insurance similar to that which exists in health.

    Wherever the risk against which insurance is needed is inversely correlated with income it is difficult to rely on private insurance.

    For example the risk of being unemployed and the risk of needing long term incapacity benefit are both greater the lower peoples? incomes in work.

    So the premia they would have to pay would be higher the lower their incomes.

    If all those in work were compelled to insure individually against these risks those with low earning power might well find that work no longer paid.

    That leaves some scope for private provision even against those risks.

    For example, anyone wanting a level of income above the standard benefit level can and should provide it themselves – which is why we abolished earnings related unemployment pay and I did the same for the earnings related element of incapacity benefit.

    Also it is feasible to expect those who take out or supply a mortgage themselves to insure against the risk of a period off work through job loss or sickness since the mortgage company will itself have assessed them as reasonable risks.

    There is no adverse correlation between people?s earnings and the premiums they require to fund a pension.

    So saving for retirement is an area particularly ripe for private provision to supplement that provided by the state.

    And the investment of people?s savings is something best left to the private sector: the state is not good at selecting investments and would in effect be nationalising industry by the back door if it controlled the pension funds.

    That is why I proposed that the basic pension guaranteed by the state should be reinforced by enabling everyone in the new generation to build up their own Basic Pension Plus pension fund.

    Another area where we need further creative thought is insurance against need for residential and nursing care in old age.

    This is an intrinsically insurable risk.

    Hence our proposals for a partnership scheme between state and individual to encourage private insurance – avoiding the need for people to sell up the homes they had planned to bequeath to their heirs.


    We have an obligation to transmit to the next generation the heritage of learning and culture which we have inherited and developed.

    And we have a common interest in ensuring that the rising generation develop their talents to the full so that they can contribute fully to society and support themselves.

    That requires compulsory schooling which inevitably means schooling must be available free (i.e. taxpayer financed).

    That is not at issue (though all parties now accept that since higher education is not universal there is some scope for loans and even fees).

    In education, unlike health, there is much more scope for policy debate about what type of education is provided – academic versus vocational, different teaching methods, schools with different ethos, specialisation in different subjects, etc.

    That in turn means there is scope for choice, diversity and specialisation.

    We began introducing policies to encourage such choice and diversity within a state funded system with considerable benefit.

    Alas, some of that is being reversed by this Labour government – the abolition of grant maintained schools, ending assisted places, balloting to close grammar schools etc.

    So we will need to restore the momentum for increasing choice and diversity.

    We need to recognise that the principal failing of the British educational system – which has been a persistent feature for much of this century – is the level attained by the less academic two thirds of our pupils.

    That stands out clearly from international comparisons.

    Broadly the A-level stream does pretty well by international standards.

    That is not a reason for complacency – we need to raise their attainments too.

    But our top priority must be to find ways of improving the performance of the less academic majority.

    There is a general presupposition that choice primarily helps the more able, academic children.

    In fact the East Harlem experiment showed that it could be of benefit to the most disadvantaged families in one of the most deprived areas of New York.

    The test we will impose on policy ideas is – can they help the least well off and most disadvantaged people, not just the most able.


    The fact that there are distinct limits to the application of market mechanisms in the public sector does not mean that Tories have correspondingly little to say.

    On the contrary.

    Belief in the free market has only ever been a part of Conservatism.

    William Hague has recently been spelling out other Conservative values in a series of important speeches.

    The approach I am proposing is not a U-turn but a return to those broader Conservative values.

    We need to apply those values to help us to devise ways of improving the public services.

    For example, Conservatives believe decisions should, where possible, be made locally.

    The Left instinctively prefers to centralise and this is one of the most centralising Labour governments we have ever seen.

    Conservatives believe in the value of voluntary activity: we should be looking for ways to enhance the role of voluntary organisations in social welfare provision.

    The Left by contrast is deeply suspicious of anything not directly under Whitehall control.

    Conservatives respect professional values.

    Whereas the Left prefer bureaucratic processes.

    We believe in ?trusting the people? which in the context of the public services means trusting the people at the sharp end of providing those services.

    We should recognise that the people who know most about health care are doctors and nurses not managers and administrators.

    And it is teachers who know most about education not bureaucrats – still less politicians.

    The Conservative tradition of pragmatism means we believe in judging by results whereas the left wing tradition is to apply fashionable theory.

    There is plenty of scope to apply our principles fruitfully in developing ways of improving the public services.

    Nor should recognition of the limits of free markets in this sphere stop us from learning lessons from private sector practice or economic analysis where it can be transferred to publicly financed services.

    Using those lessons, Conservative reforms helped to shape a new public service ethic.

    In place of the arrogance, distrust and inflexibility which had come to characterise the public sector in the 1960s and 1970s, we gave civil servants operational freedoms by creating Next Step agencies, we offered family doctors budgetary freedoms through GP fundholding and we allowed teachers and parents freedom from red tape and local council dogma through GM schools.

    We did all these things for a reason.

    We believed that public services would be better if those serving the public were allowed to bring to bear their professional judgement, if they were allowed to make more of a difference in the lives of the people they served.

    The result was that doctors? surgeries, schools and former outposts like the Passport Agency and the DVLA became more business-like even though they were not run like businesses.

    The Purchaser/Provider split is an example of learning from the market which has been successful in enhancing the efficiency of a wide range of non market organisations.


    So it is absurd to suggest that because the role of the free market in providing public services is limited Conservatives have little or nothing valid to say about them.

    They exist because of an obligation which we wholeheartedly accept.

    So we must demonstrate our total commitment to improving the services on which the vast majority of us depend.

    First of all we should be applying our minds to continuous incremental improvement.

    In the market sector competition drives that process.

    That applies to only a limited extent in the public sector which makes it all the more important for all those involved in developing policy to generate ideas for small concrete improvements and not just major systemic changes.

    We must find ways of delegating decision making to local levels.

    We must recognise that teachers, doctors and nurses know most about education and health care so we must learn from them, empower them and enhance their prestige.

    We must refine, simplify and extend testing and the dissemination of information so that public services can be judged by their results.

    We must respect professional pride and harness it to improve standards rather than closing ranks against criticism.

    We must continue to apply the lessons of the private sector wherever it is relevant even though market mechanisms are inappropriate.

    All this will only be possible if we stop identifying Conservatism uniquely with market economics.

    That is simply part of what we believe in – not by any stretch of the imagination all of it.

    So we must stop behaving as if we are only true to ourselves when we are applying the free market paradigm to anything or everything.

    It has only a limited role to play in the welfare state.

    But Conservatives have a major role.

    It is crucial that we fulfill that role because those services are vital to the lives of the people we represent.

    And Conservative principles can help generate the improvements that are necessary and possible.