Steve Richards: Higher taxes won't be any use until New Labour gives some power away

After four and a half years in power, the Government is nervously challenging its crippling inheritance.

After four and a half years in power, the Government is nervously challenging its crippling inheritance. Taking a deep breath, hiding behind an independent report, unable to utter the words explicitly, the Prime Minister and the Chancellor are preparing to make the case for higher taxes. But the low-tax economy was only one element of the Thatcherite settlement. Even now, as it finally dares to make the case for higher taxes, the Government is still in awe of the other great Thatcherite legacy. Following Mrs Thatcher's lead it does not trust any other body, elected or otherwise, to make a sensible decision.

Mrs Thatcher had no faith in anyone beyond a few selected ministers and advisers. As a result she gradually demolished local democracy. Instead, she and her allies would make decisions on behalf of distant towns. By the late 1980s her Environment Secretary, Nicholas Ridley, was busy deciding whether a housing estate in Wolverhampton deserved a lick of paint. Had he stayed in post he would probably have travelled to the East Midlands and done the decorating himself. Not surprisingly, this preposterous centralisation of power did not result in better local services. Incompetent councils were replaced by something even worse: manic, central-core paralysis.

Take the issue of Care in the Community for the physically handicapped and mentally ill, which became front-page news in the late 1980s. The system was such a chaotic shambles that Mrs Thatcher called upon her own trusted special health adviser to recommend a solution. To her horror he concluded that the only agency capable of co-ordination in this field was the local authority. That was like telling Mrs Thatcher that the EU in Brussels should be put in charge of British industrial relations. The solution was unacceptable to her. Cabinet committees met to consider other options and discovered that there were none. So nothing happened, an option Mrs Thatcher preferred to devolving power. The plight of the homeless in the late 1980s was also a cause of much ministerial concern. The bed and breakfast system was inefficient, ridiculously expensive and cruel. The Audit Commission – established by Mrs Thatcher – had an answer. Local authorities were best placed to make alternative provision. Help! Once again, she opted to do nothing.

The current Government came to power promising to do something about all of this, although the pledge was typically ambiguous. Before the 1997 election Tony Blair told local authorities: "We will give councils more power as long as they use the power properly." Mr Blair would decide what defined a proper use of power. Given the centralising tendencies of the Government, he evidently fears an improper use of power anywhere outside Whitehall or, to be more specific, Downing Street.

We have become so accustomed to this that any logical propositions sound recklessly daring. Last week the Secretary of State for Transport, Stephen Byers, suggested that he might transfer responsibility for the financial structure of London Underground to the capital's Mayor. Help! Mr Byers had to rush to the microphones to explain that he was still committed to the Government's policy. He still wanted to impose a convoluted, incomprehensible Public Private Partnership on the Mayor, who would then be responsible for running it.

Phew! That's all right then. For one moment of madness it looked as if the Mayor responsible for running Tube trains would be given some power over how they should be run.

On a range of issues the Government has adopted the Thatcherite approach, proclaiming that local initiatives are wonderful – as long as it approves of them. So ministers proclaim that some powers within the NHS are being devolved, but only within rigid parameters defined and redefined by Downing Street and the Treasury. The Government is giving the Regional Development Agencies room to breathe, but only if their lungs meet with Treasury approval.

As the Thatcher governments discovered, two consequences arise from this approach. First, ministers becomes almost hysterically busy as they assess ways of improving conditions from Sunderland to Bournemouth. Currently we have the Downing Street Delivery Unit, the Treasury imposing its own performance targets, a Cabinet Office with a Minister for Delivery and a Deputy Prime Minister who is, presumably, the Super-Minister for Delivery. All commission separate, independent reports on policies. Other departments in Whitehall commission their own reports which they hope will meet with approval when they are passed to the various delivery units evolving in Downing Street and the Treasury. Everyone involved is neurotically exhausted and frustrated.

They are frustrated because of the second consequence of excessive centralisation. Quite often nothing happens. Buttons are pressed and there are no great differences. The waiting lists grow, the trains are still hopeless, schools lack teachers. Mrs Thatcher sometimes preferred nothing to happen, rather than give up any power. The difference between then and now is that this Government almost wants to act.

When David Miliband was head of the Downing Street Policy Unit, he said publicly that a revival of municipal power had to be one of the Government's defining themes. Occasionally he would present Mr Blair with books on powerful cities in 19th-century Britain. (I have not been able to establish whether Mr Blair read them.) Mr Byers has performed a U-turn and now backs the idea of a regional assembly for the north-east. Peter Mandelson has had a similar conversion. Mr Brown sets up long seminars on how the regions and local communities can have more of an influence on their own futures.

I would not be surprised if responsibility for the financial structure of the Underground were indeed transferred to the Mayor of London at some point. I suspect that even Mr Brown has concluded tentatively that the current division of responsibilities between the puny mayoral office and the mighty Government is unsustainable for much longer.

The Underground is the latest example of what happens when central Government tries to do too much. Nothing happens. Four and a half years since the election the state of the Tube is still appalling. In contrast, the Mayor has been given some powers to improve the buses and, without central government interfering, the buses have got a little better.

While it recognises the problem of interference, the Government cannot bring itself to let go. It has grappled with the thornier issue of taxation before addressing Mrs Thatcher's other legacy, the centralised state. But higher taxes will not achieve much until it also gives up some power.