Margaret Thatcher's role in plan to dismantle welfare state revealed

Margaret Thatcher and her chancellor Sir Geoffrey Howe were behind a politically toxic plan in 1982 to dismantle the welfare state, newly released Downing Street documents show. She later attempted to distance herself from the plans after what was described as a "riot" in her cabinet.

The proposals considered by her cabinet included compulsory charges for schooling and a massive scaling back of other public services. "This would of course mean the end of the National Health Service," declared a confidential cabinet memorandum by the Central Policy Review Staff in September 1982, released by the National Archives on Friday under the 30-year rule.

Nigel Lawson, then the energy secretary, said the report by the official thinktank on long-term public spending options caused "the nearest thing to a cabinet riot in the history of the Thatcher administration".

In her memoirs, Thatcher said: "I was horrified when I saw this paper. I pointed out that it would almost certainly be leaked and give a totally false impression … It was all a total nonsense," claiming the proposals were never seriously considered by her or her ministers.

But the 1982 cabinet papers show the politically explosive paper was discussed at a special half-day extended cabinet discussion on 9 September that year. They show that Thatcher and Howe had been encouraging the CPRS thinktank to come up with such long-term radical options since February that year and that Howe continued to defend them even after the cabinet "riot" described by Lawson.

As part of that revolt a watered-down version of the CPRS paper was leaked to the press, provoking Labour accusations that Thatcher had a secret agenda to dismantle the postwar welfare state – a charge that continues to echo down the years.

Thatcher responded by famously promising in her 1982 Conservative party conference speech in Brighton that the NHS was "safe with us" – a claim that every Conservative leader since has felt compelled to repeat.

But the papers show the revised version of the CPRS paper that was leaked was mild in comparison with the original set of proposals – and that Thatcher's horror had more to do with the prospect of a leak than with the nature of its contents.

The leaked version proposed introducing education vouchers, ending the state funding of higher education, freezing welfare benefits and an insurance-based health service.

But as John Sparrow, the merchant banker Thatcher had appointed to head the CPRS, complained to her when she demanded a more circumspect version, the revised paper "loses a large part of its punch".

The original version went a lot further, including compulsory charges for schooling alongside a "drastic reduction in resources going to the public sector", full-cost university tuition fees and breaking the link that then existed between welfare benefits and prices.

But the earlier version's most controversial privatisation proposal concerned the health service: "It is therefore worth considering aiming over a period to end the state provision of healthcare for the bulk of the population, so that medical facilities would be privately owned and run, and those seeking healthcare would be required to pay for it.

"Those who could not afford to pay would then have their charges met by the state, via some form of rebating or reimbursement."

The only exceptions might be the long-term institutional care of the "mentally handicapped, elderly" who "clearly could not afford to pay".

One of those who worked on the CPRS paper was David Cameron's current advisor on crime and policing, Lord Wasserman. The cabinet papers show Gordon Wasserman, who was on the thinktank's staff from 1981-83, proposed cutting 25% of state school teachers in a background paper for the education section.

The cabinet papers show that far from being some kind of surprise freelance operation, the CPRS report was encouraged and commissioned by Thatcher and Howe. As early as February, Howe was pressing for a wide-ranging discussion on the future size and shape of the public sector. On 28 July, the Downing Street papers show that he told Thatcher: "We should not be inhibited at this stage by such considerations as … the alleged impossibility of change. A discussion of this kind would pave the way for some major strategic decisions affecting our programmes as a government for the next parliament."

Howe proposed a Treasury paper also be discussed at the special cabinet meeting on 9 September: "The PM agrees too that it would be useful if there were a CPRS paper pointing up some of the longer-term options open to us." Thatcher said they should be "vigorously explored".

On the eve of the meeting, the cabinet secretary, Sir Robert Armstrong, told Thatcher that Howe had suggested "and you agreed" that the CPRS should be asked to prepare a paper outlining possible ways of making significant changes to the scale and pattern of public expenditure.

Armstrong said the value of the meeting lay in the chance for the cabinet to "lift its eyes from current preoccupations and to focus on what they like the shape of things in this country to be at the end of the decade.

"At the extreme end, some may argue that any of the radical proposals discussed by the CPRS would be even more unacceptable than the prospect of unchanged policies. But the meeting will have failed in its purpose if ministers are not willing at least to contemplate the possibility of radical action," said Armstrong, who went on to recommend that all options should be remitted for further study.