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Splits have opened in the Conservative Party since Peter Lilley declared there were 'limits' to the free market in improving health, writes Patrick Butler

The Conservative Party may claim that deputy leader Peter Lilley's infamous Rab Butler memorial lecture does not mean it is preparing to drop its Thatcherite commitment to a market-driven NHS.

But the uproar over his comment that 'there are distinct limits to applying the free-market paradigm in the public services' suggests that many Conservative activists, backbenchers - and even some of the shadow cabinet - are not so sure.

Indeed, they fear that Mr Lilley's pronouncements - and those of party leader William Hague - are a signal that the Iron Lady's legacy to the public services is about to be dumped.

Shadow health secretary Ann Widdecombe - at her most feisty - held a press conference last week to attempt to allay those fears by re-emphasising her commitment to key articles of Conservative health policy, including a 'free at the point of delivery' NHS, as well as market mechanisms, private finance, freedom and choice.

Sitting alongside her, shadow chancellor Francis Maude declared that the Conservatives were committed to finding additional cash for the NHS from private resources, on top of increased state funding.

Party chair Michael Ancram declared that the party still had a 'passion' for markets.

Despite this display of unity, however, Mr Lilley's speech is a sign that while Ms Widdecombe's agenda has made the running so far, Conservative health policy - or at least who controls it and its presentation - is still up for grabs.

Having consulted their focus groups, the pragmatic Lilley-Hague axis may be looking to rein in the right wing on health.

'Most Conservatives have always accepted that the public services are intrinsically unsuited to replacement by universal delivery through the free market,' said Mr Lilley in his speech.

It is hardly a recent crack in the ideological foundations. Conservative fundamentalists, for whom Mr Lilley's comments were sacrilegious, and Tory pragmatists, for whom Mr Lilley's words marked a welcome display of electoral common sense, have warred for years.

The fundamentalists argue that the pragmatists effectively abandoned the 'free-market paradigm' in the NHS as long ago as 1992, when John Major's government diluted the market reforms.

In this sense, Mr Lilley's speech might be seen as an eloquent statement of neo-Bottomleyite pragmatism, which holds that although free markets cannot work in the public sector, the lessons of the private sector can be successfully applied.

More practically, he argued that unless the Conservatives 'openly and emphatically accept that the free market has only a limited role in improving public services like health', their 'supposedly hostile attitude' to the welfare state would continue to be the party's electoral 'Achilles' heel'.

He said the public has never trusted the Conservatives because

however much support and money they put into the NHS, they are always perceived to be a party whose role was 'the application and extension of the free-market paradigm', and thus whose ultimate ambition was thought be privatisation.

The image, if not the substance, he suggested, was all wrong. Using business jargon only made people suspect 'that we were planning to convert public services into profit-making business'.

He said: '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.'

The party approach should be 'not a U-turn but a return to broader Conservative values'.

He added: 'Recognition of the limits of free markets in this sphere (should not) stop us from learning lessons from private sector practice... where it can be transferred to publicly financed services.

The free market, he concludes, has only a 'limited role' to play in the welfare state. 'We must stop behaving as if we are only true to ourselves when we are applying the free-market paradigm to anything or everything.'

Mr Hague, speaking that night at a dinner for Baroness Thatcher, said: 'It is a great mistake to think that all the Conservatives have to offer is solutions based on free-markets. If we think that, we would have little to say (about) our public services where there are limits to the role of the free market.'

The dismay on the right is palpable. One right-winger told HSJ: 'What Lilley is saying is there should be a public sector monopoly. That's extraordinary. Not even Tony Blair and Alan Milburn say that.'

Another suggests that Conservative Central Office is in thrall to focus groups. 'The fear was that private polling for local government (elections) was bad, and they were trying to get cuddly.

'They want to be telling the public the truth and waiting for the public to catch up. If you are going to be out of power for a decade, a principled view is the best way forward.

'But I suspect Central Office think it might win a few seats at the next election.' See politics, page 15.