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The nature of the mandate that Heath had received was disputed, even at the time. Shortly before the election was called, his shadow cabinet had issued a policy document from a conference at the Selsdon Park Hotel which appeared surprisingly rightwing. Harold Wilson had regarded it as a vote loser and had dubbed it Selsdon Man in the attempt to portray it as paleolithically reactionary. Heath's government suffered an early blow with the death of Chancellor of the Exchequer Iain Macleod on July 20 1970. The economic policy changes on which Heath was resolved (including a significant shift from direct to indirect taxation) were not fully implemented until 1972, by which time he was engaged in the attempt to strengthen legal constraints on trade unions still more tightly than had been proposed under the abortive reforms of Wilson's government. The resulting polarised climate of industrial relations led to the downfall of his government.
Heath's government made only modest efforts to curtail welfare spending, though the squeeze in the education budget resulted in Margaret Thatcher's choosing to complete the process of phasing out free school milk rather than cutting back spending on the Open University. The contrast with the later actions of Thatcher's own government resulted in Heath acquiring a strongly humanitarian image.
In Northern Ireland the Heath government pushed for a peaceful settlement with the democratic political parties. The Sunningdale Agreement was produced but fiercely repudiated by many Unionists and the official Ulster Unionist Party ceased to support the Conservatives at Westminster. This was to contribute to Heath's eventual fall from power.
Heath's major achievement as prime minister was to take Britain into the European Community in 1973. Meanwhile, on the domestic front, galloping inflation led him into confrontation with some of the most powerful trade unions, and energy shortages resulted in much of the country's industry working a three-day week to conserve power. In an attempt to bolster his government, Heath called an election for February 28 1974. The result was inconclusive: the Conservative Party received a plurality of votes cast, but the Labour Party gained a plurality of seats due to the Ulster Unionist MPs refusing to support the Conservatives. Heath began negotations with leaders of the Liberal Party to form a coalition, but, when these failed, resigned as Prime Minister and was replaced by Harold Wilson who formed a minority government. Wilson was confirmed in office, with a wafer thin majority, in a second election in October of the same year.
Between the two general elections a Conservative Party discussion group, the Centre for Policy Studies, began to formulate a right wing diagnosis of the failures of Heath's government. Initially this trend was spearheaded by Sir Keith Joseph and, although Margaret Thatcher was associated with the CPS she was seen as a potential go between by Heath's lieutenant James Prior.
Having lost (at least in terms of parliamentary seats) three out of four general elections into which he had led his party, Heath came to be seen as a liability by many conservative MPs, party activists and by editors of newspapers sympathetic to the party. Among the wider electorate he attracted more sympathy, partly because of public statements he had made hinting at his willingness to consider the idea of serving in a government of national unity.
Heath resolved to remain as Conservative leader and, initially, it appeared that, by calling on the loyalty of his front bench colleagues, he might prevail. At this point the Conservative leadership rules merely allowed for an election to fill a vacancy but contained no provision for a sitting leader to either seek a fresh mandate or be challenged. In late 1974 Heath came under massive pressure to concede a review of the rules. It was agreed to establish a commission to propose necessary changes and that Heath would put himself up for election under the new rules. Initially Heath expected to be comfortably re-elected as there was no clear challenger to him after Enoch Powell had left the party and Keith Joseph had ruled himself out following controversial statemens on birth control. However, the determination of Airey Neave acting on behalf of disgruntled back bench MPs to seek any potential serious challenger to Heath, combined with the resolution of Margaret Thatcher that someone adhering to the CPS line should put their case to the parliamentary party led to her declaring herself a candidate in a leadership challenge.
As the rules of the leadership contest permitted new candidates to enter the fray in a second round of voting should the leader not be confirmed by a large enough majority, Thatcher's challenge was considered that of a stalking horse. Airey Neave as Thatcher's campaign manager was later accused of having deliberately understated her support in order to attract waverers away from Heath who lost the first ballot by 119 votes to 130 on February 4, 1975. Although Heath then withdrew from the contest, it turned out to be too late for any of his allies from his own wing of the party to overhaul Thatcher's lead. His favoured candidate, William Whitelaw, lost to Thatcher by 79 votes to 146 a week later.
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