Hatton joined the rate-capping rebellion in 1985 as the council refused to make a rate increase. In June, the council changed tactics and set an illegal "deficit budget" which committed it to spending £30 million more than its income, claiming that the excess represented grant "stolen" by central government. Once adopted by the Liverpool District Labour Party and 49 councillors, this policy catapulted Hatton and the city council into massive media attention and conflict with the then Conservative government. In 1986, Hatton and 46 other councillors were subsequently found to have committed wilful misconduct by the district auditor, ordered to repay the costs incurred by the council due to the failure to set a rate as a surcharge, and disqualified from office.