§ But before coming to my plans for taxation reform I must turn to the more immediate economic problems which beset our nation. Two problems, above all, command attention at the present time, inflation and unemployment: a new and, in many ways, a baffling combination of evils.
§ This Government inherited a most serious problem of cost inflation. Throughout the whole of the post-war period we in the United Kingdom, in common with almost all other western industrialised countries, have had the experience of incomes rising faster than national productivity and we have, therefore, suffered from some degree of price inflation for over 20 years. But whereas the average rate of rise in money earnings in the decade 1955–65 was under 1361 6 per cent. per annum, and under 6½ per cent. in the period 1965–68, there was a sharp change of trend towards the end of 1969, and by the end of last year average earnings were 14 per cent. above the level of a year earlier. At the same time retail prices had risen by 8 per cent. over the level at the end of the previous year.
§ Cost inflation is a canker which is eating away at our whole economic and social health. It is causing an arbitrary and inequitable redistribution of income from those who can least afford it to those in strong bargaining positions. At the same time it is sapping our economic strength, because by squeezing profit margins it undermines the confidence of businessmen and causes them to cut back on investment. It erodes our competitive position in foreign markets and here at home too. It weakens employment prospects, not only because labour becomes uneconomically expensive but because our export and import-saving industries lose out to foreign competition. These are the stark realities of the situation.
§ But it lies within our own power, as a nation, to deal with inflation and, if we do so, the prospects are certainly good. If we can get the rate of increase of money earnings down to something much nearer the rate of increase of national productivity, there is every reason to believe that we shall break out into a new period of faster growth, higher investment, rising living standards and a renewed confidence in our future.
§ Throughout these past months my colleagues and I have recognised that the first priority must be to defeat cost inflation. Our policy has been to ensure a progressive and substantial reduction in the level of pay settlements so as to ensure steadier prices. A policy of de-escalation is a hard and difficult course for any Government to follow and success is not to be had overnight. But the policy is succeeding. We still have a long way to go, but the upward trend in the level of settlements has been checked, and it is clear from informed opinion in industry that the climate is now quite different and that the pressure on costs through rising wage settlements is less than it was some months ago.