As I said earlier, the rate of inflation for many months has been determined primarily by the increase in wages and salaries. We in the Government have honoured our side of the social contract by our programme of legislation on industrial relations, by fiscal legislation to secure a juster and more equitable distribution of wealth and incomes, by action on food subsidies and rents, and by generous provision for the pensioners and others among the under privileged in our society. Total Government expenditure on items which make up the social wage increased 34 per cent. last year—or about 12 per cent. in real terms. In fact the social wage now amounts to about £1,000 a year for every member of the working population.
The TUC honoured its side of the contract in its pay guidelines, the heart of which is that there is only a limited scope for real increases in consumption at present and that in general pay increases should, therefore, be confined to compensation for the rise in the cost of living since the last settlement.
Many in the trade union movement have worked hard to apply the guidelines. But the general rate of pay increases has been well above the increase in the cost of living and much further still above the 281 level in countries which compete with us. The threshold payments introduced by our predecessors played an exceptionally damaging role here. Some of the higher increases were awarded to low-paid workers or to groups, particularly in the public sector, who had been unfairly held back by the statutory policy. But rates of increase which ought to have been exceptional have been applied to others who have no such justification.
As a result, by February the retail price index stood 19.9 per cent. above a year earlier and the wage rate index was 28.9 per cent above. Analysis of settlements made since last July gives a rate not much less than this for the total pay increases on a year earlier for those concerned. These settlements were made in a period when the RPI increase was 17 per cent. to 20 per cent. So pay has been running about 8 per cent. or 9 per cent. ahead of prices. I do not believe that anyone would claim that the TUC guidelines were intended to permit this result.
As I have warned the House and the country on many occasions since last summer, settlements so far beyond the increase in the cost of living are bound severely to restrict my room for manoeuvre in this Budget and to limit the pace at which the Government can carry out their remaining commitments under the social contract.
The immediate effect of excessive wage settlements is to increase private consumption, with damaging effects on the balance of resources in the economy, which the Government must seek to remove by increasing taxation, as I warned the House I would last November. But within six months the wage increases will feed through into the prices of the goods and services produced by the workers concerned. The higher rate of inflation damages both our competitiveness and our credit as a nation. When it is as high as it has recently been in this country, it also destroys business confidence, disrupts the planning of industrial investment and leads to increased unemployment and short-time working. If the wage settlements in the public services are as large as they have been recently, they must add substantially to the public sector deficit, and so put pressure on the Government towards restrictive budgetary policy. The gains from such wage increases are limited 282 and transient, the losses enduring and widely spread.
Bitter experience under many post-war Governments has, I think, taught most of us on both sides of the House that a statutory policy for incomes is unlikely to produce better results. Unless, however, the voluntary policy achieves stricter adherence to guidelines laid down by the trade unions of their own free will, the consequence can only be rising unemployment, cuts in public expenditure, lower living standards for the country as a whole, and growing tension throughout society.