DOMESTIC INFLATION

HC Deb 01 July 1975 vol 894 cc1189-200

The Chancellor of the Exchequer (Mr. Denis Healey)

With permission, Mr. Speaker, I wish to make a statement.

The Government have been engaged in discussions with the TUC and the CBI about measures to achieve a drastic reduction in the rate of domestic inflation. For millions of our fellow citizens, particularly housewives and pensioners, this is the overriding priority. It is a pre-condition for reducing unemployment and increasing investment. Although these discussions are not yet concluded, I believe that it is necessary for the Government to state their intentions now.

We are determined to bring the rate of domestic inflation down to 10 per cent. by the end of the next pay round and to single figures by the end of 1976. This means the increase in wages and salaries during the next pay round cannot exceed 10 per cent. The same limit is being set for dividends.

The Government have already reached an advanced stage in preparing measures which are fair and just. These measures will ensure that all sections of the community share the burden fairly. They will set out how the 10 per cent. limit for settlements should be expressed: for example as a percentage or flat rate or some mixture of the two. They will describe how the Government can satisfy the public that the limits are being observed. They will also cover action to check the rate of price increases as the rate of pay inflation slows. In addition, they will deal with the central problem of compliance, since it is no good having an agreed limit for pay increases unless we can be certain it will not be exceeded. In particular, we must be able to satisfy those who settle early in the round that they will not be left behind by later settlements at an excessive level. I know that the TUC attaches special importance to this.

The Government will use a battery of weapons for this purpose. For example, we propose to fix cash limits for wage bills in the public sector so that all concerned may understand that the Government are not prepared to foot the bill for excessive settlements through sub- sidies or borrowing or by loading excess Costs on the public through increases in prices and charges. We shall take action through the Price Code to encourage compliance by private employers.

I propose to employ the system of cash limits more generally as a means of controlling public expenditure in the short term.

My Government—[Interruption.]—are already consulting the CBI and the TUC about the proposals. [Laughter.] I doubt whether hon. Members are doing themselves or the House very much credit by the levity with which they approach this problem, The Government welcome the efforts which the TUC has already made to arrive at a plan for lower pay increases in the next round. We should much prefer to proceed on the basis of a voluntary policy agreed with the CBI and the TUC. But a voluntary policy will not be accept-able to the Government unless it satisfies the targets they have set for reducing inflation and includes convincing arrangements for ensuring compliance. If, however, no agreement can be reached which meets these conditions, the Government will be obliged to legislate to impose a legal requirement on both public and private sector employers to comply with the 10 per cent. limit. The Government will announce their decisions in a White Paper to be published before the end of next week.

Sir G. Howe

Will the Chancellor accept that the whole House will welcome the fact that the Government have at last begun to grapple with the nation's economic problem? Hon. and right hon. Members will welcome the extent to which the Government have accepted many of the policies which we have been urging upon them for months, in particular, the use of cash limits as an effective control on public sector wages.

Will the Chancellor accept that we are concerned at the possible implications of using price control in the private sector to the survival of profitable companies and so to the continuance of jobs and employment and that we are gravely disquieted by the absence from the statement of any reference to two vital matters—the abandonment of any further plans for nationalisation and reductions in public spending.

Finally, will the Chancellor acknowledge that the fact that he has been obliged to make this statement today is a confession of the total failure of the last 16 months of profligacy, dissension and incompetence?

Mr. Healey

I am grateful at least for the welcome which the right hon. and learned Gentleman gave to my announcement. He also welcomed the fact that, as he claimed, I have adopted some of his policies. The Opposition Front Bench has put forward so many policies within the last few weeks that it would be impossible for me to avoid adopting some of them.

When the right hon. and learned Gentleman asks why I did not introduce cash limits before, I might well put the same question to him and his colleagues. They were in office for three-and-a-half years up to last February but made no attempt whatever to deal with this problem. We are doing so now, and I am glad to see that we have the Opposition's support in introducing this innovation into the control of our public expenditure.

On the question of using the Price Code as a sanction against excessive settlements in the private sector, I must put this point again to the right hon. and learned Gentleman. I recognise that the Price Code has been bearing heavily on many companies. It will not bear more heavily under the proposals I put forward, except on companies which make settlements in excess of a level which I hope the right hon. and learned Gentleman will endorse. I hope that he will agree that action along these lines is a necessary supplement to any policy for bringing down the rate of inflation.

The right hon. and learned Gentleman cannot conceivably argue that there is any way of bringing down the rate of inflation quickly—and I hope he will agree that that must be our common objective, wherever we sit in the House —except through direct action on the level of wage settlements. It is ridiculous to imagine that changes in the Government's policy for nationalisation or cuts in public expenditure will have the slightest effect, even on the theory held by the monetarists, within the time scale in which it is essential for the country to produce results.

Mr. Heffer

Will my right hon. Friend accept that certain aspects of his statement will not be widely welcomed by Government supporters? It is a clear indication that the Government are steadily moving towards a statutory incomes policy, which is contrary to our election pledges. Is my right hon. Friend aware that for some considerable time an alternative economic strategy has been advocated by some of his hon. Friends, a strategy which should be adopted to avoid a statutory incomes policy and to deal with the serious crisis without resortting to the type of measures which my right hon. Friend is resorting to today?

Mr. Healey

I remind my hon. Friend that all of us on this side of the House fought the last election on a manifesto which pledged us to treat the reduction of inflation as our first and overriding priority. [HON. MEMBERS: "Yes, 8.4 per cent."] I ask my hon. Friend to recognise the truth of the statement repeatedly made by leaders of the trade union movement in recent weeks that it is not possible to bring down the rate of inflation, as we undertook to do, without achieving a substantially lower level of payment settlements in the next pay round than in the last.

What I have sought to do in my statement today is to point out to both sides of industry that we would prefer to achieve this objective by voluntary means. But achieve it we will, and I believe that the whole country will recognise that as our duty. I hope that we shall have overwhelming support from the people of this country when we carry out that duty.

Mr. Pardoe

Is the right hon. Gentleman aware that he will have the full support of my right hon. and hon. Friends and myself in his defence of the national interest against his colleagues, whether in the Cabinet or outside it? Does he recognise that to reduce pay increases to the level of 10 per cent. will involve a substantial decrease in the standard of living of all of us in this country? Will he say how much that decrease will be, and will he now accept that it is absolutely impossible to bring about that decrease by voluntary means? Will he admit that what he said this afternoon amounts to an acceptance of the position that my colleagues and I have argued consistently over 10 years or more, that this country must have a statutory incomes policy or fail?

Mr. Healey

I suppose I must welcome the offer of support by the hon. Gentleman, although I am not sure that I shall find it wholly adequate for the purposes that I intend to carry out.

The spread of the reduction of living standards which would be implied by a limit of 10 per cent. on pay increases over the coming year would depend on whether it was achieved by percentage increases all round or by a flat-rate cash increase. In the latter case, the real take-home pay—corrected for inflation, and after the deduction of tax and insurance and superannuation contributions—would rise for people on two-thirds' average earnings, would fall by about 2½ per cent. over the year as a whole for people on average earnings, and would fall by substantially more for people with above-average earnings. A percentage increase would spread the burden more equally, and to that extent the person with low average earnings would not gain but would stay in roughly the same position.

The reduction required is nothing like as great as I have seen it stated in some newspapers. It would be temporary. I believe that there will be overwhelming public support for seeking to curb this very damaging inflation by sacrifices now, rather than to remain on an inflationary merry-go-round which will ultimately destroy the whole of our society.

Mr. Jay

Although we must look carefully at the details of my right hon. Friend's White Paper, in my opinion he is absolutely right to take resolute action now. Will the House have an opportunity to debate the White Paper and my right hon. Friend's statement as soon as the White Paper is published?

Mr. Healey

Yes, Sir, of course. I can give that assurance.

Mr. Ridley

Can the right hon. Gentleman say why he thinks that these policies, whether voluntary or statutory, which have been tried by successive Governments over the past 10 years and have failed, can possibly succeed now, when all know that the true cause of our present inflation is the gross extravagance of the Government?

Mr. Healey

I know that the hon. Gentleman shares my view—he has ex- pressed it more than once, and so have many of his hon. Friends—that the root cause of our current inflation is the fiscal profligacy of the Government of which he was once a member. But I do not believe that the hon. Gentleman is realistic. I recommend the hon. Gentleman, who I know poses as a monetarist in these matters, to read a recent pamphlet by the guru of monetarism, Professor Milton Friedman, and his British acolyte, Professor Laidler, who pointed out that there was no possibility of achieving a reduction in the rate of inflation in a period acceptable to the people of this country by the methods which he espouses.

Mr. Wigley

Is the Chancellor aware that there is a grave discrepancy in income levels between Central London and other areas such as Wales, Scotland and the North-East of England? Therefore, will he give serious consideration to producing a policy, if he must, of statutory control or of other control mechanisms which allows for an increase above the average in areas where the level of incomes is much subdued at present?

Mr. Healey

I take the hon. Gentleman's point very seriously. The easiest way of securing a differential advantage for those in areas of below-average wages would be to adopt a form of limit based on a cash sum rather than a percentage.

Mr. Bidwell

Does my right hon. Friend agree that part of the British malady is not simply the rate of inflation but the rate of investment? What effect are these measures likely to have upon that'?

Mr. Healey

I am glad to be able to assure my hon. Friend that investment is certain to increase if the rate of inflation can be brought down at the rate that I have just indicated. It is difficult to conceive of any means by which investment in the private sector can be increased without a similar fall in the rate of inflation.

Mr. Tapsell

Is the right hon. Gentleman aware that the measures that he has announced this afternoon, welcome as they are, will go even further towards reassuring international opinion if he can tell the House that before we rise for the Summer Recess he will be announcing a programme of immediate public expenditure cuts and introducing legislation to give him the reserve powers to keep wages to a maximum rise of 10 per cent. in case this should be needed during the summer?

Mr. Healey

I think that I made it clear that the Government will have to make up their mind in the next week whether they can place reliance for maintaining an adequate level of wage settlements over the next 12 months on a purely voluntary policy. If they decide that they cannot, they will introduce a necessary legal framework for the policy, probably involving some use of reserve powers, as the hon. Gentleman has just suggested.

On the question of public expenditure cuts, I must point out that the problem in this country today is not excess demand. It is not pressure on capacity. We have a large number of unemployed, and our factories are working below capacity. To increase unemployment by cutting public expenditure could in no sense help in that regard. That is well understood abroad. If we went further and took the advice of the Opposition Front Bench to cut public expenditure, and cut taxes at the same time, that would, by definition, leave the public sector borrowing requirement unchanged.

Mr. Powell

Is not the right hon. Gentleman aware—his reply to the hon. Member for Cirencester and Tewkesbury (Mr. Ridley) suggests that he is—that increases in wages and prices are the symptom and not the cause of inflation, and that, therefore, all policies, whether voluntary or statutory, which are designed directly to restrain the increase in prices and wages are futile and irrelevant?

Mr. Healey

The right hon. Gentleman is well known in the House and the country for the absoluteness of his opinions and his belief that there is always only one simple answer to every problem. Let me tell him that the experience of Governments all over the world is that an adequate attack on inflation requires a mix of policies—adequate control of the money supply; in some cases direct action on prices; in other cases direct action on wages. The search for one simple solution to our problems would lead the country into the same isolation as the right hon. Gentleman experiences in occupying that bench.

Mr. Mackintosh

Those of us who represent the lower paid and the people who suffer by inflation welcome my right hon. Friend's statement. However, does he agree that the greatest danger to the future of Britain is that we produce a package deal in the next few weeks which permits a dribble downhill—by exception, by anti-social hours, by special cases of one form of another—which allows the present erosion by inflation to continue? I welcome my right hon. Friend's statement, but will he say that if there are signs that the level that he has set is being broken he will take positive action, if necessary backed by law? I believe that if he does that he will have the support of the whole country.

Mr. Healey

I am afraid that my hon. Friend does not seem to have listened very carefully to what I have said. I made it clear that unless the Government can satisfy themselves over the coming week that they can achieve a satisfactory voluntary policy which will guarantee a level of settlements over the year of no more than 10 per cent., they will not hesitate to take whatever legal action is required to impose an obligation on employers in both the public and the private sectors to comply with the limit which they have set.

On the question of allowing a policy to be eroded and diffused by exceptions, I recognise that there is a good deal in what my hon. Friend said. But the House and country must recognise that over the course of the last year the overwhelming majority of anomalies which might justify exceptional treatment have already been met by exceptional increases.

Mr. Maurice Macmillan

The Chancellor has referred to investment in industry. Will he accept that the problem is not so much the shortage of finance for investment as the lack of will, which, in turn, is largely due to the unprofitability of the private sector? Will he assure the House now that the measures he will be producing will take full account of this and recognise the need to maintain the corporate sector at a profitable level in order to ensure incentive for investment and development?

Mr. Healey

Of course I recognise—I have said this many times in the House and outside it—that the rate of return expected on capital is the key to investment, whether in the public or the private sector. But what makes the problem much more difficult at present is that it is literally impossible even to calculate a rate of return with inflation running at current rates. But I certainly accept the sense of the right hon. Gentleman's question. That is why I think that some caution is needed in the application of the Price Code to ensure that firms are not sent bankrupt, with people being thrown out of work, by too stringent an application.

Mr. Crawford

Will the right hon. Gentleman give an assurance to the people of Scotland that they will not be made subject to any statutory control of wages and that the considerable differential in earnings—I say "earnings" and not wage levels—between Scotland and England will be levelled out? Does he agree that his statement will give added impetus to the self-government movement in Scotland, especially when the people there see that the best way of breaking through to prosperity is to pursue economic policies based on their own natural resources and their economic development?

Mr. Healey

As I think the hon. Gentleman knows, I cannot agree with the latter part of his remarks. As I pointed out when I had the honour of visiting one of the greatest Scottish cities the other day, in fact Scotland benefits very substantially from union with England in the United Kingdom, for reasons which I shall not repeat for fear of wearying the hon. Gentleman. But I also noted during my visit to Scotland that no part of the United Kingdom is suffering worse from the impact of inflation. I would hope that we would have the same support from the people of Scotland as from the people of England and Wales for adequate action to bring down inflation.

Mr. Atkinson

Does not the Chancellor accept that by spelling out minimum voluntary conditions he has now announced the introduction of compulsory wage control? Does he further accept that this policy, as outlined, will represent a severe cut in wages while at the same time allowing a rise in unemployment, and will be totally unacceptable to both the TUC and the annual conference of the Labour Party? Does he further accept that the policy now spelt out will be looked upon as a defiance of the manifesto upon which we contested the last General Election? Will he not further accept that the figures he has now given—that inflation is to be cut from its present level of 25 per cent. or 26 per cent. to 8 per cent. by the end of 1976—must of necessity mean a reduction of about 6 per cent. to 7 per cent. in real living standards during the coming year, and that a cut of such brutality will be totally unacceptable to the trade union movement?

Mr. Healey

No one is more conscious than the trade union movement—I have had continuous contact with its representatives at every level in recent months—of the damage which inflation at current rates is doing to the living standards of working people and, even more, to the hope of a happy retirement for working people, who see the value of their pension funds, particularly trade union funds, being destroyed by wage inflation at its current levels. I hope that I can rely on my hon. Friend to join me and the TUC in seeking to fulfil the pledge that we made in our manifesto to bring the rate of inflation down.

My hon. Friend raised the question of unemployment. Let me tell him that the Government—I have said this to him many times and I do not believe that he really disagrees with me—are paralysed —[Hon. Members: "Oh."]—and prevented from taking action to bring unemployment down so long as—[Interruption.] Now that we appear on the radio I think that the country will appreciate the schoolboy humour with which Opposition Members attempt to escape from the labours of trying to understand a serious problem. It is not possible for this or any Government to take measures to bring unemployment down so long as inflation is running at current rates. The only way to put the country in a position to get back to full employment is to bring the rate of inflation down.

Mr. Alexander Fletcher

Does the Chancellor realise that after 16 wasted months we are back in almost precisely the same position as we were during February 1974? [Interruption.] With regard to the Chancellor's 10 per cent. limit on wage awards in the private sector, will he tell the House what action he will take if, for example, the National Union of Mineworkers puts in a claim which is 300 per cent., 400 per cent. or 500 per cent. above the limit he is trying to impose on the private sector?

Mr. Healey

If I may say so, the hon. Gentleman has passed a suitable judgment on the record of his own Government when in power. I do not accept it as a description of the record of the present Government.

Mr. Duffy

Important though consultations, consent and voluntarism are to enable my right hon. Friend to adopt his correctives—and no one on this side of the House would prefer any other policies and none of my hon. Friends can say that we have not persevered with them—is it not clear, in view of recent events, that a vital condition of stability now is an unshakeable and immutable commitment by the Government sharply to reduce inflation? If my right hon. Friend shows the necessary resolution and will between now and the end of 1976, the bulk of the population, including our own movement, will support him in the policies that are requisite to the pursuance of that target.

Mr. Healey

I believe that my hon. Friend speaks for the overwhelming majority in the Labour movement and for the overwhelming majority of the British people when he makes that judgment.

Several Hon. Members rose—

Mr. Speaker

We must press on. We are operating under a guillotine today.