HC Deb 15 July 1977 vol 935 cc987-90

11.4 a.m.

The Chancellor of the Exchequer (Mr. Denis Healey)

With permission, Mr. Speaker, I wish to make a statement about the further measures which the Government propose to take in the fight against inflation and unemployment in the light of discussions they have held with representatives of the TUC and of the revised prospects for the economy. The Government continue to regard the mastery of inflation as the pre-condition for success in returning to full employment.

In the last two years the nation has derived immense advantages from the guidelines on pay which the TUC has formulated in agreement with the Government. These guidelines have been fully observed by the whole of the trade union movement and have given invaluable help in the fight against inflation.

The Government and TUC have recognised that the period after July 1977 must bring an orderly return to normal collective bargaining and that there must be no free-for-all or pay explosion.

On 22nd June, the TUC General Council made a major contribution towards these objectives by publishing guidance on the strict maintenance of settlements made under the current policy. The General Council said that negotiators should not reopen settlements made under the current policy after 31st July in breach of the 12-months rule, and should not defer settlements due before 31st July in the hope of securing an advantage by doing so. The only exceptions to the 12-months rule relate to occupational pensions and self-financing productivity schemes.

The Government attach the greatest importance to this guidance by the TUC.

Provided it is observed by all those concerned with pay determination in both the private and public sectors, it will go far to prevent a wage explosion from developing after July 1977. It is the keystone for an orderly return to collective bargaining because it means that the phase 2 policy will continue to affect the level of the nation's earnings until the last settlement made under it expires at the end of July 1978.

The effect is to facilitate a phased return to normal collective bargaining. For most people the next settlement will not come until the first half of 1978. By that time there is a good chance that, thanks to the strict adherence to the TUC pay policy in the past year, the rate of inflation will be approaching, or will have reached, that of our major competitors. That will provide a better climate for settlements, which can be reinforced by any assistance which the Government are able to give.

The TUC does not think it practicable for it to give general guidance on the level of pay settlements in the next round when the 12 months has expired for the bargaining group concerned. But since the Government have a responsibility both for the economy as a whole and for the management of the public sector, they have a duty to the British people to state their position on this matter.

The country now faces a choice which will determine whether, by getting a sustained fall in the rate of inflation, we can profit fully from the new opportunities opened for us by the success of our other policies and the flow of North Sea oil. Many factors may affect the rate of inflation. Some of these are now turning in our favour. On the best forecasts now available of all the factors which may contribute to inflation, the prospect for prices in 1978 and after will depend critically on the rate of increase in the nation's wage bill. To take three examples by way of illustration: first, if the rate of increase in earnings is not more than 10 per cent., inflation should fall below 10 per cent. well before this time next year and stay there throughout the year: secondly, if the rate of increase in earnings is as high as 15 per cent., we should not get inflation down to 10 per cent. at all, and it would be rising steadily through the second half of next year and into 1979; thirdly, if the rate of increase in earnings were as high as 20 per cent., prices would soar and we should be back in the situation that we faced just over two years ago.

Any given rate of earnings increase implies a significantly lower rate of increase in settlements. The rate of increase in earnings takes account of overtime, job changes and other factors which contribute to what is called wage drift. The House will recall that the £ 6 policy, which represented an average increase in wage settlements of nearly 11 per cent., produced an increase in earnings for the year of about 14 per cent.

Faced with a choice of the kind illustrated by the examples I have described, the Government have a clear duty to urge all concerned to base their approach to pay negotiations on getting inflation into single figures. The Government must therefore urge that the general level of pay settlements should be moderate enough to secure that the national earnings increase is no more than 10 per cent.

In a period which must mark an orderly return to normal collective bargaining, the Government agree with the TUC that it is not possible to stipulate a specific figure at which individual negotiators should invariably settle but we must seek to ensure that the national target is achieved. This means that the general level of settlements must be well within single figures. I shall later describe the measures the Government propose to ensure that living standards will not fall in consequence.

The Government recommend those concerned with pay determination in both the public and private sectors to be guided by these considerations and to make new settlements on the basis that they will last for 12 months. The Government will do everything possible to secure that full account is taken of this guidance throughout the public sector; but the guidance applies equally to the private sector, and the Government expect similar action there.

In settling pay in important areas of the public sector, the Government have long had valuable assistance from the three pay review bodies. The Government value their help and will ask them to continue their task within the guidance for pay that I have described.

It will not be possible in the next 12 months to deal with the whole range of pay anomalies and other problems that have inevitably arisen during a period of strict pay guidelines. Only the most serious difficulties can be tackled in the coming year, if necessary on a phased basis and taking full account of the need to keep the total settlement within single figures.

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