Counter-Inflation Policy

Part of the debate – in the House of Commons at 12:00 am on 20th July 1977.

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Photo of Mr James Callaghan Mr James Callaghan The Prime Minister, Leader of the Labour Party, Member, Labour Party National Executive Committee 12:00 am, 20th July 1977

I propose to confine my remarks this afternoon mainly to the new situation that arises from the fact that no national pay increase will apply throughout the country during 1978. For the past two years the Government have had the great advantage of being able to operate against the relative certainty of an agreed national increase. That is no longer the case. Therefore, it is the Government's responsibility to offer advice and guidance to employers and trade unions who will be concerned with pay negotiations.

I begin by emphasising the Government's view that runaway pay settlements will lead to a fresh round of soaring prices. I doubt whether there is much disagreement with that general proposition. Memories are still fresh of those absurd 30 per cent. pay settlements of two to three years ago that utterly failed to bring any permanent improvement in the standard of living of those who secured them.

I am far from saying that wages are the only element in determining the level of inflation. Indeed, I should deny such a proposition emphatically if it were put forward. But surely no one will deny that the level of wages is one of a number of factors that influence the level of inflation.

I think that is particularly important at this moment, because it so happens that some of the other factors that will influence the level of inflation are moving. in favour of this country. I shall instance one or two of them. I have referred before to the cost of buying commodities and raw materials from overseas. I have referred to the fact that the value of the pound sterling has been stable for many months, to the improvement in our balance of accounts with other countries or now, more recently, to the prospects of better cereal crops throughout the world. All these factors are more favourable, and together they will help to keep the level of prices under more control.

It would be a tragedy if, against such an unusually improving background of a number of factors moving in this country's favour, a number of wage settlements were now to take off and offset those improvements. Therefore, the Government wish to influence pay settlements in such a way that everyone in the country will get the maximum advantage from this developing situation. It is our considered judgment, as my right hon. Friend the Chancellor of the Exchequer made clear last Friday, that our people will get the best overall improvement if the in crease in the national level of earnings does not exceed 10 per cent. in 1978.

In our view, everyone in this country, trade unionists and others, will find that this will be the best buy. I go further and say that higher settlements, even if they look superficially attractive at first, will in due course make our people worse off as a whole through either higher prices—even higher prices—and/or more unemployment.

Before I continue let me pay tribute to the far-sightedness and self discipline of the trade unions and their members during the past two years. They have carried through a policy that has been both voluntary and effective even though they knew this would be at a time of falling living standards. I should like to thank them, too, for their understanding even when their hopes were disappointed, as were ours.

There will be very thorny problems to be solved during an orderly return to free collective bargaining. There will be the correction of anomalies that have accumulated during this period. Negotiations will take place about the appropriate differentials in pay between various groups, some of which have been compressed.

There are those who are now right at the top of the salary scale who feel that by comparison with the responsibility of their jobs or by comparison with the earnings of their compatriots overseas or the earnings of comparable groups in this country they have a comparative grievance. All these will be thorny enough and I suppose that there is no one who really believes in his heart that a return to free collective bargaining is going to usher in a Utopia in the future any more than it has in the past. Nevertheless, the desire to return to that freedom has been strongly expressed and cannot be gainsaid. So be it. We start from there.

The Government themselves will have substantial influence or, in some cases, even direct control over the level of wage settlements in their own areas, and we shall negotiate on the basis of the guidance that the Chancellor has offered to others. We shall be faced immediately with a difficulty, namely, that those whose pay is determined by or influenced by the Government will claim that it would be unfair for them to be worse off because they are in an area where the Government directly control the purse strings whereas the private sector is not so controlled.

This notion of equity, the grievance by comparison with others, goes very deep in the formation of wage claims whenever they are formally prepared. Time after time successive Governments have been brought up against this dilemma. Hence it is particularly important, if we arc to prevent that sense of grievance from gaining ground, that employers and trade unions in the private sector should observe the general guidance.

Having mentioned some of the very thorny problems that will arise and face trade union negotiators and employers, I outline some of the other dangers that we shall face and some of the advantages with which we begin this new period. First, the dangers. There is a dangerous illusion, already expressed by some over the weekend, that they should frame their wage claims in the 1978 wage round on the basis of catching up the shortfall of the past two years. That cannot be.

The oil crisis of 1973 and the unprecedented price increases that followed brought about a fundamental change in the circumstances of this country as of others, and during the past two years the country has made the adjustment that was necessary to reflect that change. In reality we cannot job back on what has been forgone. The figures will not add up. Instead we must look forward to improving our standard of living by our own efforts.

The TUC has expressed that in the same way in its own document. I refer to the document that was issued yesterday and states: The emphasis should be on looking forward to what can be genuinely gained in terms of real living standards, not on looking backward to a situation where it was the vain attempt to counter the effects of inflation by escalating wage claims that exacerbated the very ill this was hoped to cure. I endorse and the Government endorse the TUC's view on this matter.

If such an attempt is successful, if people do formulate their wage claims in group formulation on that basis and if they get such settlements—those with the industrial strength would no doubt secure such settlements—they will look as though they are making up the ground of the past two years. But such settlements would be secured only at the expense of others and would set off the upward price spiral once more. If those with the strength get more, if the figures are to add up, others will have to take less, irrespective of the justice of their claims or the social value of their work. If the figures do not add up, the result will be either more inflation or more unemployment, or both. That is the first danger.

The second danger that we face is that some group will act as a pacemaker, or attempt to do so, and force a big settlement, and that others will use their own industrial muscle to jump on the band wagon and secure the same kind of increase. There will also be the risk that, if groups achieve unrealistically high new settlements in the early months after July, the groups whose settlements still have some months to run will feel that they must re-open their agreements. The TUC in its document has also recognised this risk and has advised its member unions not to re-open existing settlements. It has called upon those who are about to negotiate to avoid a possible chain reaction, and I am glad to acknowledge the value and importance of its advice in these matters.

The third danger is that some employers, foreseeing industrial trouble and being anxious to buy it off for what may be thought to be a good reason, will actually be willing to dip into funds that should be used for investment or other legitimate purposes in order to meet pay demands. This would be weak-minded in the extreme, for it would not only weaken the company's future but would be against the best interests of the workers themselves as it would endanger their long-term employment prospects.

Another possible danger is that multinational companies whose interests may lie in several countries outside this one may believe that they can opt out of the considerations that the Government are setting out. I trust that this will not be so and I can undertake that the Government will watch these developments very carefully.

The Government will have some special problems in their own field. We are now considering these and what we shall need to do to reach final conclusions. There are, as I said earlier, the problems that will arise in the public sector, where the Government will rightly be excepted to give a lead in adhering to the 10 per cent. national earnings guidance. However, the public sector is divided into a number of parts. There is the part paid directly by the Government, the part where payment is by way of grant to local authorities, and the nationalised industries, where the Government's influence is less, although it must still make itself felt.

In all these areas the Government will be guided by the advice that they are giving to others. I propose to write to the chairmen of the three pay review bodies, whose work has been of great assistance to the Government over the past few years and whose role in the past two years has been especially difficult. I shall be able to say to them in offering this new guidance that the new pay policy will provide some flexibility, which is needed for them to make a start on overcoming some of the special problems that have arisen in pay structures generally.

Some of the early comments that I have heard are a little too pessimistic about the degree of flexibility that can be introduced in the new arrangements that they will be able to make. The Chancellor's statement last Friday drew attention to the limitations that it will be necessary to observe, but there are opportunities here.

The national interest is at stake and I shall in due course discuss these matters with the chairmen of the three review bodies, hoping that we may continue to rely on their most valuable help and co-operation. The Chancellor of the Exchequer will be similarly in touch with the chairmen of nationalised industries, and Ministers, such as my right hon. Friend the Secretary of State for the Environment, will also in due course approach the local authority negotiating bodies.

Whatever is agreed in the public sector must also have regard to the restraints imposed by our control of public expenditure, which we intend to maintain. Part of that control is the system of cash limits. The cash limits cover pay as well as other items of expenditure, and they will continue to do so.

Most public service settlements affecting the 1977-78 cash limits have already been made under stage 2. For the limited number of employees settling later in the financial year between now and next April the cash limits assume settlements giving a 5 per cent. to 6 per cent. rise in the pay bill over the full year. Taking account of the general prospects for inflation during the remaining months of this year, the Government see no reason for any general revision of these limits. The cash limits for 1978–79 will reflect the Government's general policy on pay.

Excessive settlements in any part of the public sector would have repercussions in the rest of the economy. They might also result in a reduction in the level of service. In other cases they would result in increased prices—a direct blow against the fight to reduce inflation.

There may be areas where genuinely self-financed productivity deals can be worked out provided that they are genuine and do not add to the inflationary price levels, though even in these cases there will often be a good argument for sharing the productivity gains with the community at large. My right hon. Friend the Chancellor of the Exchequer will have more to say about this matter later today if he catches your eye, Mr. Speaker.