Denis Healey – 1978 Statement on Inflation

Below is the text of the speech made by Denis Healey, the then Chancellor of the Exchequer, in the House of Commons on 21 July 1978.

With permission, Mr. Speaker, I will make a statement on the Government’s policy for winning the battle against inflation.

The policy I announced on 15th July last year comes to an end in 10 days’ ​ time. It has been an impressive success. Inflation has been reduced to 7·4 per cent, well under half the rate a year ago, the lowest inflation rate for six years and far lower than that which the present Government inherited in March 1974. In fact, Britain’s inflation rate is now about the average for industrial countries—about the same as that of the United States, lower than that of France and Canada, although still higher than that of Germany and Japan.

The standard of living has not simply been maintained, as I then promised. It has risen by some 5 per cent. for most men and women in Britain during the current pay round, partly as a result of the tax cuts and improvements in social benefits which the falling rate of inflation has enabled the Government to make. Some of these tax cuts and increases in benefit have still to take effect. In particular, retirement pensions will be worth £31·20 for a married couple in November—an increase of almost 20 per cent. in real terms compared with the level we inherited four and a half years ago, and the child benefit will amount to £4 a week for every child when the increase next April is added to that in November. As a result of all the fiscal changes since last October and taking account of child benefit changes, a family on £75 a week with two children, will have an increase in net income of some 12 per cent. by next April—equivalent to a wage increase of about 15·5 per cent.

The fall in our inflation rate has also made possible a substantial increase in national growth. Industrial output was rising at an annual rate of well over 4 per cent. in the last three months. Unemployment has been on a falling trend since September last year.

The nation owes a debt to trade unionists and employers alike for the common sense they have shown in observing the Government’s guidelines in the last 12 months.

Inflation will remain around 8 per cent. for the rest of this year at least. We must now ensure that it does not rise into double figures again next year. This means that earnings must increase substantially less in the coming pay round than in the current round.

Our aim should be to keep the increase next year to half what it has been this ​ year. The climate for pay negotiation is now very much more favourable to moderate settlements than it was a year ago. Nevertheless, the Government cannot rely on this alone. They must give a clear lead: they must accept the responsibility for fixing guidelines which will enable us to keep inflation in single figures. The White Paper to be published today therefore sets a guideline for pay settlements for the coming round at 5 per cent.—half the level of the guideline in the current round.

The White Paper sets out some limited exceptions to this guideline. The form of the guideline offers negotiators the same flexibility as they have had in the current round to structure their settlements in the way best suited to their particular circumstances. I hope employers and unions will use this flexibility according to their needs—in particular, to restore differentials where appropriate.

In a small number of cases in the public sector the Government have already recognised that some exceptional increase is required. The increase in national earnings resulting from these exceptions is expected to be only about 0·15 per cent. in each of the next two years. There may be a small number of other groups for whom similar treatment might be appropriate when they reach their settlement date. But it would be self-defeating if more than a few groups were accorded such treatment and the Government will therefore carefully examine any proposals put forward in this area to see how far the same considerations apply.

To help those on the lowest incomes, the Government would be ready to see higher percentage increases where the resulting earnings were no more than £44·50 for a normal full-time week, which is the present-day equivalent of the minimum pay target set by the TUC four years ago plus the 5 per cent. The Government expect those on higher earnings in the same or other industries to accept the relative improvement in the position of the lowest paid which follows.

The Government will expect negotiators, as in the current year, to respect their existing annual settlement date. In the very exceptional case which may arise where a highly fragmented bargaining situation needs to be rationalised, the Government will be prepared to consider synchronising settlement dates providing ​ that the overall level of the settlement takes account of any costs involved.

Self-financing productivity deals will be permitted on the same conditions as in the current round.

Much attention has been focused on the possibility of reducing working hours and the contribution this might make to increasing job opportunities. We welcome the recent TUC initiative on the reduction of overtime working. However, if a reduction in hours led to an increase in labour costs the result could only be to reduce employment. In general, therefore, the Government could accept a reduction in hours as part of a pay settlement only on condition that the settlement as a whole does not lead to any increase in unit costs above what would have resulted from a straight guideline settlement on pay.

As in the current round, the Government will do everything possible to ensure that the guidance set out in the White Paper is observed throughout the public sector. In the private sector the Government rely on employers and unions to act with responsibility and moderation as the CBI and TUC have assured us they will. However, the Government will, if necessary, take account of any failure to observe the guidelines in exercising their discretion in the fields of statutory assistance and other appropriate discretionary powers. The pay clauses in existing Government contracts will remain in force and will continue to be included in new contracts. The Government will, of course, as promised in March, be ready to hold discussions with the CBI about the operation of these arrangements for the future.

The Government regard continuing price control as an important part of the battle against inflation. Over the coming months the Price Commission will maintain an active programme of investigations into individual companies and will also examine, at the direction of the Government, pricing practices in different sectors of industry. The Commission not only has a duty to identify excessive price increases and to recommend the steps needed to correct them, but in doing so to take full account of the wider economic background against which such price increases are put forward.

The present statutory powers to control dividends expire on 31st July 1978. The ​ Government will introduce a Bill to extend the statutory control for a further 12 months from 1st August 1978 on the present basis, with the present provisions for exceptions and one new provision. From 1st August 1978 no company will be required by the controls to increase its dividend cover above the highest level achieved since the current controls began. This will enable companies to increase their dividends in line with profits or in line with the statutory limit, whichever is the higher, but they will not be permitted to distribute funds accumulated in the past. A separate announcement giving details of this provision will be made.

The Government are convinced that the British people will not throw away the gains they have made over the last three years in the battle against inflation. The guidelines laid down in the White Paper offer negotiators the opportunity to use their freedom in collective bargaining to reach settlements with responsibility and moderation. By doing so they will encourage the regeneration of British industry, maintain living standards and make possible a continuing fall in unemployment.