Edward Heath – 1972 Speech on Inflation

Below is the text of the statement made in the House of Commons by the then Prime Minister, Edward Heath, on 6th November 1972 on the subject of inflation.

The Prime Minister : With permission, Mr. Speaker, I will make a statement on the breakdown of the discussions between the Government, the TUC and the CBI, and on the action which the Government now propose to take.

In my speech in the debate on the Address last Tuesday, I gave an account of the earlier stages of these discussions, and I explained the difficulties which at that time seemed to stand in the way of an agreement, particularly over the issue of a voluntary arrangement or the use of statutory powers.

The Government and the CBI both made clear their strong preference for completely voluntary arrangements over the whole field, pay as well as prices, though they were prepared, for the sake of reaching agreement, to accept that voluntary arrangements should be supported by backing-up legislation over their whole range. The TUC representatives, on the other hand, had made it a prior condition that there should be statutory control of prices but they were not able to accept the introduction of similar statutory controls on incomes.

I had therefore asked the TUC representatives whether the TUC was prepared to accept either completely voluntary arrangements, or voluntary arrangements backed up by statutory powers over the whole range of any agreement. This issue was so fundamental that it would clearly have been pointless to go on discussing other matters until the answer to this question was known. The TUC representatives said that they could answer that question only after reference to their General Council, and we adjourned on Monday evening to enable them to consult it.

The representatives of the TUC consulted the General Council on this question on Wednesday morning. At the beginning of the tripartite meeting on Wednesday afternoon, the TUC tabled a proposal requesting that the Government should give an unqualified guarantee that the retail price index in general, and food prices in particular, would not rise by more than 5 per cent. in the year ahead.

At the end of the meeting on Wednesday, the Government and the CBI made it clear that they would only accept arrangements which were either completely voluntary or were supported by backing-up legislation over their whole range. The representatives of the TUC said that they understood this position and would continue to negotiate on this basis.

At the opening of the meeting on Thursday, I explained why it was impossible for any Government to give a guarantee of the character sought by the TUC. However, I reminded the meeting of a number of features of the Government’s proposals which together would ensure a strict limitation of prices. Let me remind the House what those features were.

First, there was a CBI recommendation to its members to undertake not to increase prices of manufacturers over the next 12 months, except where unavoidable, and then only as little as possible. The intention was that the increase in the price of manufactured goods should not exceed 4 per cent. on average over the 12 months.

Then there was the Government’s request to the nationalised industries generally to limit their price increases to an average of 4 per cent.

Thirdly, there were the undertakings by the large majority of the British retail trade to reflect this restraint and to hold their gross percentage margins at no more than current levels. Further, the food distributors had offered to collaborate with the Government in a system of maximum retail prices for certain foodstuffs. Maximum prices for a number of manufactured foodstuffs were to be increased only if a tripartite monitoring body agreed In relation to goods other than food, the remainder of the retail trade agreed not to increase their cash margins on individual items by more than 5 per cent. without the approval of the monitoring body.

Fourthly, the Government agreed to consider taking action to limit prices where they had the ability to influence them.

The general intention thus was that the rise in retail prices attributable to the rise in domestic costs should not exceed 5 per cent. over the 12 months. We also envisaged the possibility of action to limit or offset price increases arising from other causes.

There were further proposals designed to provide and protect an improvement in the living standards of wage and salary earners, particularly those on low pay. The flat rate increase of £2 proposed by the Government would have allowed average earnings to rise by over 8 per cent. For those on or below £20 a week it would have allowed increases of 13 per cent. or more, and thus an appreciable improvement of living standards.

Threshold agreements were also proposed, to allow additional increases of pay if towards the end of the year, because of certain special factors, the rise in the retail price index exceeded 6 per cent. These would provide a safeguard for all wage earners.

I repeat that the effect of these proposals was, for anyone earning up to about £40 a week, not merely to protect but actually to improve living standards, while at the same time reducing the rise of inflation.

At the meeting on Thursday, I went on to make a number of further proposals designed to improve the position of those in low paid employment and pensioners. These included the following proposals. The needs allowance should be increased by 50 pence in order to limit the effect of rent increases in 1973 for tenants in receipt of rent rebates and housing allowances. The period for which family income supplement, free school meals and free welfare milk are awarded should be extended from six months to one year, so that entitlement to these benefits would continue throughout the year for those receiving them, irrespective of increases of pay or other changes in circumstances. When reaffirming the Government’s intention that, as a result of the review of pensions in the spring, at the next up-rating pensioners should have the benefit of a share in the nation’s increasing prosperity, I stated that, as an earnest of that intention, the Government would pay a special lump sum to those over national insurance retirement age in receipt of retirement pensions and supplementary pensions, as soon as the necessary arrangements for payment could be made.

In addition, I said that the Government were consulting the local authorities in order to moderate the rate of growth of local rates.

All these proposals, together with the very important arrangements made with the retail trade, were additional to those which the Government had made on 26th September. Moreover, in reaffirming its own intentions, the CBI had already stated its willingness for dividends to be controlled.

As the House will be aware, the representatives of the TUC stated that they did not regard the total package of proposals as a basis for negotiation. They said that, although they would take them back to the General Council, they would do so without being able to recommend their acceptance. The General Council met this morning. The statement which it has issued shows that there has been no change in the TUC’s position.

Although it has not been possible to reach agreement in this round of discussions, the Government are fully prepared to continue to take part in tripartite discussions with the CBI and the TUC on subjects of mutual concern to the three parties.

The responsibility for action now rests with the Government. We have come to the conclusion that we have no alternative but to bring in statutory measures to secure the agreed objectives of economic management in the light of the proposals discussed in the tripartite talks.

These measures will take time to work out in detail and to implement. In order that the fulfilment of the objectives should not be prejudiced in the meantime, the Government propose to introduce tomorrow an interim Bill to provide for a standstill on increases in pay, prices, rents and dividends, subject to a limited number of defined exceptions. The standstill will come into operation immediately, and will run for 90 days from the Royal Assent to the Bill, with provision for an extension of up to 60 days, by order subject to affirmative Resolution.

The arrangements for the standstill are set out in a White Paper, which will be available in the Vote Office at 4.30 p.m. The draft of the Bill is contained in a separate White Paper which will be available later this evening.

Although it has not proved possible to reach a tripartite agreement, the Government intend to implement their proposals for increasing the needs allowance; for extending from six to 12 months the period of entitlement to family income supplement, which carries with it exemption from National Health Service charges, and to free welfare milk and free school meals; and for paying a lump sum to pensioners. As regards the latter, the payment will be made as early as practicable in the new year, and will consist of £10 to each retirement and supplementary pensioner – that is, £20 for a married couple both of whom are over retirement age.

The CBI’s and the TUC’s acceptance of the Government’s invitation to join in discussions on the objectives and methods of economic management signalled a major change in the conduct of economic policy in this country—far in advance of anything even tried for by previous Governments. I know that I was not alone in thinking that it was one of the most hopeful things that had happened in Britain for many years. I deeply regret that last Thursday’s disagreement has forced us to take action which I regard as less satisfactory than a voluntary arrangement could have been.

I profoundly believe that the course upon which we had embarked was the right, rational and sensible course for Britain. I therefore hope that this setback will not be allowed to stand in the way of our resuming discussions between the three parties in due course on the objectives and problems of economic management.

In the meantime, the Government have a duty to the nation to carry through the proposals which I have now put before the House.

Let me remind the House again of the objectives: the maintenance of a high rate of growth and an improvement in real incomes; an improvement in the position of the low paid and the pensioners; and moderation in the rate of cost and price inflation.

All those round the table at Chequers and Downing Street were in full agreement on these objectives. But I would go much further than this. I believe that they command the support of the great majority of the people of this country. The opportunities now open to the country and to us all are immense, if we can, together, succeed in these objectives.

The Government’s proposals are designed to secure these objectives. I therefore commend them with confidence for the approval of the House, and for the support and co-operation of all those concerned, on both sides of industry, and of the whole nation.

Mr. Harold Wilson : The right hon. Gentleman will know that, as we said publicly on Friday, we share his disappointment at the breakdown of the discussions. I take it that his words mean that he wishes the talks to be resumed at an early date. In our view, if they were resumed, there would have to be a radically different approach on the Government’s part to certain fundamental issues affecting prices and the wider living costs of the average household. If there is to be any agreement emerging from future talks that will have to be the fundamentally changed approach of the Government.

This is not the time to remind the right hon. Gentleman of all the many strongly worded statements, since he became Leader of the Conservative Party, in every debate in this House, on every proposal of the Labour Government, and during the General Election—and of the fact that this represents the biggest reversal of positions he has taken on any subject since he broke his “at a stroke” promise on coming to office.

We have repeatedly warned the right hon. Gentleman that no agreement would be fair and just, or workable, which did not provide for guarantees on food prices, not only domestically created prices—the right hon. Gentleman again referred to domestic prices—and a limited range of other essentials—rents, both private and public, rising mortgage interest rates, VAT and school meal prices, which he is to increase next April, as well as the dividends referred to in his statement. The right hon. Gentleman has moved a little in his three months’ proposals, but he has not met the main requirements for a fair agreement as we put them to him.

Has the right hon. Gentleman recognised, in all these long-drawn-out talks, that those he has to meet are not so much employers or trade union leaders as trade union members and, above all, the wives of trade union members responsible for balancing their family budgets? Does he agree that a three-months freeze – for it is only three months; even if the further 60 days are added, it will take it only to early April – would mean on 1st April, or soon afterwards, increases in rents of up to 50p for many families, many private rent increases – he has not told us, or perhaps I did not hear him correctly, whether private rents are to be included in his controls, but I hope they are  increases in school meals, taxation of school and other children’s clothing and V.A.T., as well as three months of rising European food prices and rate increases, all next April? Does he recognise that, even at the end of this period, that will be the position, whether the freeze is renewed for 60 days or not?

Will the right hon. Gentleman tell the House his proposals for dealing with the wide range of prices that have been pushed up since the breakdown of the talks, on Friday, Saturday and again this morning? They are on record already in the Press – for example, pharmaceutical and other manufactured goods. How does the right hon. Gentleman propose to catch those in his Bill? Of course, as a public employer he has caught many wage discussions and held them back since 26th September while allowing rents to rise on 1st October and other prices to rise since last Thursday. What machinery has he in mind? Recalling that he scrapped the National Board for Prices and Incomes, in a mood of euphoria after the last election, will he now restore that Board and the Consumer Council?

The right hon. Gentleman referred to exceptions. What exceptions has he in mind? For example, do they cover increments in public and private employment? Do they cover pay increases for the police, atomic energy, local authority and electrical workers which have been agreed but not yet paid? Will he explain the answer to that question?

Finally, is the right hon. Gentleman aware that, in our view, no proposals will be workable, or fair and just, which fail to deal with food prices, rents, both private and public, school meals, mortgage rates and taxation of children’s clothing, and that, because such proposals will be neither workable nor fair, we shall oppose them?

The Prime Minister : On the right hon. Gentleman’s first point, of course he is right. As I said in my statement, we are prepared at any time to carry on further talks with both the TUC and the CBI. They realise this and I hope that it will be possible.

I reiterate my belief, of which the right hon. Gentleman is well aware, that in a free society it ought to be possible to make these arrangements on an entirely free and voluntary basis. No Government have tried harder than we have tried during the past three months to achieve that result. Indeed, this has been widely recognised by both the CBI and the TUC. I regret that it has not been possible to do this. Therefore, we must look forward to the time when we can have an arrangement of a similar kind, which I hope can be negotiated voluntarily.

The right hon. Gentleman will find the answers to the detailed points he raised set out in the White Paper. However, I will deal with some of the major ones. He asked what machinery would be used. Government machinery – Government Departments – will be used. One of the first things I learned in the discussions was that the National Board for Prices and Incomes had been anathema as much to the TUC as to many other people. Therefore, there was no desire to recreate that body. [Interruption]. Let us discuss these matters frankly. This is what I was told.

Incremental payments will be excluded. I hope the right hon. Gentleman will agree that that is right. In the nature of their payment, they are not in fact wage increases.

Concerning the other matters mentioned by the right hon. Gentleman, concentration is not only on domestic costs. As I pointed out in my statement—and it was said on Thursday to the TUC and the CBI – the Government have undertaken to use the means available to them for influencing and holding down costs outside domestic costs. We gave our full undertaking to do that.

Many of the other matters mentioned by the right hon. Gentleman—I must frankly say this to him—are political. They are not matters which directly affect the discussions which we have been having. Every Government has the right to carry through its policy. I told the CBI and the TUC that I was not prepared to repeal the Act taking us into the European Community, nor to repeal the Industrial Relations Act, nor to repeal the fair rents Act, but that the Government were prepared to take into account the results of that legislation. That is what we have told them all the way through. When we said this, we said that the Chancellor of the Exchequer in framing his next Budget will, of course, take into account the consequences of membership of the European Community and of the other factors in the economy. This is the right position for Government and Parliament to take up, and then to discuss with those concerned how best we can deal with these items. That is what we have done.

Mr. Wilson : One of the first points the right hon. Gentleman made when he said that the Government had a policy for food price increases that arose from causes other than domestic causes, was – I think his statement was to this effect – that he envisaged the possibility of action to offset price increases. Was he able to tell the TUC, or can he tell the House today, whether there is a firm Government proposal for shielding the British consumer from the increase in food price rises that will result from entering the Market in January and from other increases arising from outside causes? Is the right hon. Gentleman prepared to answer that question? Will the right hon. Gentleman, following what he has just told the House about the discussions on other prices, now give an undertaking that he has powers to deal with them? When he refers to political matters, is he not confirming that it is the right hon. Gentleman’s own political prejudices which stopped an agreement on rents and on other matters?

The Prime Minister : In no circumstances do I accept that. As to the food prices of the Community, they do not have an effect until the spring in any case. The Government have in mind certain items of food the prices of which they can influence. As my right hon. Friend the present Leader of the House pointed out on Friday, it is quite incorrect to say that the rise in food prices has been due to levies by the British Government – quite untrue. It is due to the impact of the rise in world food prices. We told the TUC and the CBI that in dealing with other factors we would take account of what was going on in this sphere.

Mr. Powell : Does my right hon. Friend not know that it is fatal for any Government or party or person to seek to govern in direct opposition to the principles on which they were entrusted with the right to govern? In introducing a compulsory control of wages and prices, in contravention of the deepest commitments of this party, has my right hon. Friend taken leave of his senses?

The Prime Minister : The present Government were returned to power to take action in the national interest when they were required to do so.

Mr. David Steel : Is the right hon. Gentleman aware that we on these benches also share his regret at the breakdown of the talks? He said that no Government had tried harder in the past three months to seek agreement. Is he aware that his party has been in office for two years and three months and that we regret that this approach was not adopted when the Government came to power in June, 1970? Can the right hon. Gentleman say whether the exceptions during the 90-day period will include exceptions for the lowest paid and whether the Government are moving towards a national minimum earnings rate?

The Prime Minister I am grateful to the hon. Gentleman for what he said. I must emphasise that the present Government, when they came into power, asked the CBI and the TUC to consult and co-operate with them. It was through no fault of the Government that consultation was refused. I have no desire in any way to make it more difficult to achieve a resumption of these talks and I therefore do not wish to discuss that matter further. Whether the reluctance to consult was based on political motives is not for me to say. The Government have always been fully prepared to consult and co-operate with both the TUC and the CBI.

On the second point which the hon. Gentleman raised, he will see the exceptions set out in the White Paper. The one to which I would particularly draw his attention is that of wages councils’ awards. These are concerned with those who are the lowest paid in the country, and where the proposal has taken place before the standstill and it is more than a year after the last award it will be possible for it to be an exception.

Sir Harmar Nicholls : Is my right hon. Friend aware that although the method that he has announced is a change of direction for the Conservative Government, the nation as a whole will recognise and respect the great efforts that he has made to arrive at a voluntary agreement? Is he also aware that the one thing he could not do, under the circumstances that exist in this country at the moment, was, as the Leader of the Government, to do nothing, and that what he has done by underwriting the offer he made to the bodies when they were discussing the matter will help to restore the credit of this country when it is badly needed in a time of crisis?

The Prime Minister : This country now has expansion going at a rate of 5 per cent., faster than we ever had under the last Administration, with capacity for further expansion for at least another year, with capacity for investment to carry on that expansion over further years ahead. In addition, we are now providing more jobs and greater productivity. [HON. MEMBERS: “Where?”] We are not going to see this expansion and the future of the British people thrown away by excessive wage increases.

In reply to what the right hon. Gentleman said, the great mass of trade unionists and of their wives believe that the proposals which were put to them by the present Government were fair and gave them a better chance of a steady improvement in their standard of living than ever before.

Mr. Eadie : The right hon. Gentleman is very fond of using the expression “economic management”? Is he aware that if he applies the test of economic management to the Government which he is leading he will fail in that test and, therefore, that he should resign as a consequence of what he has said this afternoon or reconsider his position? Is he aware that a former Conservative Minister has said that the policy that he is presenting to this House this afternoon cannot succeed unless he has a long-term economic strategy? However hard the right hon. Gentleman may try to convince or influence this House, he cannot say that he has a long-term economic strategy.

The Prime Minister : I have constantly told the House that the economic objectives were agreed around the table. Those objectives are very clear, and I believe that they have the full support of the country.

Sir D. Walker-Smith : Does my right hon. Friend appreciate that thinking people, who tend to respect the constitutional principles of this country, will support efforts to resist any attempt by organisations or people, however respected and however powerful, to deny the function of government to the elected representatives of the nation?

The Prime Minister : Yes, Sir; I am sure that that is the view of the majority of the people of this country. It is time that all three parties in this House made it absolutely clear that when Parliament has passed its legislation the law should be observed by everyone, regardless of his position, wealth or power.

Mr. Sheldon : Is the right hon. Gentleman not aware that the whole argument about a prices and incomes policy is an argument about who gets what? What the Prime Minister and the Chancellor have ensured over the past two years is a redistribution in favour of the well-to-do. When the Prime Minister went to those tripartite talks, he did not go with clean hands. If he ever wants to get a voluntary agreement, he will have to reverse those policies which he has carried out already.

The Prime Minister : The hon. Gentleman’s first sentence touched on what obviously proved to be one of the major matters in the discussions—namely, whether the higher paid wage earners are prepared to see, in this stage, the lower paid getting proportionately larger increases. This is what was agreed around the table, but when the proposals were put forward at the end of the day they did not secure acceptance.

Mr. Edward Taylor : As steel is one of the basic costs of manufacturing industry, and a crucial one for Scotland, will the right hon. Gentleman confirm that any restraint on the prices of nationalised industries during or after the 90 days will apply to steel also? Will he obtain the agreement of the ECSC for this to be done?

The Prime Minister : As I said in my statement, the Government have requested all nationalised industries to comply with the voluntary policy. Now that we are moving into the standstill, obviously the nationalised industries themselves—all of them—are involved.

Mr. Palmer : Would the right hon. Gentleman not agree that many of the wage and salary claims at present before negotiating machinery are for the rectification of unjust and unsatisfactory differentials? Will not this proposal simply freeze an artificial payments structure and mean that it will take a very long time for the country to recover from it?

The Prime Minister : I do not think that the hon. Gentleman’s last sentence is justifiable, in view of the fact that the intention of this proposal is for a 90-day standstill, in order then to get through the legislation which will enable the further stage to take place. But of course the hon. Gentleman is right that many of the problems of wage bargaining arise from differentials which some groups believe to be unjust. The real problem is how that can be dealt with without causing inflationary wage increases. What we were trying to do in the talks was to get agreement about a basic approach for this first year only and to establish priorities. The priority which was agreed was to help the lower-paid workers. Of course, this affects differentials right the way up, but it is a priority which was agreed. What one has to do in any attempt at a policy which will prevent inflation is to see how these can be adjusted fairly.

Dame Joan Vickers : In view of the fact that many proceedings are going on under arbitration, including those for Her Majesty’s Dockyards, when the arbitration court decides on the award, will the Government agree to accept that without any further delay?

The Prime Minister : I would ask my hon. Friend to await the White Paper. These matters are set out quite specifically, stating what will be done in the particular cases. It is much better that it should be seen in the whole context.

Several hon. Members rose—

Mr. Speaker : Order. I want the help of the House, if I may have it. There is to be a business statement next, the contents of which I know. There is an important debate on poverty today and there is a debate on the industrial situation tomorrow. I hope that it is the wish of the House that I should not continue these exchanges indefinitely.

Mr. Strang : Is the right hon. Gentleman aware that his proposal to increase the rent rebate needs allowance by 50p will mean in practice that council tenants in Scotland who were facing increases of £1 a week will have it reduced by a derisory 8½p? Will the local authorities which have refused to implement the Housing Finance Act have present rent levels frozen, and will council tenants who have had increases imposed on them as a result of the Act have them withdrawn?

The Prime Minister : No, Sir, and those councils which have refused to carry out the law will not be exonerated by the Bill.

Mrs. Knight : Would my right hon. Friend be reluctant to prescribe either excessive medication or the surgeon’s knife except in a case in which the patient is quite incapable of recovering otherwise? In view of what he has recently said, will be assure us that the fears that some of us have entertained since hearing what the Post Office Corporation intends to do about putting up prices, will be allayed by his statement?

The Prime Minister : As I have said, this applies to all the nationalised industries. Therefore my hon. Friend’s fears can be allayed during this standstill period.

Mr. Roy Jenkins : May I ask the right hon. Gentleman one question on a matter on which I think the House is entitled to know the state of his current thinking? Has he now abandoned his constantly reiterated view that a statutory policy could only make inflation worse in the long run, or does he now regard the short-term situation that he has produced as so disastrous that he cannot afford any longer to think about the long run?

The Prime Minister : I have already told the House that I believe that, in a free society, it ought to be possible to manage the economy in co-operation with the TUC and CBI in a voluntary way. I have read with great interest a reprint of the speech which the right hon. Gentleman made, in which he himself said that these matters should be voluntary and that there should be as little legislation as possible. I am glad to see the right hon. Gentleman nodding his head. Therefore, we are both in agreement on that matter.

What I am saying is that, in the situation when these talks have not led to agreement, it is essential to have this standstill for 90 days and then to move on to the next phase. But I believe that there is a difference between the situation in which we are doing this and that in which the right hon. Gentleman had to do it. He was doing it at a time of a stagnant economy, at a time when he was deflating continuously through heavy taxation and at a time when he was trying to reduce the real standard of living of the British people. We are doing it at a time of expansion. Our sole objective—I am sorry that the right hon. Gentleman turns away—is to protect the expansion and the improvement in the real standard of living of the whole nation.

Hon. Members: Resign!