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HIS D O C U M E N T IS T H E P R O P E R T Y O F H E R B R I T A N N I C M A J E S T Y ' S G O V E R N M E N T d
COPY NO
C ( 7 5 ) 70
17 J u n e 1975
CABINET PAY OPTIONS AND THE PROSPECT FOR INFLATION N o t e by t h e S e c r e t a r y of t h e C a b i n e t I a t t a c h , f o r t h e c o n s i d e r a t i o n of C a b i n e t at i t s m e e t i n g on F r i d a y 2 0 J u n e ,
a r e p o r t by the Official S t e e r i n g C o m m i t t e e on E c o n o m i c S t r a t e g y .
JOHN HUNT
Cabinet Office
ii
17 J u n e 1975
i
j i
(SECRET) PAY OPTIONS AND THK PROSPECT FOR INFLATION
Report by the O f f i c i a l
1.
This note f i r s t
S t e e r i n g Committee on economic
Strategy
s e t s out the c u r r e n t Treasury f o r e c a s t f o r t h e
r a t e of p r i c e i n c r e a s e i n t h e p e r i o d up t o t h e f i r s t
q u a r t e r o f 1977.
Next, i t c o n s i d e r s what would be i n v o l v e d i n an i n f l a t i o n t a r g e t
the second h a l f of 1976.
A f t e r d e s c r i b i n g some i m p o r t a n t
for
features
l i k e l y t o a f f e c t pay s e t t l e m e n t s i n t h e 1975-76 pay r o u n d , i t
then
t r i e s t o s e t out t h e main o p t i o n s f o r pay p o l i c y f o r t h a t r o u n d ,
beginning i n t h e e a r l y autumn; and r e h e a r s e s b r i e f l y t h e advantages
and disadvantages o f each o f them.
The o p t i o n s d i s c u s s e d a r e : ­
i
TUC g u i d e l i n e s o n l y : a n o t h e r r o u n d ;
i i
a n o n - s t a t u t o r y Government pay p o l i c y w i t h o u t a norm;
i i i a n o n - s t a t u t o r y Government pay p o l i c y w i t h a norm;
i v
TUC g u i d e l i n e s o r a Government norm supported by compulsory
p r e - n o t i f i c a t i o n o f pay s e t t l e m e n t s and d e l a y i n g powers;
v
a s t a t u t o r y p o l i c y w i t h a norm.
Schemes f o r t a x i n g away e x c e s s i v e pay i n c r e a s e s a r e n o t d i s c u s s e d i n
t h i s n o t e , though Annex
D , which i s concerned w i t h
enforcement,,
contains a r e f e r e n c e t o t h e use o f such a t a x as a p e n a l t y .
does n o t cover e i t h e r schemes l i k e
The n o t e
t h a t s u b m i t t e d by M i c h a e l Young t o
NEDC which i n v o l v e s v e r y l a r g e t a x l e v i e s t o f i n a n c e v e r y
large
s u b s i d i e s ; though t h e s t a t u t o r y pay p o l i c y which i s p a r t o f t h a t
p a r t i c u l a r scheme corresponds t o O p t i o n 5 above.
2.
Annexes t o t h i s n o t e c o n c e r n : A
t h e assumptions u n d e r l y i n g t h e p r i c e f o r e c a s t and f a c t o r s
which might change i t ; B
comparative i n f l a t i o n i n o t h e r OECD c o u n t r i e s ; 0
some comment on d i f f e r e n t
t y p e s o f pay norm and t h e i r
l i k e l y e f f e c t on t h e R P I ;
D
enforcement i n a s t a t u t o r y
policy.
1
(SECRET) (SECRET)
The P r i c e
3.
Forecast
Tfee c u r r e n t f o r e c a s t f o r the y e a r on y e a r i n c r e a s e i n t h e
retail
p r i c e i n d e x i s as f o l l o w s : ­
1975 1976 1977
4.
It
Q3
Q4
Q1
Q2
25
24
20
16
Q3
Q4
15 14 Q1
14 i s dangerous t o put too much weight on f o r e c a s t s a y e a r ahead,
Many ( i n c l u d i n g t h e Bank o f England and t h e N a t i o n a l I n s t i t u t e
Economic and S o c i a l Research) would t a k e t h e v i e w t h a t t h i s
f o r the p e r i o d a f t e r 1976 Q1 w i l l prove too l o w .
for
forecast
For the reasons
g i v e n i n Annex A some d e c l e r a t i o n from t h e h i g h r a t e s o f t h e summer
and autumn o f 1975 seems l i k e l y , h u t , as Annex A a l s o makes
it
could e a s i l y prove l e s s t h a n shown i n p a r a g r a p h 3.
clear,
The exchange
r a t e , o i l p r i c e s , n a t i o n a l i s e d i n d u s t r y p r i c e s and i n d i r e c t
tax
changes could e a s i l y add 3% or 4% t o i t by t h e second h a l f o f
5.
1976.
The assumption about pay i n the 1975/6 pay round w r i t t e n i n t o the
f o r e c a s t i s t h a t on p r e s e n t p o l i c i e s s e t t l e m e n t s w i l l a g a i n be i n
t h e range 25-30% on a y e a r e a r l i e r .
Some reasons f o r t h i s ,
together
w i t h o t h e r assumptions u n d e r l y i n g t h e f o r e c a s t , a r e g i v e n i n Annex A.
Paragraph 8i below a l s o
refers.
A P r i c e O b j e c t i v e
6.
There a r e s t r o n g r e a s o n s , both e x t e r n a l and d o m e s t i c , f o r seeking
a speedy and c o n v i n c i n g d e c e l e r a t i o n i n our r a t e o f
inflation.
Annex B shows some comparisons of UK i n f l a t i o n p r o s p e c t s and those of
other OECD c o u n t r i e s .
E x t e r n a l l y they i n c l u d e t h e p r e s s u r e on
s t e r l i n g and t h e d e c l i n e i n our s t a n d i n g as a borrower a r i s i n g from
l a c k o f c o n f i d e n c e i n our c o n t r o l o f i n f l a t i o n , as w e l l as t h e
2 (SECRET) E C R E T )
e f f e c t s on c o m p e t i t i v e n e s s .
There a r e s i m i l a r reasons o f c o n f i d e n c e
at home, e s p e c i a l l y f o r i n d u s t r i a l i n v e s t m e n t .
I n addition, i t
would
be i m p o r t a n t t h a t any new counter i n f l a t i o n p o l i c i e s should show
r e s u l t s w i t h i n a y e a r o r s o , i f support f o r t h e p o l i c i e s was t o be
sustained.
7.
I f M i n i s t e r s accept t h i s ,
the minimum o b j e c t i v e
to meet t h e
requirement would seem t o be t o reduce t h e r a t e o f i n f l a t i o n t o \ 0 f o
by the e a r l y autumn o f 1976, w i t h t h e p r o s p e c t o f r e a c h i n g s i n g l e
figures by t h e end o f t h e y e a r .
rates of our main c o m p e t i t o r s .
T h i s would s t i l l l e a v e us above t h e
I f a 10$ r a t e o f i n c r e a s e , y e a r on
year, were reached by say September 1976, t h e Government would be
e n t i t l e d t o e x p e c t t h a t pay i n t h e 1976/77 pay round would be r e l a t e d
to t h a t f i g u r e ,
or l e s s .
d e c e l e r a t i o n d u r i n g 1977.
T h i s would open t h e way t o f u r t h e r
I t would c l e a r l y be d e s i r a b l e t o
invite
the g e n e r a l a s s e n t o f t h e community t o such a programme and t o make
every e f f o r t p o s s i b l e t o e x p l a i n the need f o r i t t o t h e t r a d e u n i o n
movement.
Pay F e a t u r e s a f f e c t i n g t h e 1975/6 Pay Round
8. Some f e a t u r e s o f t h e pay scene need t o be borne i n mind i n
considering t h e o p t i o n s f o r pay i n 1975/76 d i s c u s s e d i n the n e x t
section of t h i s
i
paper:
t h e f o r c e o f c o m p a r a b i l i t y w i t h i n a pay r o u n d :
"the tone o f t h e r o u n d " .
Once a p a r t i c u l a r
r a t e o f pay
i n c r e a s e becomes e s t a b l i s h e d i n some i m p o r t a n t
settlements
a t t h e b e g i n n i n g o f t h e round ( e g l o c a l a u t h o r i t y and HHS
manuals) subsequent s e t t l e m e n t s , e s p e c i a l l y i n t h e p u b l i c
s e c t o r , w i l l n o t r e a d i l y f a l l below t h a t l e v e l .
M
I n particular,
a d e c l i n e i n t h e r a t e of p r i c e i n c r e a s e d u r i n g t h e round i s
likely
t o be r e f l e c t e d only g r a d u a l l y i n a d e c l i n e
settlement
rates;
3
(SECRET) in
ii it is a special feature of the 1975/76 pay round that we expect it to start against the background of a "hump" of 25­
26$ price increases in the autumn of 1975. There is an obvious risk that in spite of any subsequent decline, this will set the tone for the round. There are signs that the TUC have shown some recognition of this in their recent discussions. If a significant deceleration is to be achieved it would be necessary to bring into the reckoning the prospect of a lower rate of price increase, perhaps expressed as an inflation target, and secure settlements in the autumn well below the then current year on year inflation rate; iii in the public sector comparability within the round is strong between successive groups of manual workers (ranging
from loc 1 authority manuals and the industrial civil service
to miners and railwaymen); but there is also an important
group whose pay is affected by comparability with the previous
round (non-industrial civil servant, the armed forces and
others covered by the Review Bodies, the. Police). Comparability
with the previous round raises problems for any policy of
de-escalation;
iv there is a strong tendency for differentials to re-assert themselves on a percentage basis if^they are compressed. This has happened both in relation to the flat rate elements in the the 1973/74 statutory policy (£1+4$; 40p thresholds), and in relation to the TUC £30 low pay target; v there will be a higher level of unemployment in the 1975/76 pay round. This will undoubtedly have an effect on some private sector settlements and, as stated in Annex A, it is taken into account in the forecast. It is difficult to be sure what effect it will have on the general level of pay settlements
however and especially on those in the public sector. Experience suggests that the part of the pay scene where pay drift (positive or negative) is strongest and the impact of the level of demand on employment is greatest is that part of the engineering and construction industries where pay is mainly determined by plant or site bargaining. 4 (SECRET)
(SECRET)
The Pay Options;
Option 1 : TUO Guidelines only 9. The contribution which this policy would make to the reduction of the rate of inflation would depend on whether the guidelines were in the end stricter than in this round and whether they were more faithfully observed. The current price forecast assumes a continuance of the present guidelines but implies a smaller excess over the RPI increase than hitherto in the early settlements of the new pay round. 10. Recent public statements by some TUO leaders and the discussions in the TUC Economic Committee, as reported, imply a recognition of the need for a more explicit norm, which would allow less room for latitude in interpretation; and of the possibility that that norm might have to be below the level which would give general compensation for the cost of living. It remains to be seen whether the General Council and Congress will find it possible to agree on a norm consistent with the kind of price objective discussed in paragraph 7; and whether some major unions would dissociate themselves from such a norm. Annex C shows the effect which various flat rate norms of the kind suggested by Mr Jack Jones would have on prices, if fully observed. A flat rate of £8 would be a little above a 15$. norm, but whilA more favourable to the low paid would probably have less chance of observance by unions representing skilled and white collar workers. .
.
.
.
.
.
1 1
11. The advantages of a "guidelines" policy would be: i
continuity of Government policy; ii limited Government commitment. Responsibility for pay restraint continues to lie with the TUC and Government policy is less directly at stake in pay conflicts; but iii even if the TUC find it possible to take a stricter line than in 1974-75, and remove some of the escape routes, it is difficult to have any confidence that there will be sufficient .: observance in 1975-76. Overseas opinion is likely to remain sceptical; 5 (SECRET) (SECRET) iv this policy is not in itself an assurance that industrial conflict will be avoided. It is at least as easy to have dispute
over high figures as over lower ones. Avoidance of conflict could mean acceding to progressively higher bids; v this policy could well mean settling for a limited contribution only from incomes policy to meeting our economic difficulties. It is in effect a decision to rely more on other policies of restraint which, in present economic circumstances, already bear a heavy load Option 2:
Non-statutory with no norm 12. i A White Paper might say that as part of a national campaign to reduce the level of inflation to 10$ by late 1976 pay settlements would need to be lower, and indeed below the level of RPI compensation; ii there would be no published norm or guiding light, though' the
target would indicate the general area for settlements. There would be case by case decisions in the public sector and an appeal for much lower settlements in the private sector. There would be a determination to resist industrial action and refuse financial provision for excessive settlements in the public sector but the policy would permit flexibility to accommodate groups too powerful to resist; iii there would need to be firm central control of pay negotiations in the public sector and comparability either within the round or with the previous round would have to be rejected. 13. The pros and cons of this policy are discussed in paragraphs 16 and 17 below. Option 3:
Non-statutory with a norm 14. i. A White Paper would promulgate a norm related to, say, a
10% inflation target for autumn 1 9 7 6 ;
ii the norm would be applied by appeal, perhaps with OBI suppor
in the private sector; and by Government action or influence (including financial sanctions) in the public sector. Because
6
(SECRET)
t h e r e i s a norm, t h e need f o r f u l l c e n t r a l c o n t r o l o f n e g o t i a t i o n s i s somewhat l e s s t h a n i n O p t i o n 2; iii
c o m p a r a b i l i t y would have t o be s e t a s i d e i f i t s
results
c o n f l i c t e d w i t h t h e norm.
15.
The n e a r e s t p r e c e d e n t f o r O p t i o n 2 i s the N -1 p o l i c y o f t h e
Conservative Government o f 1970-72.
Sir S t a f f o r d O r i p p s
1
The precedents f o r O p t i o n 3 a r e
wage s t a n d s t i l l o f 1948-50; Mr Selwyn L l o y d ' s
pay pause and g u i d i n g l i g h t
"Declaration of I n t e n t "
1
of 1961-62; and Lord George Brown s
o f 1964-66.
The f i r s t and l a s t r e s t e d on
agreement w i t h t h e 3JUC, t h e second d i d n o t .
16.
The advantages o f O p t i o n s 2 and 3 a r e : ­
i
they meet t h e demand f o r a new and determined Government
initiative
statutory
ii
to t a c k l e the i n f l a t i o n , without r e s o r t to a
policy;
i n d i f f e r i n g d e g r e e s , t h e y p e r m i t more f l e x i b i l i t y
a statutory policy.
than i n
A few s e t t l e m e n t s i n c o n s i s t e n t w i t h t h e
i n f l a t i o n t a r g e t or t h e norm can be accommodated, p r o v i d e d
they
do n o t s e t a p a t t e r n and thus d e s t r o y t h e p o l i c y ;
i i i t h e y a r e aimed f i r s t a t t h e p u b l i c s e c t o r b u t ,
especially
i n t h e circumstances of 1975-76, i t i s i n t h e p u b l i c
sector
t h a t t h e s t r u g g l e w i t h pay i n f l a t i o n w i l l be won o r l o s t .
It
i s r i g h t t h a t t h e Government should make whatever changes a r e
needed i n t h e management o f t h e p u b l i c s e c t o r t o a c h i e v e t h e
result;
but
i v
a n o n - s t a t u t o r y p o l i c y has t o be e s t a b l i s h e d by example,
w i t h whatever r i s k o f c o n f r o n t a t i o n a t t h e b e g i n n i n g o f t h e pay
round t h a t i n v o l v e s .
It
implies a decision to enforce
against
t h e l o c a l a u t h o r i t y and NHS manuals i n November/December 1975
s e t t l e m e n t s w e l l below t h e y e a r - o n - y e a r HPI i n c r e a s e ;
(SECRET) (SECRET)
v
as a counterpart to the fact that they permit more flexibility, these policies give less assurance to those to whom the policy is first applied that it will be applied even-handedly
to others. This increases the risks of acquiescence for union leaders and thus the likelihood of resistance; vi these policies are exposed to accusations of discrimination against the public sector. In Government-led voluntary policies,
the Government inevitably appears to act more as employer and paymaster than as Government. The Government has to suspend public sector pay institutions: pay research, the review bodies and arbitration for public sector pay. It has to apply the policy as rigorously as it can in the public sector before it can
demonstrate that the private sector will also comply. If arbitration continued for the private but not the public sector, that would be both a serious loophole and a source of grievance; vii if it were thought that the non-statutory policy would fail and that a statutory policy would then succeed it, that could create forestalling pressure on the non-statutory policy. 17. As between Options 2 and 3, Option 2 seeks to provide both for greater flexibility in relating settlements to market needs (recruitment, profitability etc) and greater room for manoeuvre by the Government. The counterpart of that is however great uncertainty about how it will be applied in the private sector and a greater need to assert central control of local authority and nationalised industry pay negotiations, with whatever resistance that entails. The N -1 policy, which had some similarities, produced in 1972 much of the disparity between public sector groups (teachers, nurses, the Post Office) which led to the special catching up increases in 1974. The absence of a norm might also mean that until such a policy established itself, it would have less impact on overseas opinion. Option 4:
Guidelines or norm with monitoring and delaying powers 18. This policy, which requires legislation, would be similar to that reflected in the Prices and Incomes Bill of 1966 when it was first introduced. Its advantages would be:­
8 (SECRET)
(SECRET) i
it stops short of requiring pay increases by statute to comply with a norm, and does not make it illegal for employers to pay, provided the prenotification etc requirements are complied with. Free collective bargaining continues; ii it might be possible to present this option as "giving teeth to the TUC guidelines", provided the guidelines were in themselves regarded as adequate; iii flexibility (and its counterpart risks) remains; but iv in legislating the Government incurs much of the criticism associated with a statutory policy; and statutory delays, like a statutory (or a non-statutory) policy, could be challenged by industrial action; v
the need to resist most excessive settlements at the end of the delaying period remains if the policy is to carry conviction. This option does not remove the problem of enforcement. It might be necessary to recreate the equivalent of the MBPI to assist the Government in handling such cases. In fact, the difficulties of a case by case approach remain; vi it might be expected that, as in 1966, this option would prove to be a step on the way to a statutory policy. Option 5:
Statutory policy with a norm 19. The precedents are 1966-68 and 1972-74. Both policies had an
initial year or more of acceptance. The advantages are:­
i an unreserved commitment by the Government, with such advantage as that may have in convincing unions settling early in the round that others will be similarly treated; and in convincing external opinion of the Government s determination to tackle the inflation; 1
9 (SECRET) (SECRET) ii assurance that very few employers, and no major ones in either the public or the private sector, will disregard the law,
so that the policy will, in particular, be effective in the private sector. This means even-handedness of treatment between
public and private sectors and, provided the policy holds, uniformity of treatment within the pay round; iii arbitration, pay research, the review bodies, independent pay action by local authorities and nationalised industries are all suspended for the period of control but without the appearance of a specific attack on, or singling out of, any of these institutions; iv scope for promulgating a counter-inflation plan over say 2 years, as part of an economic strategy; with the possibility of a controlled relaxation of the pay controls in the second year
subject to safeguards devised and negotiated in the first; but v
the TUC would be bound to oppose a statutory policy (as they would a tough voluntary one). Only if there were a manifest crisis could we expect their opposition to be token or muted. The reaction of individual unions would no doubt also depend on the seriousness of the economic situation and the impact that was having on public opinion; vi as in 1966 and 1972, a statutory pay control would mean a reversal of Government policy; vii there is damage to the Government and to the credibility of the economy in any further failure to check pay inflation, whether it takes the form of inaction or of the breakdown of a new pay policy, statutory or non-statutory. If a new tougher pay policy, statutory or non-statutory, is destroyed by strike action or the threat of it, the ability of the Government to govern is called in question. The damage is however greater with a failed statutory policy not necessarily because the law itself is broken, but because Ministers have to use consent powers to adapt the law to the demands of particular groups. 10
(SECRET) (SECRET)
- - -
-
How serious this is depends on the circumstances (eg after failure to resist a strike successfully) in which consent powers have to be used. 20. Crucial questions which arise on a statutorj'- policy, but arise also mutatis mutandis on a tough non-statutory policy, are:­
i
is there a reasonable chance in the period October 1975 to July 1976 of the traditional honeymoon period/grudging acquiescence for a statutory policy as in 1966-67 and 1972-73 or not? Would it for example be challenged at the outset by the local authority manuals and if so, could they be successfully resisted? ii is there a chance that the miners would acquiesce as in 1973* or alternatively that, with the aid of a Ministerial safety-valve power in the Act (like that used by the present Government in March 1974) an out-of-line miners increase could be isolated? 1
21.
Annex D contains a note about enforcement under a statutory policy. Types of Norm 22. Annex C contains notes on different types of norm, and a table
showing the impact these norms would have on the rate of inflation
in 1976. The table suggests that a 15$ norm (or a flat rate of £8)
is the highest which would have any chance of yielding a 10$ inflation
rate by September 1976. (A "mixed" equivalent would be £4 plus 7T$) .
It might well prove insufficient.
17 June 1975 (SECRET) (SECRET) ASSUMPTIONS UNDERLYING THE PRICE FORECAST AND FACTORS WHICH MIGHT CHANGE IT Assumptions 1. The more important assumptions underlying the price forecast are as follows:­
i
pay settlements in the 1975-76 pay round are assumed again c
to he in the range 25$-30/£, On the one hand the pay round will start in October/November 1975 against a background of a 25$ year on year rate of inflation, compared with about 17$ in 1974; and the going rate at the end of the current round will be in the range 25$-30$. On the other hand, unemployment will be rising and there will not be the once-for-all adjustments following the exit from the statutory policy which occurred in the autumn of 1974; ii the effective sterling exchange rate is forecast to fall in two steps of 5$ to 29i$ below Smithsonian. The forecast in fact assumes that the first step would take place in July 1975 and the second in January 1976. In fact the rate is now already 26$ below Smithsonian, a fall of nearly 7$ from the starting point of the forecast; iii after including the effects of the forecast sterling depreciation, food import prices are assumed to rise at 8$ over the period the first quarter of 1975 and the first quarter of 1977. Import prices of manufactured goods are assumed to rise at 15$ per annum and other non food import prices at 8$ per annum; iv
nationalised industry prices are forecast to add 2-£-$ to the
RPI in 1975-76 and 1 4 - $ in 1976-77;
v
local authority rents are assumed to increase on average by 45p a week in 1975-76 (which is the assumption Ministers are making for subsidy purposes). In 1976-77 they are assumed to rise in line with consumer prices; vi
since the basis of the forecast Is "existing policy", there is 1
(SECRET
-
-
-
Ml
inn r-*
OECD COMPARATIVE INFLATION FORECASTS
Consumer P r i c e s
1.
An OECD f o r e c a s t i s a v a i l a b l e up to t h e f i r s t h a l f o f 1976.
The f i g u r e s show p e r c e n t a g e i n c r e a s e s on t h e corresponding h a l f
o f the p r e c e d i n g y e a r ( e g 1976 f i r s t h a l f on 1975 f i r s t
USA
75(1)
76(1)
9.8%
5.9%
Wholesale
2.
Germany
6.2%
5.8%
Japan
12.1%
9.0%
France
Italy
12.9%
9.2%
21.4%
11.7%
year
half).
Canada
UK
19 .4%
16.4%
12.7%
9.1%
Prices
F o r e c a s t s of t h e r a t e of i n c r e a s e i n domestic w h o l e s a l e
prices,
y e a r on y e a r , a r e as f o l l o w s : USA
74
75
76
Germany
22.2%
10.7%
5.6%
13.6%
2.5%
1.2%
Japan
26.6%
8.9%
7.9%
France
Italy
29.1%
10.6%
7.4%
35.8%
18.2%
12.9%
I n c r e a s e s i n U n i t Wage Costs i n Domestic
3.
Canada
UK
20.7%
9.0%
9.1%
24.6%
22.0%
17.
Currencies
The f o l l o w i n g t a b l e shows y e a r - o n - y e a r changes i n u n i t wage costs
f o r t h e UK and 6 c o m p e t i t o r c o u n t r i e s .
They a r e not c o r r e c t e d f o r
a p p r e c i a t i o n (Germany) o r d e p r e c i a t i o n (UK) o f t h e r e s p e c t i v e
c u r r e n c i e s s i n c e t h e purpose i s t o show u n i t l a b o u r cost
throughout t h e p e r i o d .
increases
I t f o l l o w s t h a t t h e y do not measure
relative
c o m p e t i t i v e n e s s , though t h e i n c r e a s e s i n 1975 and 1976 g i v e some
i n d i c a t i o n o f what may happen to c o m p e t i t i v e n e s s i n t h a t
4.
period.
The f i g u r e s f o r 1975 and 1976 a r e t e n t a t i v e and p r e l i m i n a r y .
Some
o f t h e h i g h u n i t c o s t s f o r 1975 ( e g f o r t h e US) r e f l e c t t h e expected
d e c l i n e i n o u t p u t and t h e low ones f o r 1976 the e f f e c t o f a r e c o v e r y
of output.
Wot too much weight should be p u t on t h e i n d i v i d u a l
figures.
The g e n e r a l p i c t u r e i s however c l e a r .
controls)
shows up as t h e best year o f t h e r u n f o r t h e UK f o r r e l a t i v e
wage i n f l a t i o n .
1974 was a bad y e a r .
1973 ( a y e a r o f pay
1975 l o o k s a b e t t e r y e a r
in
r e l a t i o n t o t h e US (because of t h e f a l l i n o u t p u t t h e r e ) , b u t n o t
i n r e l a t i o n t o Germany;
5.
and 1976 looks v e r y bad i n d e e d .
I t may be r i g h t t o a l l o w f o r some t i m e l a g i n e f f e c t s
in
c o m p e t i t i v e n e s s eg 1973 costs ^ a f f e c t i n g t h e f i r s t h a l f o f 1974 and
so o n .
(SECRET)
ANNEX B (contd) (SECRET)
change a
n
annual
rates Canada
USA
Japan
1972
3.9
4.4
8.2
1.7
2.8
4.6
1973
1974
1975
1976
7.7
8.5
8.7
18.0
3.1
5.1
31.1
24.3
3.7
Germany
3.8
5.6
10.3
5.9
- 2.9
France
Italy
1 .6
10.3
13.4
17.0
7.3
5.2
15.7
21.4
22.5
9.5
(SECRET) Neth.
0.3
3.1
15.0
19.0
8.6
Belux Total
2.6
10.2
12.0
12.5
8.9
2.9
6.2
13.9
15.5
4.6
UK 8.6
8.6
18.6
20.7
17.8
(SECRET)
TYPES OP NOEM AND THEIR RPI EFFECTS The attached table shows the effect on the current price forecast
of substituting pay settlements at the levels stated for the present
assumption of settlements in the 25% to 3O70 range.
2. 15% norm. This is self explanatory. Part of the argument for it would be that it took account of the expected decline in the rate of inflation over the ensuing year (with a 10% target, a decline from say 25% in October 1975 to 1 0 % in October 1976). A single percentage norm would be closest to normal bargaining practice. But it would leave the RET in 1976 Q3 only a little under 12%, with the risk of higher figures if the outturn were worse on other elements of the forecast. 3. 10% * 5%. This would give 10% at normal settlement date plus 5% six months later. Like the more severe alternative 5% * 10%. it aims to reduce the impact of a 15% pay increase on prices by splitting the norm, rather than by reducing the 15% total. 4. Indexation ( j RPI) and 5% plus full indexation. The first of
these is very severe indeed. It involves giving no increase at the
normal operative date, so that for example local authority manuals
would say in the autumn of 1975 that they were being asked to miss a
complete year's pay increase under conditions of 25% inflation.
,, .
Thereafter it would give percentage (or if desired flat rate) increases equivalent to ij- of the RPI increase in each quarter at the end of that quarter. u
5. 5% plus full indexation is more generous, and roughly equivalent in impact to 5% + 10%. There would be a 5% increase at normal settlement date, plus indexation payments on a 1% for 1% basis quarterly in arrear. 6. Indexation tailors increases more closely to the cost of living, tut it is vulnerable (as were thresholds) to an unexpectedly bad outturn on prices. There is also the risk that it will become 1 (SECRET) embedded in the negotiating system and will be treated as a "floor" or automatic entitlement in a post-control period, with bargaining on top. Denmark and Belgium seem to have been trying to modify or eliminate their pay indexation systems for anti-inflationary reasons recently. 7.
Flat rate norms (£6, £8, £10). A £6 flat rate would have to be justified as designed to protect the low paid (20$ of the present TUC target of £30 a week). An £8 flat rate is equivalent in its effects to a 15$ norm. Higher flat rates come nowhere near achieving the suggested objective. A £12 flat rate would be equivalent to the current Treasury forecast. 8.
The great trouble with flat rates is that they risk resistance from unions representing skilled, white collar or managerial workers, as well as from better paid manual workers like the miners and those in electricity supply. They also store up pressure on differentials for the immediate post-control period. The 1973-74 controls used mixed flat rate / percentage norms (£1 * 4$; 40p thresholds; 7$ or £2.25) but this was enough to generate big post-control increases to pull out differentials. The £30 TUC target had similar effects. The
attempt to use the policy for income redistribution, rather than achieving this through the tax/benefit system, adds seriously to the strains on it. Under a non-statutory system in particular the risks of non-compliance seem notably greater with a flat rate than with a percentage norm. 9. Non-statutory or Statutory. In general these norms could be associated with a guidelines policy, a non-statutory policy with a norm, or a statutory policy. But the more severe norms would have little chance of general observance outside a statutory policy (and might of course lead to defiance within it). A split norm would hardly work outside a statutory policy. And according to the nature of the policy one would have to discount the RPI effects to a greater or lesser degree to take account of the likelihood of non-observance. This would apply particularly to a "guidelines" norm. 2 (SECRET) (SECRET)
ENFORCEMENT IN A STATUTORY PAY POLICY 1.
The heart of a statutory pay policy is that it is illegal for employers to pay more than a specified increase; or more precisely, that it is illegal for an employer to pay an increase without pre-notifying it and if the controlling authority then objects, it becomes illegal to pay the increase. The question then arises whether it is necessary or desirable to protect employers from pressure by employees or groups of employees to break the law by conceding out of line increases. 2.
In the Prices and Incomes Act 1966 and again in the Counter Inflation Acts 1972 and 1973 provisions were included making it an offence for Unions or "organisations of workers" to put strike pressure on employers to break the law. Prosecutions could be under­
taken only with the consent of the Attorney General and penalties­
were fines, not imprisonment. The fines were primarily payable out of union funds, not individual pockets. In fact the 1972 and 1973 Act powers were never used against a group of workers, or an individual worker. But in theory it would have been possible for a really determined would-be martyr to get himself or his union fined and eventually court imprisonment by committing contempt of court in refusing all forms of payment. 3.
What really matters however is whether a policy is successfully resisted by strike action or the threat of it. If strike action is avoided or defeated and the policy stands, it is not really a central issue whether the union concerned, or part of it, is also prosecuted. The 1973 experience, when the prosecution powers were, never used, confirms this. The statutory sanction operates primarily on employers who in practice do obey the law, especially if they are substantial and important public companies. So normally do the vast majority of unions and workers. 1 (SECRET)
4.
A tax penalty.
ANNEX D (contd) The T r e a s u r y have n e v e r t h e l e s s e x p l o r e d w i t h
l e g a l a d v i s e r s the q u e s t i o n whether i t would be p r a c t i c a b l e
their
to have a
pay c o n t r o l under w h i c h :
i
i t was i l l e g a l f o r t h e employer t o pay an e x c e s s i v e
increase,
but
ii
the matching d e t e r r e n t on employees and unions was n o t
make i t
to
an o f f e n c e s u b j e c t t o a f i n e t o p r e s s u r i s e an employer into
an e x c e s s i v e payment: b u t to p r o v i d e t h a t the whole of an excess
payment would be t a x e d away.
5.
1
The T r e a s u r y s c o n c l u s i o n however, i n t h e l i g h t o f the a d v i c e of
the T r e a s u r y S o l i c i t o r ,
i s t h a t such a system would not be w o r k a b l e .
B e f o r e t h e t a x o r p e n a l t y could be l e v i e d on employees t h e l i a b i l i t y to
i t would have t o be c l e a r l y e s t a b l i s h e d : t h a t i s , i t would have t o be
e s t a b l i s h e d i n l a w t h a t t h e employer had committed an o f f e n c e by paying
an o u t - o f - l i n e
increase.
T h i s means t h a t
the t a x could n o t be collected
u n t i l t h e employer had been c o n v i c t e d in t h e Courts and ($£ he used them)
had exhausted a l l t h e channels o f a p p e a l - a process t h a t c o u l d t a k e
months.
A l o n g i n t e r v a l c o u l d t h e r e f o r e e l a p s e between t h e pay
s e t t l e m e n t and t h e i m p o s i t i o n o f t h e p e n a l t y , and t h i s i n t e r v a l would
g r e a t l y weaken t h e c r e d i b i l i t y o f the p e n a l t y and i t s d e t e r r e n t v a l u e .
The l o n g e r t h e money was i n payment, t h e more d i f f i c u l t
take i t
away; and r e c o v e r y o f p a s t over-payments might anyway be
impracticable,
6.
i t would be to
,
eg because o f job changes.
S e c o n d l y , t h e r e would be g r e a t a d m i n i s t r a t i v e d i f f i c u l t y
in
d e t e r m i n i n g t h e amount of t h e t a x l i a b i l i t y f o r each i n d i v i d u a l
employee.
How much b e n e f i t a p a r t i c u l a r employee d e r i v e d from t h e
e x c e s s i v e i n c r e a s e would v a r y n o t o n l y a c c o r d i n g t o how the
applied to d i f f e r e n t
settlement
grades and g r o u p s , b u t a c c o r d i n g t o t h e number of
hours worked, s i c k n e s s , unemployment, change o f job and o t h e r
A l l t h i s would p r o v i d e copious m a t e r i a l f o r a p p e a l s , and i t
c o n c e i v a b l e t h a t assessment could be l e f t
appeal denied.
is
factors.
hardly
t o employers and a l l forms of
These a r e t h e d i f f i c u l t i e s a s s o c i a t e d w i t h any attempt
t o t a x i n c r e a s e s in pay.
Taken w i t h t h e p o i n t i n paragraph 5, t h e y
seem t o r u l e out t h i s p a r t i c u l a r
2
approach.
(SECRET) RPI EFFECTS OF PAY NORMS (1) New year-on­
year RPI increase i.
15% norm
ii. 10%
iii.
5'/o +
4-
5%
10%
19.3
Q2 14.6
Q3 11.9
1976 Ql
1976 Ql
Q2
Q3
18.9
1976 Ql
18.6
Q2
12.8
Q3
9.1
2
1
Q3
v.
5% plus f u l l
indexation
1 7 6Q
1
-0.8 -1.8 -2.7 2.2 4.0 2.1 -1.2 -2.7 -4.0 1.9 3.5 1.7
-1.5 -3.4 -5.5 1.7 2.9 1.1 -1.9 -4.2 -6.6 1.5 2.7 0.7 -1.4 -3.5 -5.6 1.7 3.0 1.0 13.7
10.6
iv. Indexation^ 76 Ql
18.2
ii RPI)
Q
(2) (3)
New quarter-on­
Change in (1) from post-
quarter RPI Budget forecast increase 2
t
2
8.0
1 8
7
*
Q2
12.9
Q3
9.0
£6 flat
1976 Ql
19.1
Q2
14.1
Q3
11.0
-1.0 -2.3 -3.6 2.0 3.7 1.7 vii. £8 flat
1976 Ql
19.3
Q2
14.7
Q3
11-9
-0.8 -1.7 -2.7 2.2 4.0 2.1 1976 Ql
19.6
Q2
15.5
Q3
13.2
-0.5 -0.9 -1.4 2.4 4.5 2.6 viii.£lO flat
(SECRET)