Workers will have to settle for real-terms pay cuts if Britain is to avoid 1970s-style “stagflation” and soaring interest rates, Boris Johnson has warned.
In a major speech, the prime minister performed a startling U-turn on a promise – made just months ago – to create a high-wage economy, instead highlighting the pain to come from rising inflation.
“We cannot fix the increase in the cost of living just by increasing wages to match the surge in prices,” Mr Johnson said, in a speech billed as the latest reset of his troubled premiership.
He said: “If wages continually chase the increase in prices, then we risk a wage-price spiral such as this country experienced in the 1970s. Stagflation – that is inflation combined with stagnant economic growth.
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“When a wage-price spiral begins, there is only one cure and that is to slam the brakes on rising prices with higher interest rates.
That has an immediate impact on mortgages and rents. It puts up the cost of borrowing for business, it is bad for investment and growth, it is bad for jobs – it is bad for everyone.”
The prime minister blamed the Ukraine war for having “brutally interrupted” the bounce back from Covid, also dashing hopes of early tax cuts or higher spending to help struggling families.
He pointed to “the risk of borrowing too much”, telling his audience in Blackpool: “When you face inflationary pressure, you can’t just spend your way out of it.
“On the contrary, you have to be careful not to add to inflationary pressure. We are constrained in what we can do.”
The deputy general secretary of the TUC angrily dismissed the call for wage cuts as “nonsense”, arguing that only pay rises could provide “financial security”.
“It hasn’t taken long for the prime minister to abandon his commitment to a high-wage economy,” Paul Nowak said.
“British workers are suffering the longest wage squeeze in more than 200 years. They urgently need more money in their pockets.
The prime minister’s call comes just weeks after No 10 slapped down Andrew Bailey, the governor of the Bank of England, for saying workers must accept pay curbs to help control inflation.
Mr Johnson described the purpose of the speech as highlighting that “price pressures are going to make things tough for a while, but we will get through it”.
But, beyond widely criticised ideas to boost home ownership, it contained no other new measures beyond a hint that tariffs will be removed on imported foods such as olive oil and bananas.
Mr Johnson appeared to dismiss a suggestion that he is planning a 2p pre-election income tax cut – and ducked two opportunities to get tough with firms refusing to pass on fuel duty cuts at the pumps.
Asked why the UK has plunged to the bottom of the world’s economic growth league table, he argued the UK ‘came out” of Covid first, which meant it is “slightly out of sync” with other economies.