The period of the tripartite talks with the TUC and the CBI from early July to the end of October did not get us much further as regards the Government’s aim of controlling inflation by keeping down wage demands. It did, however, move us down other slippery slopes. In exchange for the CBI’s offer to secure ‘voluntary’ price restraint by 200 of Britain’s largest firms, limiting their price increases to 5 per cent during the following year, we embarked on the costly and self-defeating policy of holding nationalized industry price increases to the same level, even though this meant that they continued to make losses. The TUC, for its part, used the role it had been accorded by the tripartite discussions to set out its own alternative economic policy. In flat contradiction to the policies we had been elected to implement, they wanted action to keep down council rents (which would sabotage our Housing Finance Act — intended to bring them closer to market levels). They urged the control of profits, dividends and prices, aimed at securing the redistribution of income and wealth (in other words the implementation of socialism), and the repeal of the Industrial Relations Act. These demands, made at the TUC Congress in September, were taken sufficiently seriously by Ted for him to agree studies of methods by which the pay of low-paid workers could be improved without entailing proportionate increases to other workers. We had, in other words, moved four-square onto the socialist ground that ‘low pay’ — however that might be defined — was a ‘problem’ which it was for government rather than the workings of the market to resolve. In fact, the Government proposed a £2 a week limit on pay increases over the following year, with the CBI agreeing maximum 4 per cent price increases over the same period and the extension of the Government’s ‘target’ of 5 per cent economic growth.
In any case, it was not enough. The TUC was not willing — and probably not able — to deliver wage restraint. At the end of October we had a lengthy discussion of the arguments for now proceeding to a statutory policy, beginning with a pay freeze. It is an extraordinary comment on the state of mind that we had reached that, as far as I can recall, neither now nor later did anyone at Cabinet raise the objection that this was precisely the policy we had ruled out in our 1970 general election manifesto. Yet no one could accuse Ted of not being willing to go the extra mile. Only with the greatest reluctance did he accept that the TUC were unpersuadable. And so on Friday 3 November 1972 Cabinet made the fateful decision to introduce a statutory policy beginning with a ninety-day freeze of prices and incomes. No one ever spoke a truer word than Ted when he concluded by warning that we faced a troubled prospect.
The change in economic policy was accompanied by a Cabinet reshuffle. Maurice Macmillan — Harold’s son — had already taken over at Employment from Robert Carr in July 1972, when the latter replaced Reggie Maudling at the Home Office. Ted now promoted his younger disciples. He sent Peter Walker to replace John Davies at the DTI and promoted Jim Prior to be Leader of the House. Geoffrey Howe, an instinctive economic liberal, was brought into the Cabinet but given the poisoned chalice of overseeing prices and incomes policy. It has been said that I was thought of for the job; if so, I can only be thankful that I wasn’t asked.
For a growing number of backbenchers the new policy was a U-turn too far. When Enoch Powell asked in the House whether the Prime Minister had ‘taken leave of his senses’, he was publicly cold-shouldered, but many privately agreed with him. Still more significant was the fact that staunch opponents of our policy like Nick Ridley, Jock Bruce-Gardyne and John Biffen were elected to chairmanships or vice-chairmanships of important backbench committees, and Edward du Cann, on the right of the Party and a sworn opponent of Ted, became Chairman of the 1922 Committee.
As the freeze — Stage 1 — came to an end we devised Stage 2. This extended the pay and price freeze until the end of April 1973; for the remainder of 1973 workers could expect £1 a week and 4 per cent, with a maximum pay rise of £250 a year — a formula designed to favour the low-paid. A Pay Board and a Prices Commission were set up to administer the policy. Our backbench critics were more perceptive than most commentators, who considered that all this was a sensible and pragmatic response to trade union irresponsibility. In the early days it seemed that the commentators were right. A challenge to the policy by the gas workers was defeated at the end of March. The miners — as we hoped and expected after their huge increase the previous year — rejected a strike (against the advice of their Executive) in a ballot on 5 April. The number of working days lost because of strikes fell sharply. Unemployment was at its lowest since 1970. Generally, the mood in Government grew more relaxed. Ted clearly felt happier wearing his new collectivist hat than he ever had in the disguise of Selsdon.
Our sentiments should have been very different. The effects of the reflationary Budget of March 1972 and the loose financial policy it typified were now becoming apparent. The Treasury, at least, had started to worry about the economy, which was growing at a clearly unsustainable rate of well over 5 per cent. The money supply, as measured by M3 (broad money), was growing too fast — though the (narrower) Mi, which the Government preferred, less so.[30] The March 1973 Budget did nothing to cool the overheating and was heavily distorted by the need to keep down prices and charges so as to support the ‘counter-inflation policy’, as the prices and incomes policy was hopefully called. In May modest public expenditure reductions were agreed. But it was too little, and far too late. Although inflation rose during the first six months of 1973, Minimum Lending Rate (MLR) was steadily cut and a temporary mortgage subsidy was introduced. The Prime Minister also ordered that preparations be made to take statutory control of the mortgage rate if the building societies failed to hold it down when the subsidy ended. These fantastic proposals only served to distract us from the need to tackle the growing problem of monetary laxity. Only in July was MLR raised from 7.5 per cent, first to 9 per cent and then to 11.5 per cent. We were actually ahead of Labour in the opinion polls in June 1973, for the first time since 1970. But in July the Liberals took Ely and Ripon from us at by-elections. Economically and politically we had, without knowing it, already begun to reap the whirlwind.
Over the summer of 1973 Ted held more talks with the TUC, seeking their agreement to Stage 3. The detailed work was done by a group of ministers chaired by Ted, and the rest of us knew little about it. Nor did I know at the time that close attention was already being given to the problem which might arise with the miners. Like most of my colleagues, I imagine, I believed that they had had their pound of flesh already and would not come back for more.
I hope, though, that I would have given a great deal more attention than anyone seems to have done to building up coal stocks against the eventuality, however remote, of another miners’ strike. The miners either had to be appeased or beaten. Yet, for all its technocratic jargon, this was a government which signally lacked a sense of strategy. Ted apparently felt no need of one since, as we now know, he had held a secret meeting with Joe Gormley in the garden of No. 10 and thought he had found a formula to square the miners — extra payment for ‘unsocial hours’. But this proved to be a miscalculation. The miners’ demands could not be accommodated within Stage 3.
In October Cabinet duly endorsed the Stage 3 White Paper. It was immensely complicated and represented the high-point — if that is the correct expression — of the Heath Government’s collectivism. Pay increases were to be limited to £2.25 a week or 7 per cent with a maximum £350 per annum; there were complex provisions to pay shift workers more for ‘unsocial hours’, and room was made for additional payments in respect of productivity agreements and moves towards equal pay for women. In addition, there were ‘threshold payments’ to be made if inflation rose to specified levels — we made some rosy assumptions about future rates of inflation — and there was also money for pensioners and a new mortgage subsidy for first-time buyers. But the most significant new development– and one whose necessity ultimately demonstrated the futility of the kind of approach we were pursuing — was the provision that the Pay Board should set up an inquiry into ‘relativities’ between groups of workers, with the aim of accommodating grievances on this score in Stage 4. All possible eventualities, you might have thought, were catered for. But as experience of past pay policies ought to have demonstrated, you would have been wrong.
30
Mi comprised the total stock of money held in cash and in current and deposit accounts at a particular point in time; M3 included the whole of Mi, with the addition of certain other types of bank accounts, including those held in currencies other than sterling.