Boris Johnson warns against ‘wage-price spiral’ to tackle rising inflation

British prime minister said big pay rises to manage rising prices could cause stagflation in UK economy

Britain's Prime Minister Boris Johnson delivers a speech in Blackpool, north-west England on Thursday. AFP
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British Prime Minister Boris Johnson warned that increasing pay to manage soaring prices could cause a 1970s-style “wage-price spiral”, as he set out an extension of the right-to-buy scheme for housing association tenants.

Mr Johnson also outlined plans for a “benefits to bricks” scheme on Thursday to allow welfare payments to secure mortgages, as he sought to get his embattled premiership back on track.

In a bid to help renters on to the property ladder, he also pledged a review of the mortgage market after surviving a bruising Tory revolt against his leadership.

But Mr Johnson suggested in a major speech in Blackpool that there should be restraint on wage rises, on the day the cost of a full tank of petrol for a family car exceeded £100 ($125) for the first time.

Calling for caution in the face of rapidly rising inflation, he said that the government would “fan the flames of further price increases” if it tried to spend its way out of the cost-of-living crisis.

“We can’t fix the increase in the cost of living just by increasing wages to match the surge in prices," Mr Johnson said.

"I think it’s naturally a good thing for wages to go up as skills and productivity increase – that’s what we want to see.

“But when a country faces an inflationary problem you can’t just pay more and spend more, you have to find ways of tackling the underlying causes of inflation.

“If wages continue to chase the increase in prices then we risk a wage-price spiral such as this country experienced in the 1970s.”

Unions reacted with anger, with the TUC accusing Mr Johnson of abandoning his commitment to build a “high-wage economy” with “nonsense” claims about raises.

But he warned that big pay rises could cause “stagflation” — inflation combined with stagnant economic growth, which blighted the 1970s.

He stopped short of repeating Bank of England Governor Andrew Bailey’s suggestion that workers should not ask for big pay rises to help control inflation, which is forecast to hit about 10 per cent this year.

But Mr Johnson said pay rises in line with inflation would lead to a need to “slam the brakes on rising prices with higher interest rates”, which would increase government spending, and affect jobs, mortgages and rents.

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Instead, he said ministers would ease the pain by working to “finish the right-to-own reforms Margaret Thatcher began in the 1980s” in the coming months, extending the scheme to the 2.5 million households “trapped” in their housing association homes.

Mr Johnson criticised some associations for showing “scandalous indifference” to tenants and pledged a “one-for-one” replacement of each property sold to prevent the housing stock dwindling, in a bid to address the major criticism of his Tory predecessor’s policy.

But Clive Betts, chairman of the House of Commons levelling up, housing and communities committee, urged him to commit to replacing social housing “on a like-for-like basis”, to prevent flats filling in for houses.

To help low-paid workers, Mr Johnson pledged a change in the rules so housing benefits could be spent in securing a first mortgage and going towards payments.

He said the about £30 billion annually spent on housing support was being “swallowed” to pay mortgages of landlords and housing associations.

“It’s time to put this huge wall of money — taxpayers’ money — to better use," Mr Johnson said. "It’s time to turn benefits to bricks."

A “comprehensive review” of the mortgage market reporting back in the autumn was also pledged to extend low-deposit mortgages.

But Mr Johnson refused to guarantee the government would meet its target of building 300,000 homes a year by the middle of the decade.

“I can’t give you a cast-iron guarantee that we’re going to get to a number in a particular year,” he said.

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Welfare rules taper the amount of Universal Credit received when the recipient’s savings exceed £6,000, and stop completely after £16,000.

But the government was committing to exempt Lifetime Isa savings from the rules to encourage people to save for mortgage deposits.

Work and Pensions Secretary Therese Coffey estimated “several thousand” people on housing benefits were likely to buy their housing association home.

“It’s fair to say our initial thoughts are that it will be quite modest, several thousand,” Ms Coffey told BBC Radio 4.

Labour's shadow housing secretary Lisa Nandy said: “You can’t solve a housing crisis with back-of-the-envelope policies that have no realistic chance of success."

Mr Johnson acknowledged the “spooling digits on the petrol pumps” after the average cost of filling a typical family car with petrol passed £100.

He said the strain on household budgets was being driven by the coronavirus recovery being “brutally interrupted” by Russian President Vladimir Putin’s invasion of Ukraine.

Mr Johnson pledged to continue supporting Ukraine’s resistance so Mr Putin is not allowed the “partial success of swallowing some of the country, as he has done before”.

He was hoping the new pledges would calm his critics after 148 of his own MPs – or 41 per cent – voted on Monday to remove him from Downing Street.

Sir Graham Brady, chairman of the Conservative 1922 Committee, said leadership rules could be changed to allow another confidence vote within the next 12 months.

But Mr Brady told Times Radio: “I think it’s important we say the rule that is in place, and is likely to remain in place, is that there is a year’s period of grace following a confidence vote.”

Polly Neate, chief executive of housing charity Shelter, said the right-to-buy plans were “baffling, unworkable and a dangerous gimmick”.

“Hatching reckless plans to extend right to buy will put our rapidly shrinking supply of social homes at even greater risk,” Ms Neate said.

“If these plans progress we will remain stuck in the same destructive cycle of selling off and knocking down thousands more social homes than get built each year.”

Updated: June 09, 2022, 10:37 PM