Boris Johnson warns of ‘wage-price spiral’ if workers demand higher pay

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Boris Johnson has raised the spectre of a 1970s-style “wage-price spiral” that could force the Bank of England to push up interest rates dramatically if workers demand to be compensated for rocketing prices.

Instead the prime minister promised a return to lowering taxes, cutting government spending and slashing regulation, after a renewed push by backbench Conservative MPs.

In the speech in Blackpool on Thursday, billed as a reset of his premiership after MPs forced a bruising no-confidence vote in his leadership, Johnson said the current tax burden was an “aberration” and the state must reduce its spending.

It came as Conservative MPs prepared to formally launch a tax-cutting lobbying group, which some Tories claimed had already influenced the prime minister’s speech.

MPs who are promoting the renewal of the Thatcherite lobbying group, Conservative Way Forward, said key talking points from its pre-launch memo had influenced Johnson’s warnings on “tax and spend”.

The memo, drafted by key Johnson critic Steve Baker and leaked to the Guardian, was widely shared among MPs before conversations with Johnson in the run-up to the confidence vote on his leadership on Monday.

It says the government’s current policies were “contributing to the cost of living crisis and increasing the chance of Labour winning the next election”. Its six points urge Johnson to address the tax burden on families and business, soaring inflation, intergenerational unfairness, government borrowing and public sector debt.

In his speech, the prime minister said the government should reject what he called the “Covid mindset” that more state spending was the answer to every problem, and instead focus on cutting regulation to unleash growth.

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In a nod to the pressure from his own backbenchers and within cabinet, Johnson suggested the government was considering bringing forward tax cuts, adding: “I would much rather it was sooner than later; that burden must come down.”

He said: “The answer to the current economic predicament is not more tax and more spending, the answer is economic growth.” The government had been “straining at the leash” to do “reforms that will cut costs for government, cut costs for business and cut costs for people across the country”.

As rail workers prepare to go on strike later this month, and with inflation running at 9%, Johnson claimed that if wages continued to chase prices upwards it could unleash an economic crisis.

“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,” he said at Blackpool and the Fylde college.

In a wide-ranging speech about the economy, the prime minister acknowledged that the UK would be “steering into the wind” in the coming months, as he blamed “global pressures”, including the war in Ukraine, for soaring inflation and weak GDP growth.

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The prime minister said the government would announce several more measures aimed at cutting costs in the coming weeks, from making it easier to become a childminder, to cutting tariffs on imported food.

He acknowledged that the UK would need to move faster to speed up growth. The Organisation for Economic Cooperation and Development (OECD) thinktank forecast this week that the UK economy would grind to a halt next year, making it the weakest in the G20 aside from Russia, while inflation would remain above 7%.

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At the heart of the speech, the prime minister voiced a desire to tackle housing, which he described as being the highest cost burden for the majority of people.

Johnson’s flagship announcement was that lower-paid workers would be allowed to use housing benefits to make mortgage payments, as well as extending right to buy for housing association tenants – which he termed turning “benefits to bricks”.

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“Just as no generation should be locked out of home ownership because of when they were born, so nobody should be barred from that same dream simply because of where they live now,” he said.

Johnson said an independent review would report by the autumn with the aim of widening access to low-cost, low-deposit mortgages, and opening the market to renters paying hundreds more a month in private rent than they would in mortgage payments.

“We have a ludicrous situation whereby plenty of younger people could afford to make monthly mortgage payments – they’re earning enough to cover astronomical rent bills – but the ever-spiralling price of a house or flat has so inflated deposit requirements that saving even just 10% is a wholly unrealistic proposition for them,” Johnson said. “First-time buyers are trying to hit a continually moving target.”

He said the review “will look at how we can give our nation of aspiring homeowners better access to low-deposit mortgages”.

The plans have been greeted with trepidation by some housing campaigners, with warnings that the right to buy reforms would deplete the housing supply, and that allowing those on benefits to use them for mortgage payments would help only a small number.

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

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Lindsay Judge, the research director at the Resolution Foundation, said the changes to mortgages for those on benefits was likely to have limited impact. “More than four in five families on means-tested benefits have no savings at all and high cost of living pressures means a second change that allows benefit recipients to save into certain savings accounts without seeing their benefits cut is unlikely to lead to a surge in savings.”

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