It will be tough

The Chancellor Alistair Darling calls for pay restraint: increases must stay below inflation.

Alistair Darling MP, Chancellor of the Exchequer

ANDREW MARR: Chancellor, good morning. You were listening to that.

Can I just start off by asking you about the general state of the economy which is what everyone is talking about.

Mervyn King the Governor of the Bank of England made it pretty clear that people were going to have to accept below inflationary increases for the coming year.

Is that your view as well?

ALISTAIR DARLING: Yes. There's two things here I think. Both Mervyn King and I have said that the economy along with every other developed economy in the world will slow down this year. That's been clear for some time.

We've also said though that in the face of inflationary pressures coming from the doubling of the price of oil, rising food prices, which is pushing inflation up in every country in the world now, that we've got to make sure that inflation doesn't take hold here in this country.

Because the last thing on earth you want is to get back to the situation we had in previous decades where every single penny of a wage increase you got was eaten up by rising prices. So that doesn't help anybody.

ANDREW MARR: So ..

ALISTAIR DARLING: But there's no doubt that ..

ANDREW MARR: Can I, can I, can I just be, to be specific ..

ALISTAIR DARLING: Yes of course.

ANDREW MARR: .. public sector employees will have to accept below inflation increases this year. Yes?

ALISTAIR DARLING: Well let's be clear. From the boardroom to - everyone - public and private alike, the last thing any of us want is to get into the situation we got into in the nineteen seventies or nineteen eighties for example where you simply lost out because no matter what your pay increase it was eaten up by rising prices in the shops.

Now we know because we've got bitter experience in this country of what happens if you like that, that, if you let that take hold. But let's be in no doubt - it applies to each and every one of us from the top to the bottom, private and public sector. Everyone has a vested interest in not allowing inflation to get hold. Now the big problems they've got ..

ANDREW MARR: So ..

ALISTAIR DARLING: .. at the moment is that whereas in the past the inflationary pressures in this country were home grown, now in common ..

ANDREW MARR: Well ..

ALISTAIR DARLING: .. with every country in the world they are coming from international pressures, the high oil prices ..

ANDREW MARR: Sure.

ALISTAIR DARLING: .. the high food prices which is why it's so important that you know the meeting in Jeddah today and other initiatives ..

ANDREW MARR: I ..

ALISTAIR DARLING: .. succeed because we've got to bring downward pressure on those prices.

ANDREW MARR: I want to come back to that in a moment. But before I do can I be absolutely clear that to put it in plain language we are all, the country ought to feel, needs to feel poorer in the coming year in order to get a grip of inflation and ensure that it doesn't take off?

ALISTAIR DARLING: No. I'll repeat what I said a moment ago. It's absolutely imperative from the boardroom to the shop floor, both private and public sector that we don't allow inflation to take hold again in the way that it did in the nineteen seventies and the nineteen eighties and even in the early nineteen nineties.

ANDREW MARR: So what does that mean for individuals ..

ALISTAIR DARLING: We ..

ANDREW MARR: .. chancellor? What does that mean for ..

ALISTAIR DARLING: What it, what it ..

ANDREW MARR: .. individuals?

ALISTAIR DARLING: What it means is that pay awards in both the private and public sector have to be consistent. With our inflation target which is two percent we've got to make sure that we keep inflation under control because if we don't what will happen is that people may get a pay increase but every penny of it will be eaten up by rising prices in the shops. Now none of us want to see that happen. As I said to you ..

ANDREW MARR: So ..

ALISTAIR DARLING: .. our economy along with every other economy in the world is going to be slowing this year. It will be difficult. It will be tough. But the last thing on earth you want is to allow inflation to take hold again because rising prices will erode people's living standards and nobody wants to see that at all.

ANDREW MARR: So when you say consistent with your target that means two percent or below?

ALISTAIR DARLING: No. It means that the pay awards have to be consistent with that. It doesn't mean they have to be two per cent as, as you can see. But if you look at the wage increases over all at the moment they're running at you know just about under four percent which is a little bit actually below what they were ten years ago. So people have been getting pay increases, particularly in the public sector.

Pay increases for nurses, for other public sector workers have gone up quite a great deal in the last ten years. But what I'm saying is that if we want to avoid getting ourselves into a sation (sic) we had, a situation we had in the past where every penny of a pay increase was eaten up by rising prices that would be a huge mistake. It's in no one's interest. And that applies from the top to the bottom, public and private sector alike.

ANDREW MARR: And you will be prepared to face out industrial action, strikes, if that's what it takes?

ALISTAIR DARLING: Well we have to get across to people that it is not in their interests, in not, it's not in anybody's interests if we get into a situation whereas I say people are getting above inflation pay increases but they lose every penny of that because quite simply it passes on into increased prices in the shops.

ANDREW MARR: Can ..

ALISTAIR DARLING: We've been there before in the seventies, eighties and nineties. We cannot go back there again because it is extremely damaging for each and every one of us as individuals as well as for the country as a whole.

Which is why as I say you know it's, it's important that we don't allow inflation to become entrenched here at home. But at the moment, unlike in the past the inflationary pressures in this country are not home grown, they are in fact coming from oil and food prices. That is what is putting up inflation in this country and in every other country in the world which is why ..

ANDREW MARR: Well ..

ALISTAIR DARLING: .. as I say it's so important that we tackle the root causes of those.

ANDREW MARR: Well let me come directly to that. Oil prices around the world affecting food prices around the world. Both going up together. Everyone understands that.

The charge against your government has been however that you have spent so much during the fat years that you are not able to do what for instance the Americans are doing in response to this, spending a hundred and fifty billion dollars in their case to, to stimulate the economy. You don't have that money?

ALISTAIR DARLING: Well we have actually put more money into the economy this year. And the American economy is different to ours, for example you know that their housing market is far more severely affected. And of course the credit crunch ..

ANDREW MARR: Well not for long necessarily.

ALISTAIR DARLING: .. started in America. Well the credit crunch which started in America has had a far more profound effect on their housing market. But you know I was listening to Alan Duncan a few moments ago and as you correctly said what he said would have had more strength had it no been for the fact that over the last ten years the Conservatives were calling for more spending on just about everything under the sun every single day.

We have increased investment on things like schools and hospitals, transport. That was absolutely essential because our infrastructure was pretty run down ten years ago. But if you look this year it is right that we support the economy, especially when it slows down. We've been able to do that.

And I will continue to do whatever I can to help people get through this difficult time, to help our economy get through this difficult time. Remember our, at the moment you know our borrowing, our debt, are actually at much, much lower than they've been in the past. We go into this with historically low levels of inflation ..

ANDREW MARR: Yes but ..

ALISTAIR DARLING: .. and low interest rates ..

ANDREW MARR: And ..

ALISTAIR DARLING: .. compared with what we had in the past. So we are actually far better equipped. We're far more resilient than we ever were in the past.

ANDREW MARR: Well ..

ALISTAIR DARLING: Despite that, as I said last week and I'll say again today, we are in for a tough time.

ANDREW MARR: Are ..

ALISTAIR DARLING: All economies across the world are in for a tough time.

ANDREW MARR: Are you going to be able to stick to below forty percent as a proportion for public borrowing? Because almost everybody thinks you're going to break that self imposed rule.

ALISTAIR DARLING: Well the, the rules that we've put in place are designed to exercise discipline on all governments. If you look at the forecast that I set out earlier this year we stick to our rules. But I think what is important is that you know two things I think people need to remember. Firstly our economy is in much, much better shape than it was in the past.

You know in the early nineteen nineties we had nearly three to four million people out of work. We had very high inflation. We don't have that today. Yes we've got pressures. And as I say most of them are coming from international pressures - as I say the rising oil and food prices. Those are the things that we need to bear down on. As well as of course as I was saying ..

ANDREW MARR: Are you ..

ALISTAIR DARLING: .. in my, my speech at the Mansion House last week ..

ANDREW MARR: Sure ..

ALISTAIR DARLING: .. to ensure that we maintain financial stability which is equally important ..

ANDREW MARR: Absolutely.

ALISTAIR DARLING: .. especially after what's happened over the last few months.

ANDREW MARR: So, so therefore are you absolutely sure that you're not going to break that forty percent limit?

ALISTAIR DARLING: I set out my forecast at the beginning of this year. I will be setting out ..

ANDREW MARR: But it's a change, it's a changing picture as you know chancellor.

ALISTAIR DARLING: .. forecasts for the Pre-Budget Report this year.

ANDREW MARR: It's a changing picture. I'm just asking ..

ALISTAIR DARLING: Well ..

ANDREW MARR: .. if that's still, if that's still safe or secure that, that self imposed limit?

ALISTAIR DARLING: Well, well I set out the limits earlier this year. I will set out, out our forecasts again in the Pre-Budget Report this autumn. What is clear as I said last week is that our economy ..

ANDREW MARR: Okay.

ALISTAIR DARLING: .. quite clearly along with every other developed economy in the world is slowing down. But as I say to you, two things. One is our economy is in better shape than it's been in the past. The second thing is whereas in the past a lot of our problems were entirely home grown - and certainly that was the case ten years ago - now we're in a different situation.

The problems that we face, whether it's international financial instability, or whether it's oil and food price inflation, that is coming internationally and that means we've got to take in, action internationally which is why Gordon Brown is in Jeddah this morning.

ANDREW MARR: And the effect on our economy - do you think there's any chance of hitting your growth target which is two and a quarter percent up in the coming year? Again everybody around the world is saying we'll be well below that this year?

ALISTAIR DARLING: Well my forecast for this year is between one and three quarter and two and a quarter percent. And you know if you look at the consensus of independent forecasters yes they're the lower end of that range. But as I say those forecasts I set out twice a year and I will continue to do that. But there is no doubt that what is happening and started last summer in the financial markets and, and together with the inflationary pressures we're seeing particularly with oil prices is having a profound effect.

And there's not a country in the world that isn't affected by it. Where I disagree with Alan Duncan is I do actually think you can do something about it. Not only in terms of trying to bring some stability in the oil market but also of course in the longer term reducing our dependence on energy and particularly on carbon sources of energy which is something that we have put a lot of effort into, whether it's renewables or nuclear. And you know if the Conservatives have now changed their tune on that I very much welcome it.

ANDREW MARR: You were trying to unblock the housing market last time we spoke and forecasts are for a very sharp fall in the number of houses being sold and a continuing fall in prices. In other words it's not being unblocked it's being blocked. Is there anything you can do there?

ALISTAIR DARLING: Well I did say that it would take time. And you know there's two things happening. If you look at the availability of mortgages, ten years ago most money that was leant were, was in the form of the deposits that people had put into their bank or building society that was then re-leant. Now about a third of it, of that money that was leant was raised on the international financial markets. Now that has clearly been very badly hit so there is less money around. And that is feeding through ..

ANDREW MARR: Okay.

ALISTAIR DARLING: .. into lower house prices.

ANDREW MARR: What about ..

ALISTAIR DARLING: But you know I, I did take action. I can't remember whether it was just before or just after we last spoke, to support the banking sector. That will help but it will take time. And it all ..

ANDREW MARR: Okay.

ALISTAIR DARLING: .. comes back to the same thing.

ANDREW MARR: One, one final ..

ALISTAIR DARLING: Our economy is being affected by these pressures. It will slow down.

ANDREW MARR: One final question on that. Today this big meeting in Jeddah. Any realistic hope as a result of that that actually fuel prices at the pump and elsewhere will fall?

ALISTAIR DARLING: Yeah, it's part of a process. What we want to do is to firstly try and get increased production. Because if the markets think that production will increase that will bring downward pressure on prices. I think secondly we need to reduce our dependence in the long term on, on oil and gas.

And we need to encourage some of the oil producing companies like the Saudis, like Abu Dhabi, to invest in those new sources because in the long term that's in as much in their interest as it is in ours. And we also need to make sure that we make sure the whole process is far more open than it is at the moment. Because a lot of the reason that the prices are going up is because ..

ANDREW MARR: Right.

ALISTAIR DARLING: .. people aren't sure just how much oil there is, what the supply ..

ANDREW MARR: Right.

ALISTAIR DARLING: .. the demand is likely to be. Now I think these ..

ANDREW MARR: Okay.

ALISTAIR DARLING: .. things can make a difference but it will take time. It is part of a process but we are getting that process going which is so important.

ANDREW MARR: Not a happy first anniversary for the prime minister. Any prospect that the year ahead offers some kind of recovery for your government?

ALISTAIR DARLING: Well I've always taken the view that we can turn this round. Look we've had a difficult year you know, whether it's the economy, other political issues as well. But I believe that we are actually doing the right thing by the country. We are, yes we're going through choppy waters just now.

ANDREW MARR: Right.

ALISTAIR DARLING: But in terms of making sure that we have a stable economy, that we can get inflation under control, that we can improve the living standards of people in the country as well as making the country a better place to live, I believe that we can do that.

And remember the next election isn't a referendum on us. It is a choice between us and the Conservatives. And I believe that in the long term ins... interests of this country we're doing the right thing and we'll continue to do so.

ANDREW MARR: Chancellor, thank you very much indeed for joining us.

INTERVIEW ENDS

Please note "The Andrew Marr Show" must be credited if any part of this transcript is used.

NB: This transcript was typed from a recording and not copied from an original script.

Because of the possibility of mis-hearing and the difficulty, in some cases, of identifying individual speakers, the BBC cannot vouch for its accuracy

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