You know, as I do, that we face two deep-seated problems, inflation and unemployment. Both of them are still too high. ... I have to emphasize to you that if we fail to bring down inflation, we shall never succeed in overcoming unemployment. We cannot have a prosperous industry in this country if we are unable to sell our goods overseas. No one owes Britain a living, and may I say to you quite bluntly that despite the measures of the last 12 months, we are still not earning the standard of living we are enjoying. We are only keeping up our standards by borrowing, and this cannot go on indefinitely. There is no soft option. I do not promise you any real easement for some time to come. There can be no lasting improvement in your own living standards until we can achieve it without going deeper and deeper into debt as a nation.

The time has come for a wholly new approach to economic policy in Britain. The overriding need is for a long-term stabilisation programme to defeat inflation, recreate business confidence and provide a favourable climate for economic growth. At the head of such a programme must lie a firm commitment to a steady and gradual reduction in the rate of growth of the money supply, until it is consistent with our best guess at a potentially sustainable rate of economic growth. Only in this way can inflation be wrung out of the system. But this alone is not enough... An equally important part of a long term stabilisation plan has to be a reduction in the present Budget deficit... Indeed, something akin...to the old balanced Budget discipline needs to be restored: the secret of practical economic success, as overseas experience confirms, is the acceptance of known rules. Rules rule: OK?

Inflation in Britain is at an unacceptable level. It is now mostly home-induced and wage-induced. It is moving well out of line with that of the rest of the world. If it goes on doing so it will ruin us as a nation, both economically and politically. It is of a different order from any of our other difficulties. It is, quite simply, our biggest menace since Hitler.

The Budget I have presented today is a hard one for all of us in Britain. It is dictated by the harsh reality of the world we live in. A severe Budget is a necessary element in any strategy for improving the overall performance of our economy, which has been lagging increasingly behind most industrial economies for more than a single generation. Added to the need for measures to produce the essential structural changes in the balance of our economy are the burdens we carry with other countries because the explosion of world prices has cut our real income by 4 per cent. But in this situation the key to our immediate success is the rate of inflation inside Britain, and it is our failure here which is responsible for the special severity of this Budget. So long as pay and prices increase at their present rates, no Chancellor of the Exchequer who puts his country first would act otherwise than I have done this afternoon.

All my adult life I have seen British governments driven off their virtuous pursuit of low inflation by market problems or political pressures. I was under no illusions when I took Britain into the ERM. I said at the time that membership was no soft option. The soft option, the devaluer's option, the inflationary option, that would in my opinion be a betrayal of Britain's future.

The dilemma is this: they know, and we know, that if the rate of inflation is to be reduced, at whatever rate my right hon. and learned Friend later this afternoon announces is the Government's intention, then the result of that, for the time being, must be a slowing down of the rate of economic growth and a slowing down, to put it mildly, in the fall in unemployment. That is the known and certain consequence of reducing the rate of inflation—not of the way in which it is done but of the fact that it happens.

They have a duty either to say to the country, "We propose to continue with inflation at its present level and to maintain or 'contain' it at that level, because otherwise there would be at least a temporary loss of growth and unemployment", or, alternatively, to say, "So great and intolerable are the consequences, direct and indirect, social, moral and economic, of on-going inflation at a cumulative rate of nearly 10 per cent. per annum, that we intend to bring that rate down steadily, consistently, perceptibly, and...we tell you that the price which we shall have to pay for that will be some reduction in growth and in employment." ... I am prepared to say, as I have done over and over again, that I believe inflation at 10 per cent. per annum cumulative to be an evil far more dangerous, far exceeding in its consequences the cost of the temporary dislocation which is involved in terminating it. I have said that time and again... We either go on at present with the present rate of inflation or else we deal with inflation and incur the temporary cost in terms of output and employment. In the real world there is no third choice. What the Government are doing with their counter-inflation policy is declining to take that decision in the open, declining to come forward and make clear which decision it is that they have taken, and using the counter-inflation policy as a means of pretending that a third course exists when they know that it does not.

If inflation priced us out of world markets we should be back in the old nightmare of unemployment. What folly to risk throwing away all that we have gained... Our first duty at a time when there is more money about than goods to spend it on is to keep down Government expenditure... The second duty of the Government is to frame policies which encourage saving and discourage spending... [I]n the long run there is only one answer to the 64,000 dollar question—to increase production. That is the answer. That is where the real hope lies.

I fully understand why I have been urged by so many friends both inside and outside the House to treat unemployment as the central problem and to stimulate a further growth in home consumption, public or private, so as to start getting the rate of unemployment down as fast as possible. I do not believe it would be wise to follow this advice today. As I have said, I did last July and November adopt reflationary measures whose full effect would only be felt this year. I cannot afford to increase demand further today when 5p in every £ we spend at home has been provided by our creditors abroad and inflation is running at its current rate. I do not believe anyone in Britain would thank me for producing an even larger deficit on our balance of payments and injecting a further massive dose of inflation through price and wage increases. Moreover a Rake's Progress of this nature could not last for long. The patience of our creditors would soon be exhausted. We would then face the appalling prospect of going down in a matter of weeks to the levels of public services and personal living standards which we could finance entirely from what we earned. I do not believe that our political or social system could stand that strain.

The power structure in Britain is changing. Authority is no longer obeyed for its own sake. There are severe limits on what government can do, so the way to win the battle against inflation and unemployment is not to try to dragoon the country. If we do we shall fail. We must secure its consent. We are playing for high stakes. In a real sense, adherence to the social contract puts on trial whether our society has the will and determination to solve its problems by democratic means.

[T]o reduce the rate of inflation in an economy from something like 10 per cent. to any figure which we would dare to regard as tolerable, cannot but be accompanied by severe stresses, one of which will be an increase in unemployment. That does not derive from the method by which it is done. It derives from the fact that it is done.

[The first task is to beat inflation.] Until we do, every wage rise which is not met from higher production is a ticket to the dole queue. That is why it is important to reach a renewed understanding with the trade union movement for the next 12 months, an arrangement which will break decisively from the inflationary spiral that has plagued us.

In 1970 my right hon. Friend the Prime Minister, and all of us who sit on these benches on the Government side of the House, said to the country "We utterly reject the philosophy of compulsory wage control," or again—"Labour's compulsory wage control was a failure...and we will not repeat it." Why did we say those things so emphatically, over and over again, to the country in 1970? We said them on the basis of what we had argued, experienced, seen and watched over the preceding years. We said them out of a conviction, often stated, that the inevitable result of combining inflation with the attempt to control it by compulsory control of wages was bound to be the most damaging and irresolvable conflict between State and citizens. We said them because...we were convinced in those days that inflation was the result, overwhelmingly, almost exclusively, of actions and policies which were within the power and control of Government. It was because we were convinced that if Government, for their part, would so manage the finances of the nation, if they would so frame the policies within their control, within their hands, there would, indeed, be industrial conflicts, there would be collective bargaining, carried no doubt sometimes to the use of the strike weapon, and there would be the attempt, natural and inevitable, to reassess and reassess again the real relativities between the wages of one industry and another and those of one job and another, but we would not be bringing into the arena of direct conflict between Government and citizen every wage dispute, every bargain, every price and every wage that was fixed. We were convinced that responsibilities would lie where they ought to lie—the responsibility of management and the responsibility of trade union leadership could be exercised where they belonged—if Government would exercise the responsibility which is theirs.

It should surprise no one that the lost generation of British economists who had succumbed to the teachings of Lord Keynes should form a panicky mob when a reversal of the policies they had inspired reveals the damage they have done. ... Following their advice has induced a structure of employment that can be maintained only by accelerating inflation but will collapse only when it becomes a gallop and destroys any possibility of a rational use of resources. Nobody has ever claimed that so long as it is necessary to reduce inflation to get out of this vicious circle the effect can be anything but to destroy the particular employments created by past inflation. Only after inflation has been brought to a full stop can the market be expected to guide workers to jobs which can be maintained without accelerating inflation. All those who plead for “mild” inflation and oppose “too much” inflation are merely preparing the ground for a later depression.