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Boris Johnson warned of a 1970s-style “wage-price spiral” if pay packets increase in line with soaring prices as he set out an extension of the right to buy to housing association tenants.
Mr Johnson pledged a review of the mortgage market under plans to help renters onto the property ladder after surviving a bruising Tory revolt against his leadership.
But he suggested in a major speech in Blackpool there should be restraint on wage rises on the day the cost of a full tank of petrol for a family car exceeded £100 for the first time.
Calling for caution in the face of rapidly rising inflation, Mr Johnson warned 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. 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,” he added.
“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.”
The Prime Minister warned that could create “stagflation” of inflation combined with stagnant economic growth.
He stopped short of explicitly repeating Bank of England governor Andrew Bailey’s suggestion that workers should not ask for big pay rises to help control inflation.
But Mr Johnson argued salary hikes in line with inflation would lead to the need to “slam the brakes on rising prices with higher interest rates”, which would increase Government spending, and impact jobs, mortgages and rents.
Instead he said ministers would ease the pain by working to “finish the right-to-own reforms Margaret Thatcher began in the 1980s” by extending the scheme to the 2.5 million households “trapped” in their housing association homes.
He 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 an attempt to address the major criticism of his Tory predecessor’s policy.
To help low-paid workers, Mr Johnson pledged a change in the rules so housing benefits can be spent in securing a first mortgage and going towards payments.
He said the around £30 billion yearly 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. It’s time to turn benefits to bricks,” the Prime Minister added.
A “comprehensive review” of the mortgage market reporting back in the autumn was also pledged in order to extend low-deposit mortgages.