Prices and Incomes Policy

Prices and Incomes Policy, government policy to restrain increases in prices and wages, usually with the aim of controlling inflation. In the United Kingdom during World War II price control was accompanied by a system of rationing. During the latter half of the 1960s and for much of the 1970s, the Labour government pursued a variety of prices and incomes policies, and in 1973 an independent Price Commission was established to administer a Price Code that laid down rules governing price increases. Since the Conservative party was returned to power in 1979 there has been no formal control over all prices or incomes, though the government has, as it has to, set limits on overall public sector pay, and the regulators of privatized utilities such as gas and electricity have the power to limit price increases. Prices and incomes policies have since gone out of fashion, but in the early 1980s New Zealand's government imposed a year-long wage and price freeze, and in Australia, a longer-lasting accord was introduced, whereby government, employers, and unions set centrally agreed limits to wage increases.

Price control can involve the direct fixing of prices or the setting of a maximum by which prices may be raised. It may also be exercised in relation to profit margins. Price controls interfere with the operation of a free market. They result in distorted supply and demand, and they discourage investment. When they are removed, the natural inclination of producers and suppliers is likely to be to make up for the profits they feel they have lost during the period of price control. Another way that governments keep prices artificially low is through subsidies. Price controls in the former Union of Soviet Socialist Republics may have meant that everyone could afford to buy bread, but they did nothing to ensure a plentiful supply of it, with the result that Soviet citizens spent much of their lives standing in line outside food shops. One reason why industry in the former Communist countries of Eastern Europe was so inefficient was the availability of cheap oil from the Soviet Union; if they had had to pay the market price, there would have been a big incentive to improve efficiency and use less fuel.

An incomes policy usually involves setting a limit (either an amount of money or a percentage) on wage increases. The strictest form of incomes policy will include the ability to impose sanctions, such as a fine or increased taxation, on companies that exceed the limit. The least strict forms of incomes policies involve voluntary agreements between governments, employers and unions (such as the 1980s Accord in Australia) or government exhortations to keep wage rises below a certain level. In similar fashion to price controls, an incomes policy interferes with the operation of the free market. It reduces the incentive to increase labour productivity, and when the controls come off there is a danger of a wages explosion.