The 4 1/2% Solution

Rarely if ever before had a British Labor Party heavyweight made such a boast. Yet last week Chancellor of the Exchequer Denis Healey was fairly cheering that the pay raises his countrymen would receive in the year beginning Aug. 1 are "likely to be below those in probably all Western developed countries." Healey's seemingly perverse enthusiasm was not misplaced: his negotiations achieved a union wage accord that was a needed early triumph for Prime Minister James Callaghan's five-week-old government.

The victory was written into a new pay-policy agreement concluded by the government and leaders of the powerful Trades Union Congress that aims at slashing Britain's inflation rate (currently 12%) by combining a tough 4 1/2% average limit on wage hikes with a cut in taxes (see ECONOMY & BUSINESS).

The T.U.C.'s leaders accepted the austere pay formula, recognizing that failure to do so would almost certainly mean a continued double-digit inflation that erodes worker purchasing power faster than pay raises can keep up with it --the disease that has forced British governments into stop-go cycles of inflation and recession since the early 1960s. Exclaimed T.U.C. Chief Len Murray: "It is the best news for many a long day in Britain." Healey credited the agreement to public exasperation with inflation: "People got sick and tired of being paid in confetti."

Callaghan can probably count on strong popular support for the new policy. Recent polls suggest that as much as 70% of the country backs tax relief in return for stringent pay restraint. Even the Tories approved; Sir Geoffrey Howe, the Conservatives' shadow Chancellor, admitted that the plan reflected "a greater sense of realism."

Monumental problems still confront Callaghan. Because two Labor M.P.s died in the past month and a third quit the party, Labor's ruling bloc has lost its thin majority in the House of Commons, where it now holds 313 of the 631 seats. Labor still maintains a 38-seat edge over the Tories and can count on a few votes from the minor parties to enable it to continue governing, but it may lose its grip on the important committee chairmanships. The Tories, moreover, demonstrated impressive muscle in last week's balloting for town and district councilmen in England and Wales. Of the nearly 16,000 members elected, the Conservatives picked up more than 1,000 new seats; Labor gained only 15 new seats. While not too much should be read into these results--the party holding national power usually loses ground in local races--they will probably make Callaghan even more resistant than he has been, to advice from some members of his Cabinet to call for national elections this summer. (The latest polls give Labor a 6% lead over the Tories.)

Deft Leadership. Although there is little doubt that a special T.U.C. conference, called for next month, will approve the new pay policy, the Callaghan government must exercise deft leadership to ensure that the voluntary restraints are not breached. If the government seems unable to make the wage agreement stick, the run on the pound, which stabilized at about $1.83 last week, could continue. Since this would boost Britain's bill for imported raw materials and food, it could quash London's hope for a real recovery.

Still, the pay agreement has a good chance of holding, primarily because the T.U.C. seems ready to remain the government's ally in the fight against inflation. Moreover, if the unions begin getting out of hand, Callaghan can always play his trump--daring the union leaders to withdraw their support for his Cabinet, a move that could open the door to a Tory government. That is something union leaders evidently fear even more than their Labor Prime Minister's 41/2% inflation solution.

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