§ Mr. Pardoe
I beg to move Amendment No. 3, in page 2, line 6, leave out '42/' and insert '40'.
I shall be brief. In this Amendment I am endeavouring further to reduce the rate of corporation tax. I should state at the outset that I am not pinning my colours to any particular set of figures, although in the Amendment I am asking for a further reduction of 2½ per cent.
I want merely to question the Government on the philosophy of the reduction they are making. Presumably the Government are asking for an increase in investment. We all know that this is what is desperately needed if we are to obtain economic growth. The creation of fixed capital in this country is appallingly low and has been so over far too long a period, and far behind our major industrial competitors. I hope, therefore, that the Government's intention in reducing corporation tax is to increase and encourage investments.
I do not want to get involved in any way in an argument about exactly how best to encourage investment, in the terms of whether it should be investment allowances or investment grants. Obviously this would be without the terms in the specific Amendment. But I have before me the report of the Confederation of British Industry Industrial Trends Survey, No. 39, of October, 1970. The survey makes clear that the outlook for investment is still very gloomy and depressing. For instance, it says:The outlook for authorisations of capital expenditure on plant and machinery has worsened since June, while that for authorisations of buildings has remained unchanged. For 1971 a decrease in manufacturing investments is indicated.1099 The Confederation of British Industries' survey goes on:The implication for policy is that there should be greater incentives for investment.It also says that perhaps the best of these incentives would be a reduction in corporation tax. I merely want to ask the Financial Secretary to tell us how he believes the new rate of corporation tax will affect the overall level of investments, and whether he thinks that it will overcome the gloom which the Confederation of British Industry found in its latest survey.
Obviously this, I hope, will be a means of getting investment. If it is, I suspect that there will have to be a much more substantial reduction in the level of corporation tax in order to overcome this gloom, because undoubtedly the major factor weighing against industrial investment is not a question of whether we have tax allowances or grants but, frankly, whether we have those investment incentives at all.
Business men will only invest if they have a confident climate in which to do so. If one follows the path of upward industrial investment over the last 20 years, one can clearly see a strict relationship between the level of investments and the level of demand in the economy. When we have a booming economy, with booming consumption and demand, then business men have felt that they were able to look forward to a period of profitability and they have been prepared to invest.
Obviously interest rates affect investment, too. One would hope that one could get some international agreement on this matter. I hope the Government will make efforts to that end, to lower the disincentive to investment.
At this stage, it seems primarily that the Government are putting all their money on the idea that if they can reduce the impact of taxation on industry through corporation tax, we shall leave industry with a little more to invest. It is unfortunate that we should have a level of corporation tax across the whole range of profits. It would seem far better that we should not only reduce it, as I have proposed in this Amendment, as a better incentive, but also that we should have a much lower rate of tax on companies 1100 with small profits. I think that the growth of the economy will never come from the giant industries but that it will inevitably come from the small entrepreneurs starting in business and getting growth in the early years. These are the people who need incentive and a lower rate of tax.
Even if the Government cannot accept my proposed lower rate of corporation tax across the board, it may well be that they will consider giving a lower rate of corporation tax to companies with lower turnovers and smaller profits.
§ Mr. Dell
The hon. Member for Cornwall, North (Mr. Pardoe) said that the main influence on investment is the expectation of profitable demand, and that that has a greater influence than systems of investment incentives. I entirely agree with him in that. It is nevertheless interesting that the Government have decided to introduce a system of investment incentives, though one different from the system which existed under the previous Government. I agree with the hon. Member for Cornwall, North that this is not an appropriate occasion to discuss the merits or demerits of the two systems, and I do not intend to do so. On the other hand, we have a Government which have proclaimed their interest in scientific management. No doubt they will therefore be very careful to assess the effects of the various measures which they take.
The Government have an alternative. They could have reduced company taxation by a greater amount and eliminated any system of investment incentives at all. This would have been an alternative and one for which many of the Financial Secretary's hon. Friends, when they were on the Opposition back benches, used to argue. Nevertheless, the interesting thing is that the Government have not just reduced corporation tax but have introduced a system of investment incentives. I should like the Financial Secretary to tell the Committee how the Government intend to assess the effect of the system of investment incentives which they have introduced. We have a government of scientific management and they should, presumably, be working to set up a system for assessing the effects.
After the previous Government had been operating the system of investment 1101 grants for about two years, the Board of Trade began an assessment, in so far as this was possible, of the effectiveness of investment grants. The assessment was not completed, although I was glad to hear, in answer to a question of mine to the Parliamentary Secretary for the Department of Trade and Industry, that as much as possible of the results of that assessment will be published. I should like the Financial Secretary to tell the Committee what work the Government are doing along these lines.
The first thing to notice is that what they are engaged in is a process of social engineering, which I suppose is quite contrary to their philosophy. It would have been in accordance with their philosophy simply to have reduced the level of company taxation, but by introducing a system of investment incentives they have presumably attempted to achieve certain specific effects. For example, they want to provide cash specifically for investment. They want to direct cash specifically into investment, so they encourage companies to put money into investment, as a result of which they will get a reduction in taxation.
Then, presumably, they want to help capital-intensive industries, because this is the effect of the system that they have introduced. It used to be held as a serious accusation against the investment grant system that it assisted capital intensive industries. Their system does exactly the same thing and presumably it does exactly the same thing because that is the result they wish to achieve.
How will the Government assess the effect of their proposals on capital-intensive industries? They say that they want to help the development areas. This is another argument for having a system of incentives. One can differentiate that system in the direction of development areas and achieve effects there. I ask the Government to tell us how they propose to assess these matters and these effects. I ask them how they intend to introduce their principles of scientific management into this matter, because the first factor of which one becomes aware is that there will be a serious reduction in the amount of information about all this that will be available.
A short time ago I ask the Chancellor of the Exchequer whether there would 1102 be published the sort of analysis of investment allowances and tax allowances under the new system that was published in respect of investment grants. The reply was that the cost of so doing would be unacceptably high, and therefore it would not be done. The Financial Secretary will remember the extensive information that used to be published about investment grants. I hope that we shall have a further report for the year up to 31st March, 1970. I hope that we shall have a detailed analysis of expenditure in particular industries, because it will help us to assess the effectiveness of that sort of investment incentive. This kind of information is not to be available in respect of investment allowances. What system are the Government setting up to achieve control over their system of investment allowances?
We have been assured that differentials for the development areas will not be reduced, but the statement that they will not be reduced has not been supported by any calculations presented to the House or to the public. It is very curious that no such calculations have been presented. One would have expected such calculations to be brought before the House. I suppose that one reason why they have not been presented is that the Treasury does not want to tie itself to particular estimates which might be shot down. If that is a reason, I do not think that it is an honourable one. I think that the Treasury should present the estimates upon which this statement has been based.
Another reason why the Treasury has not given us this information is that the statement depends, to a considerable extent, apparently, upon what happens to grants and loans under the Local Employment Acts, and this the Treasury cannot say because the Prime Minister said in the House a short time ago that "one never knows". If one never knows, how does one make the claim that the differential is being preserved?
I ask the Financial Secretary to tell us how the Government propose to assess the effect of combining a reduction in corporation tax with investment allowances in producing the results, the social engineering results which they apparently want to achieve. How will the Government find out whether they are doing what they want to 1103 do? What information will be available? What will they tell the House? Is it just going to be the surprising deficiency of information associated with the Chancellor's most recent pronouncements, or will it be more? Will we have information along the lines that we had for investment grants. What sort of information will the Treasury consider is worth the cost of producing it? What is the Treasury going to do about providing estimates of the likely effect of its decisions on particular industries which have a major impact on the country's export results, and economic results generally?
Let us consider a few of the vital industries that will be affected by the decisions which the Treasury has made. Let us consider the motor car industry. From reading the Press one realises that in recent months—and during last year—the motor car industry has not been notable for the profits that it has made, and therefore it will not have many profits against which to offset its capital expenditure. Presumably the Treasury has made some estimate of the effect of all this on the motor car industry, which is the major exporter in the country? It is, presumably, going to be affected. Presumably the Treasury has estimated the effects, and presumably it can tell us what they will be?
The chemical industry is a highly capital intensive one. If one can believe recent reports in the Press, the Chemical Industry Association has been making representations to the Government about transitional arrangements. There have been reports of intentions to cut capital expenditure in the chemical industry. On Saturday morning we had in The Times an article about I.C.I. and its intention to cut its capital expenditure. Here is a possible effect of the decision which the Government have made. Presumably the Government have made an estimate of the effects that it will have, and presumably they can tell us about them and thereby encourage us to be less discouraged by the initial reaction of industries to this total package which, as far as one can see, has been to revise downwards their investment intentions, rather than, as was clearly necessary, to revise them upwards.
Let us consider the shipping industry, which has been most outspoken in its 1104 reactions to the Government's decision. I remember a year ago the shipping industry telling us how its recent expansion and the recovery of its position in world shipping was due exclusively to the initiative and vigour of those gentlemen who ran the industry. More recently we have seen the industry attribute this just a little to the existence of the investment grant system. The industry is really worried that it will lose that system. What is the Treasury's estimate of what will happen to the shipping industry? What will happen to the expansion of earnings from shipping, which are an important contribution to our invisible earnings?
I put those questions to the Treasury in an entirely non-partisan spirit and in an attempt further to establish the Government's skill in scientific management which we know they are trying to develop. The Financial Secretary will realise that our appreciation of the Government's success in the development of methods of scientific management will depend to some extent on his ability to answer those questions.
§ Mr. Joel Barnett (Heywood and Royton)
It will come as no surprise to the hon. Member for Cornwall, North (Mr. Pardoe) that I disagree with his argument as much as I disagree with the Government's argument for reducing the rate of corporation tax in the context of this year's economic situation. I hope that this will become clear when I refer later to some of his remarks.
I hope that on this occasion the Financial Secretary will do my right hon. Friend the Member for Birkenhead (Mr. Dell) the courtesy of replying to the important points that he has made. Similar points have been made frequently during debates in the House over the last few weeks, and questions have been put to Ministers time and again, but those questions have been evaded and we have had no answers whatsoever on this vital issue of the estimate of the effect which the Government's policies will have on investments. I hope that on this occasion the Financial Secretary will reply to the points that have been made. If the Government have done nothing, let them at least say so.
On one point I agree with the hon. Member for Cornwall, North. The important aspect of this Clause and, indeed, of the whole Government package, 1105 is its effect on demand. Much the most important part of the package is what will be its effect, and therefore what will be the effect on investment.
The impression has been given that the effect of the package as a whole will be neutral on demand. This is not quite what the Chancellor of the Exchequer said on 27th October. He then said:The reduction in income tax and the reduction in public expenditure, taken together, will, therefore, be broadly neutral in their effect on demand in 1971–72."—[OFFICIAL REPORT, 27th October, 1970; Vol. 805, c. 51.]He did not refer to corporation tax at that time. However, realising that he had again, perhaps not deliberately, misled the House, he corrected that, or attempted to correct it, in the debate on 4th November when he said:It was in the light of the assessment which I have just given to the House and because I wanted to preserve my freedom of action next April that I was prepared to bring in legislation now to reduce direct taxation to an extent which, taken together with the reduction in public expenditure, would be broadly neutral. …In other words, he was now taking together both income tax and corporation tax.
However, realising that he had confused the situation, he went on to say about corporation tax:… after allowing both for the time that normally elapses before investment decisions can be translated into production and for the effects of corporate borrowing"—an interesting phrase—the demand effect of the proposal concerning corporation tax during the financial year will be small, both absolutely and in relation to the effect of the reduction in income tax."—[OFFICIAL REPORT, 4th November, 1970; Vol. 805, c. 1089–90.]I shall be interested to hear exactly what the Chancellor meant by that statement.
It seems to be the practice of the Chancellor to confuse both himself and the House, and on this occasion what he had in mind was far from clear. Is he telling us that there is so little effect on demand by a £60 million cut in corporation tax followed by a £90 million cut in corporation tax in the following year, which will be taken into account by companies whose years end after 5th April, 1970, a total of £150 million, that it will be meaningless?
1106 I understand that the normal effect of corporation tax is about 20 per cent. The Chancellor may consider that to be a very small amount, but his whole judgment of whether the package is neutral on demand has been seriously questioned by many commentators, not least by a very senior former Treasury official, Mr. Wynn Godley. The Government owe it to hon. Members to answer this serious criticism of the effect of the package on demand.
It may be that the Government are being coy because they feel that once they show the makeup of the various parts of the package, it may be so open to criticism that it will be seen for the nonsense that perhaps it is, but if that is not the reason, why do they not tell us? After all, we have been told time after time that we now have an open style of government. Why can they not extend the open style of government to let hon. Members know how it is that the Chancellor disagrees on such a serious matter with so many serious commentators?
If we do not get this answer and explanation, we can only assume that the Chancellor's calculation, as with so many others which he has made in the past, will not stand scrutiny. We cannot believe that he can imagine that he will somehow delude foreign observers into believing that the effect on demand is neutral simply because he happens to say so. The least he can do is to tell us just how he arrives at this conclusion.
The major and most interesting comment about the cut in corporation tax is that it does nothing for the great majority of companies. There were precisely 514,826 companies on the register in 1969 and only 255,000 pay any tax. According to the 1970 Report of the Commissioners of Inland Revenue, out of those, 133,000 pay corporation tax on profits of less than £100 and 64,000 had nil profits anyway. One assumes that many did not submit returns; one has to judge from the total of companies on the register. It is clear that for the majority of close companies, about which the Conservatives said so much in the last Parliament, the corporation tax cut will do nothing. It will be interesting to know exactly what the Government have in mind to help close companies.
Let us deal with the minority of companies which the cuts in corporation tax 1107 will help. What will be the effect on the efficient part of that minority? It is said that those with profits, those able to stand on their own feet, will get enormous benefit from this £60 million reduction. I do not know, but there was an interesting article in the November issue of the Director which threw a little doubt on whether it was true that the cut in corporation tax would have a tremendous effect on the efficient directors. I quote one or two relevant extracts:… nearly half the directors ignore tax when assessing the attractiveness of new investment …This does not seem to coincide with what the Government have been saying about efficient companies and how those companies will be able to recognise the true benefit if they use the discounted cash flow system, for example.
If they do, and, according to this report, not many do, this cut will certainly not be their main or only criterion in measuring the return which they are likely to get from their investment. Even if it were, they would be interested in the answer to two Questions put by my hon. Friend the Member for Ashton-under-Lyne (Mr. Sheldon) on 4th November showing that those efficient companies using the discounted cash flow system under the old arrangement, with corporation tax at 45 per cent., and the old investment grants, on every £100 of investment outside the development areas would get £39 of relief and £52 inside the development areas, whereas under the Government's new system the comparable figures are £32 and £36.
Therefore, efficient directors assessing the likely yield from a given piece of investment will be able to see that they need a much higher yield under the present arrangement than under the investment incentive system of the previous Government. So we will get a further inflationary boost, because companies will decide to carry on with the investment and increase their prices in order to get the yield which they would have had under the old system, or they will cut back on their investment. But whichever way they decide to do it, one thing is clear—the Government's policies certainly will not be beneficial to investment in this country.
1108 7.0 p.m.
What is the effect on that part of the minority of companies which the Government would describe as inefficient, those which cannot stand on their own feet, which have no profits, companies like Rolls-Royce, companies in the development areas where in the first year or two all too frequently there are, understandably, no profits and so no benefits? There is nothing for those companies in the Government's policies. There is nothing for the majority of companies, and very little for the minority which are using what is said to be the most efficient method of investment analysis.
So whichever way we look at it, there is nothing in the Government's policies to help in any way in the vital matter of investment. There is not one jot of evidence that a cut in corporation tax of 2½ per cent., or even the 5 per cent. suggested by the Liberal Party, would go any way to help increase the appallingly low level of growth which seems likely this year and next year if the O.E.C.D. is anything to go by. There is nothing to help in these vital fields. There is nothing to help the close companies, nothing to help the efficient companies, nothing to help the progressive but loss-making companies in development areas.
After five months in charge of the Government of this country, a country with serious economic problems, as the late Iain Macleod described them, it speaks volumes for this Government that we are now discussing what is at best an irrelevant Clause in an irrelevant Bill. If the Prime Minister's speech at the Mansion House means anything, it is that the Government are abdicating economic responsibility and leaving it to the people. If they have the idea that the problems will somehow go away, if they have a pious hope that they will somehow solve themselves, we can tell the Government that they certainly will not, and the Clause will not do anything to help.
§ Mr. Patrick Jenkin
I have some sympathy for the Opposition in the position in which they find themselves, because this Government, then the Opposition, went to the country on a programme which included cutting public expenditure and reducing taxation. The Opposition are faced with the embarrassing position of having to try to find 1109 something on which to attack us, because we have succeeded within five months of taking office in doing just that.
The hon. Member for Cornwall, North (Mr. Pardoe), whose Amendment we are discussing, is in a very honourable tradition. Looking through previous corporation tax debates, I find that Mr. Peter Bessell and Mr. Richard Wainwright—neither of them, sadly, now with us—then moved Amendments to reduce corporation tax, as I myself have done. The difference is that this time we are doing it in the Bill. We are achieving a 2½ percentage points cut, which represents a reduction of just over 5 per cent. in the tax. The hon. Gentleman's Amendment would reduce that by a further 2½ percentage points. Clearly, there is something to be said in favour of his proposal, but I cannot advise the House to accept it.
We must look at the corporation tax cut in the Bill as part of the balanced judgment which my right hon. Friend the Chancellor felt it necessary to make when he was considering his policy for investment grants, tax allowances, and, indeed, the whole package which he announced on 27th October. The Government were committed to ending the system of investment grants, which was obviously warmly espoused by hon. Members opposite for reasons which we can all understand. We were committed to ending it, because we regarded it as wasteful. Huge sums of public money were being spent to try to encourage investment, and even after four or five years hon. Members opposite never produced any of the figures along the lines of those that the right hon. Member for Birkenhead (Mr. Dell) suggested I should now produce, estimates of the effect of investment grants. As my right hon. Friend the Chancellor has said, investment in the four years the grants were in force was somewhat lower than in the previous four years, when a different system had applied.
§ Mr. Dell
The hon. Gentleman says that we did not produce estimates of the effect of the investment grants system. We were engaged in a study of it which began at the beginning of 1969, about two years after the system came into effect. All that I asked him is what sort of assessment he will make of the effect of his system.
§ Mr. Jenkin
The right hon. Gentleman is anticipating what I shall say. My case is that the grants did not produce the results which right hon. and hon. Gentlemen opposite expected. We feel that they were ineffective and that the expenditure was misdirected, not least because they were not profit-related. I simply cannot believe that it is in the interests of this country that 40 per cent., as it is in the development areas, of the capital cost of major projects should never have to produce any return. That is the effect of an investment grant, which by its very nature is not related to the profitability of a particular investment. That is our case against the grants, and why they went.
We have replaced them by a new and greatly simplified system of tax allowances, based on free depreciation in the development areas and accelerated depreciation outside, with a simplified form of annual allowances. This has been accompanied, as the Bill provides, by a 2½ percentage point reduction in the rate of corporation tax. This is a balanced package. It achieves what we mean to achieve, which is to improve in the medium term the liquidity of companies, many of which have complained that their tight cash position is one of the restraints on their investment programme. The figures are set out in the investment incentive White Paper of £60 million this year and £90 million next year.
The hon. Member for Heywood and Royton (Mr. Barnett), by a piece of sophisticated logical juggling, managed to convince himself, even if he did not convince anyone else, that the cut in the corporation tax does not help close companies. Perhaps he meant to say that it does not help all close companies.
§ Mr. Barnett
The hon. Gentleman must listen. I said that it did not help the majority of close companies. Would he deny that?
§ Mr. Jenkin
The hon. Gentleman knows that he is playing with figures. A company may not pay corporation tax because, for instance, it is a small family company in which the whole of the profits come out in directors' remuneration. That covers a large number of companies. The hon. Gentleman was one of the foremost pressing, with us, on 1111 the Government which he nominally supported to get rid of the limits on directors' remuneration which the previous Government imposed. That is why some close companies do not pay corporation tax. All that do—and some of them are very large—will be helped. Many tens of thousands will be helped by the cut in the corporation tax, as they will be helped by the Government's decision not to reopen the shortfall assessments or agreements that have been reached on distributions. On a strict matter of logic, we might have done this on a reduction of the rate of corporation tax on the ground that they may have more distributable profits. That, too, will help close companies. There are many tens of thousands of close companies which will very much welcome this easing of the tax burden upon them.
The hon. Gentleman also mentioned the study by the Director, and quoted the article about it. I imagine that he has read the article. Does he realise that the sample was of about 83 companies, which represents such a minute fraction of the total number of companies which operate in this country that I am surprised that an hon. Member as intelligent as the hon. Gentleman put as much weight on it as he did?
§ Mr. Jenkin
I should want to know exactly how the sample was found. These were people who answered a questionnaire, which is a self-selected sample.
I come to the questions asked by the right hon. Member for Birkenhead. The hon. Member for Heywood and Royton asked one or two as well. I understand very well the anxieties of the right hon. Gentleman about some of the points he raised. First, he asked how we intend to assess the effect of the change of investment assistance. As I am sure he appreciates, because in the previous Government he was involved in this at an earlier stage, this is a matter for my right hon. Friend the Secretary of State for Trade and Industry, which Department is concerned overall, as was the Ministry of Technology before it, with assessing the effect of the Government's various Measures on investment by manufacturing and other industries.
§ Mr. Dell
Surely the hon. Gentleman is under a misapprehension here? It was a matter for the Board of Trade and subsequently the Ministry of Technology in the previous Government, because there was a system of investment grants administered by those Departments. Here we shall have a system of tax allowances administered by the Inland Revenue. Therefore, it is the responsibility of the Chancellor. The Chancellor is responsible for telling us what justification he has for the very large sums of money which will be given in tax allowances as investment incentives.
§ Mr. Jenkin
That was not the right hon. Gentleman's question which I was answering. He asked us how we intend to assess the effect. I say with the greatest respect to him, because he knows a great deal about this from his own experience, that that is not a matter for the Inland Revenue. He knows that. It is a matter for the sponsoring Department for industry, the Department of my right hon. Friend the Secretary of State for Trade and Industry.
§ Mr. Barnett
Is the hon. Gentleman saying, then, that the Treasury does not know what the effect of its investment incentives will be?
§ Mr. Jenkin
On the contrary, I am saying that this is a decision of the Government. It has been taken by the Government and all the Departments concerned have contributed. The right hon. Gentleman's question about how the effect will be assessed is a matter for my right Friend, and I do not intend to be drawn on it this evening because it is not one which is open to me to answer.
The right hon. Gentleman asked whether as much information on investment allowances would be produced as has hitherto been produced on investment grants. We shall consider this. Of course, a lot of information on investment allowances is given in the statistics produced by the Inland Revenue. The right hon. Gentleman knows that last year, for the first time, the Inland Revenue produced an entirely separate volume of statistics containing a number of entirely new charts and tables of interest to those who study these things. We shall certainly consider the right hon. Gentleman's suggestion as to how far we should go in producing further statistics on investment 1113 allowances. I hope that he will take that as sincerely intended.
The right hon. Gentleman also asked something that he has asked two or three times before about the differential between the development areas and the rest of the country. He asked me to support, with figures if possible, the assertion of my right hon. Friend the Chancellor that the package as a whole broadly maintained the existing differential. I am sorry that he has not been satisfied with the answers which my hon. Friend the Minister of State, in particular, gave him in reply to his question, and felt it necessary to launch into the columns of the Press on the matter. Perhaps I may just refer to his letter to The Times Business News. It had a sting in the tail which was not wholly deserved, suggesting that my hon. Friend the Minister of State and I had forgotten all we had ever learnt about discounted cash flow techniques and so on. I assure him emphatically that that is not the case. We are very well aware of the importance of these methods of calculation in the right place. Indeed, we are impressed by the degree of sophistication and awareness by both the Inland Revenue and the Treasury in this complex field. Perhaps the right hon. Gentleman will feel that his gibe was undeserved.
I come to the question of the regional differential and the cost of the existing differential element in the investment grant. Perhaps I should apologise for addressing the House in a dark brown voice. I have a cold and I trust that hon. Members will forgive any inconvenience that this is causing.
The cost of this element paid to the development areas in 1969–70 was about £100 million, and it is expected that it will be a little higher in 1970–71. Of course, the net value to industry is somewhat lower, about £80 million, because the annual writing down allowances on capital expenditure are given net of grant. But for the grant, firms would receive higher annual allowances. We estimate that the cost to the Exchequer of the regional differential incentive in 1972–73 will be about £90 million, made up in part of the residual differential grant payments and, in part, of the additional cost of free depreciation over the national rates of allowance.
1114 Obviously, as the grant is phased out that figure of differential will, to that extent, decline, but this will be matched by the growth of additional expenditure—which my right hon. Friend told the House would be up to £25 million extra by 1974–75—under the Local Employment Acts. These figures taken together—the decline as the grants are phased out, the maintenance of the margin of investment allowances and the growth of expenditure in respect of the Local Employment Acts—in my submission fully justify our assertion that the balance of advantage for the development areas will be broadly maintained.
§ Mr. Jenkin
No. The investment is, of course, assumed to rise, for the purpose of argument, broadly in line with recent trends. This would seem to be a perfectly proper assessment, bearing in mind the fact that industry will be less burdened both with corporation tax and tax on distributed profits as a result of the cut in income tax. We anticipate, therefore, that investment will begin to rise.
I was then asked about the effect of the change on the liquidity of companies. Hon. Members will realise that what one is talking about is the liquid assets of companies available for investment. It would not be right to apply discounted cash flow to these assets because one is talking about cash that is available. Here there is very little difference between the two systems.
If one looks at the first three years, one sees that in the case of an asset qualifying for a 40 per cent. grant, the variation was between 49.8 per cent. and 54.8 per cent. An asset qualifying for free depreciation at the corporation tax rate of 42½ per cent. would get 42.5 per cent. With a grant of only 20 per cent., again, the figures varied—the variation would depend on the amount of the writing down allowance—between 33.1 per cent. and 39.7 per cent.
Under the new system it is 32.9 per cent. In the case of an asset which did not qualify for grant, it varied between 29.7 per cent. and 31.8 per cent. The figure under the new system is 32.9 per 1115 cent. Although if one looks at a particular asset there may have been in the case of the development areas some reduction in the minimum liquid cash amount available, one must have regard to the effects of a 2½ per cent. cut in corporation tax on the rest of a company's profits.
If the right hon. Gentleman says, "What about a company that does not make any profits?", then the answer is, "Let it become efficient and it will then be able to benefit from the allowances and from the reduced rate of corporation tax being paid."
If hon. Gentlemen opposite are arguing that we should continue to make substantial payments out of public funds to companies whether or not they make profits, then we on this side of the House do not agree. We feel that the system needed a change and, as part of that change, a 2½ per cent. cut in the rate of corporation tax was, we believe, appropriate.
I hope that the hon. Member for Cornwall, North will not press the Amendment. If he does press it, I trust that my hon. Friends will reject it. Equally, I hope that my hon. Friends will support the Clause, if necessary on a Division.
§ Mr. Pardoe
In view of the Financial Secretary's remarks, I beg to ask leave to withdraw the Amendment.
§ Amendment, by leave, withdrawn.
§ Clause 3 ordered to stand part of the Bill.
§ Clause 4 ordered to stand part of the Bill.
§ Bill reported, without Amendment.
§ Motion made, and Question, That the Bill be now read the Third time, put forthwith pursuant to Standing Order No. 55 (Third Reading), and agreed to.
§ Bill accordingly read the Third time and passed.