§ Question proposed, That the Clause stand part of the Bill.
§ 4.5 p.m.
§ The Chief Secretary to the Treasury (Mr. Maurice Macmillan)
This Clause authorises the charging of corporation tax at the rate of 40 per cent. on company profits arising in the 12 months of the financial year starting 1st April, 1970. It is a short Clause of 17 words, which means, if my calculations are right, that it is worth about £29 million a word. I shall be brief in introducing it, since reductions in the previous rate have already been debated at some length last October, in the Budget debate and on the Second Reading of the Finance Bill. I do not think that that will necessarily prevent a reasonably long debate today, but the Government's reasons are well known, so perhaps the Committee would perfer me to make my main argument in reply to the points raised during the debate.
Nevertheless, it will probably be convenient for the Committee if I make a few introductory remarks of a practical nature. In doing so, I will try to avoid anticipating the future work of the Committee on the question of capital allowances, which we shall debate on the Floor of the House on Clause 30 and also upstairs, and the work of the powerful Select Committee which is to consider the Green Paper on corporation tax changes. I am bound to mention these aspects because of their connection with the rate 396 of tax, but I hope I can do so within the rules of order without anticipating our future debates.
Corporation tax was first introduced at the rate proposed in the Bill—40 per cent. It remained at that rate throughout the financial year 1965–66. In 1967, the rate was raised to 42½ per cent. In the financial year 1968–69, it was 45 per cent. It was to have remained at 45 per cent. for the financial year 1969–70 until my right hon. Friend the Chancellor of the Exchequer last October put the rate back to 42½ per cent.
During that period, we saw a considerable falling off in company profits. Gross trading profits and outturn prices and not just taking account of changes in the value of money, were £4,400 million in 1964 and £4,610 million in 1965, ending up with £5,010 million in 1970. In other words, the percentage of total domestic income which was represented by company profits, excluding stock appreciation, fell steadily from 14.3 per cent. in 1964 to an estimated 10 per cent. in 1970. This in itself is justification for the Government's policy of reducing the rate of corporation tax both last October and in the Budget, and, indeed, it might even commend itself to the Opposition, however much they may equate profits with extortion. It should commend itself to them on the basis that one cannot successfully milk a starving cow. Before we come to the question of company profits, I want to mention the question of the yield from corporation tax as affected by my right hon. Friend's proposals.
The Budget estimate of the yield of corporation tax for 1971–72 is £1,620 million. Not all of this will actually be charged at the 40 per cent. rate. Some of it may relate to earlier years, when the rate was higher. It is estimated that the reduction from 423, to 40 per cent. will reduce the tax receipts by £55 million in 1971–72 and by £105 million in a full year.
I should warn the Committee that this estimate takes account of two significant side effects. The first is that the cost to the Exchequer of what is known as overspill relief will be increased. Overspill relief was introduced by Section 81 of the Finance Act, 1965, for a transitional period to compensate companies 397 with overseas income for a reduction of double taxation relief due to them as a result of corporation tax being lower than the old combined rate of income tax and profits tax. As provided in the 1965 Act, overspill will be reduced to two-fifths of its original value in 1971–72 and to one-fifth in the final year, 1972–73.
The second side effect is that the reduction of the rate will in principle increase the funds available for distribution, and to the extent that companies do increase their dividends, there will be a corresponding increase in the amount of Schedule F tax, deducted from dividends, reaching the Exchequer. Obviously, this calculation involves some judgment, since in practice many companies will need to retain funds rather than distribute them in order to restore their liquidity position and to finance investment. But in estimating the effect of these changes, these two side effects have been taken into account.
There was a 2½ per cent. reduction last October and a further 2½ per cent. reduction in the Budget, and the two together bring the rate of corporation tax down to 40 per cent. and are estimated to reduce the tax coming into the Exchequer by £150 million in 1971–72 and £200 million in 1972–73. That is a gross figure, not taking account of any other changes in investment grants, allowances and the rest.
If one takes the effects on companies and on the Exchequer together, for the year 1970–71, following the Budget proposals, there is a reduction in the yield of taxation and an increase, therefore, in company liquidity and the money available to companies. Taking account of the change in investment grants and of the new capital allowances of about £60 million, rising to £135 million in 1971–72, dropping to £10 million in 1972–73, rising to £20 million in 1973–74 and dropping again to £10 million in 1974–75, the greatest effect on company liquidity will come increasingly in the years 1970–71 and 1971–72, when, of course, it is likely to be most required.
The purpose of the reduction in corporation tax is obvious. The whole purpose of the Budget was, among other things to help investment by expanding demand and by re-establishing confidence in business and the growth of the economy, and by various other measures, 398 including the reduction in corporation tax. These measures taken together will improve incentives help the cash flows of companies and restore liquidity.
The reduction in the rate is also needed for the purpose of reforming the structure. I will, however, steer clear of the details of that because they are contained in the Green Paper and will be subjected to detailed examination by the Select Committee. But together they add up to a consistent and integrated policy which will reduce the total weight of tax on companies and redistribute the burden of taxation as between companies in a way which the Government regard as likely to be more equitable and more effective towards encouraging economic growth and investment. The reduction in corporation tax brings it to a level which is consistent with the Government's intention of bringing in a two-rate tax at acceptable rates.
§ Mr. John Cronin (Loughborough)
Why has the reduction been made in two separate slices? What is the difference between the situation now and the situation a few months ago?
§ Mr. Macmillan
The trend was beginning to be apparent when my right hon. Friend made his original judgment which led to the reduction last October, and it became more established and more obvious. The requirement for greater assistance for company liquidity and profitability was even clearer by the time he came to make his Budget judgment. Therefore, his further measure in the Budget was an extension of the process which he had already started.
The criticism of the Opposition is not that we acted too early but that we should have expanded the economy more. As that criticism was largely directed towards increasing the capacity not only of the economy but of companies to invest, my right hon. Friend's judgment in making the reduction to 40 per cent. is hardly open to criticism by hon. Members opposite. No doubt it will be said that we should do more to encourage investment by companies and to help them invest in new programmes. But I do not think that it can be clearly argued that the present reduction in the rate of corporation tax is too much in current circumstances. Indeed, I hope that the 399 Committee will accept that it is necessary to help the Government in securing profitable investment in the future. But, as has been made clear, this depends on restoring the confidence of business in the prospect of profitable trading and investment in the United Kingdom. It means that people expect to see relief from taxation so as to be able to retain profits as well as the possibility in the future of earning greater profits. It is this expectation that must govern to a large extent the decisions of companies on their future policy.
There is a second factor. It is not just the expectation of profit but the capacity to invest and the availability of funds for investment that are important, and the reduction in the rate of corporation tax will directly and indirectly help companies, institutions and individuals in restoring a greater capital market and helping future investment. It is in that spirit that I commend the Clause.
§ Mr. Joel Barnett (Heywood and Royton)
I should like to examine briefly the objectives that the Chief Secretary told us lie behind the reasons for cutting corporation tax on this and the previous occasion and to see whether this is the best way of achieving the purposes set out by the Chief Secretary. No one denies that the reduction in corporation tax will clearly improve liquidity. Obviously, if we cut the rate of corporation tax, we improve the amount of resources in the hands of companies. As the Chief Secretary pointed out, in 1971–72 there is a £55 million reduction in corporation tax as a result of this Bill, and altogether, by 1971–72, if we include the mini Budget, the total is £150 million.
We cannot really take that on its own, and say that it is the only thing that affects companies. There are clearly other measures taken by the Government and other things happening which affect company liquidity. This cannot be taken in isolation. There are the increased national insurance costs, the increase in the employers' share of national insurance and graduated pensions, which the Government Actuary reckons in 1971–72 will cost employers £85 million.
I have heard the Minister of State argue that a great many companies are 400 looking at their affairs on a discounted cash flow basis and in that sense the costs of national insurance increases will be the same as the tax reductions. In my view, in the great majority of companies the national insurances increases will be treated as part of the costs, and will be largely offset by increased prices, whereas because most companies look at their situation from a pre-tax position, the real liquidity position—and I give this for the purpose of the argument to the Chief Secretary—would be increased because national insurance contributions would be largely offset, being part of costs, by increased prices. I accept that there would then be this increase in company liquidity arising from the reduction in corporation tax.
Then we have to examine the 50 per cent. selective employment tax reduction. From time to time we have been told by the Prime Minister, the Minister of Agriculture and many others, in speeches here and elsewhere that the greater part of the selective employment tax cut will be passed on in reduced prices. At the same time we have been told that it will also be available for increased company liquidity for further investment. Clearly, it cannot be for both, and there will be part for one thing and part for another.
I should have thought that the Chancellor must have made an estimate in arriving at his Budget judgment as to the extent to which S.E.T. would be passed on in reduced prices and the extent to which it would be retained for the purpose of improving liquidity and further investment. The Government owe it to the Committee to tell us what is that judgment. My view is that the Chancellor could not have imagined that a great deal of the cut would be passed on otherwise he would not have made it in that way because it would have had too great an effect on demand. It is not good enough for the Chancellor to say, on the one hand, that it will be passed on in reduced prices, and, on the other, that it will also be available for improving company liquidity with increased investment.
The amount to which it will go to each department must at least be known as an estimate. I accept that no one could known the exact way in which the reduction would be effective in terms of demand because we have never had this 401 sort of situation before, but the Chancellor in arriving at his judgment must have made that estimate, and it is not good enough for him to refrain from giving the judgment to this Committee.
Transcending the whole of this is the problem of money supply. We cannot say that there will be a cut of 2½ per cent. in corporation tax which in 1971–72 will put £55 million in the hands of companies while at the same time ignoring the fact that the Government are pursuing a particular form of money supply policy. Admittedly it is not terribly clear what that policy is and I hope that I will not embarrass the Chief Secretary too much if I quote one or two things in an endeavour to ascertain the Government's policy in this respect, because it is important for company liquidity. The first comment was by the Chancellor in his Budget speech on 30th March when he said:I think it is now well understood that, important as monetary policy is as a means of influencing demand generally, it has no special magic for dealing with cost inflation, and it would be inconsistent with my Budget judgment to restrict the growth of money supply so as to reduce demand below the level needed to achieve a growth of output in line with the growth of productive potential.That is reasonably clear. Then he said:But, equally, the supply of money must not be so plentiful as to produce an additional boost to demand beyond that intention.He then said:Nor must it accommodate any further impetus to the rise in costs and prices.I have a feeling that he must have read that a little later and decided, before he delivered his speech, that as it may not be too clear he ought to add a bit more.
§ Mr. John Nott (St. Ives)
Can the hon. Gentleman help me? I thought that we were on a corporation tax Amendment. Since the reduction in corporation tax increased retained earnings of companies I am not clear where the money supply comes into the argument.
§ Mr. Barnett
I know that the hon. Gentleman is not as naive as that. He knows that money supply, bank lending and the rest, will have an effect on the whole problem of company liquidity. If he is arguing that money supply has no effect on the whole problem and what the Government are trying to achieve through their cut in corporation tax I 402 shall listen with great interest. The point I am examining is whether the Government would achieve the purposes outlined by the Chief Secretary in his opening remarks through cutting corporation tax.
Clearly this will be affected by the rest of the package, which we cannot ignore. We must take into account the whole of the Government's policy, and I am trying to find out what that policy is in this respect. I should have thought that the hon. Gentleman would be interested to know. I know that he has a great interest in these matters and I am sure he can control himself with patience until the winding-up speech from the Government Front Bench, when he will no doubt be enlightened as to the true effect of the whole Government package on companies and the effect of corporation tax in addition to the rest of the Government's policies.
I have been diverted and I should like to refer to what the Chancellor added to his remarks after reading through them. He went on to say, a little later:But this does not mean that I intend the growth of money supply simply to accommodate the going rate of inflation. As the rise in costs and prices is moderated, so the aim will be to slow down the growth of the money supply. This will depend on the progress we make in de-escalation. I do not want to prejudge this or appear to set a limit to what can be achieved by laying down now a firm objective for money supply for 1971–72 as a whole."—[OFFICIAL REPORT, 30th March, 1971; Vol. 814, c. 1371–4.]It was left at that for the time being. Then the Minister of State obviously felt that something more was needed, that probably it was not too clear what the Chancellor was intending to convey and possibly companies would not be clear as to what was likely to happen about money supply. On 1st April he attempted to explain the Chancellor's policies. He said:The present choices for monetary policy are often presented as two distinct options—a neutral policy and a passive policy.He then went on to explain this:I take a neutral monetary policy to mean a growth in money supply equal to the underlying growth in productive potential, plus some allowance for an irreducible price increase based on past experience. I take a passive monetary policy to be one which accommodates whatever rate of growth in money incomes and prices is generated by the development of the economy.403 That was his explanation of the two methods. He did not say which was the Government's.
My right hon. Friend the Member for Birmingham, Stechford (Mr. Roy Jenkins) tried to elicit that information. He asked the hon. Gentlemanwhether the Government's policy is closer to neutral passivity or to passive neutrality".The hon. Gentleman was honest enough to say:I am not sure that that would really clarify the position."—[OFFICIAL REPORT, 1st April, 1971; Vol. 814, c. 1803–4.]So we still do not know what the Government are trying to achieve with their monetary policy. We are left in a state of suspended animation. The Chancellor will not finance inflation but, on the other hand, if wage escalation continues he will finance it—or will he? It is not clear, but no doubt whoever winds up the debate will tell us what the right hon. Gentleman had in mind.
Presumably—and this was made clear by the Chief Secretary—the Chancellor was not trying to increase company liquidity for its own sake; presumably he had something more in mind. He said that he did not wish simply to finance wage inflation, neither presumably was he doing it simply to maintain high dividends, although clearly it will, to some extent, do that. As the Chief Secretary said today, the objectives are to obtain an increase in investment and higher rates of growth.
But what led the Government to conclude that that was likely to happen when they made the decision to cut corporation tax, first by 2½ per cent., in October, and then by a further 2½ per cent? Presumably they assumed that some of the saving would go into increased investment. But did it not occur to the Chancellor that companies might simply say, "Thanks very much. The Chancellor has, at a stroke, increased our post-tax profits." Listening to the cheers of hon. Members opposite when the Chancellor spoke about this matter, one would almost have imagined that, at a stroke, he had increased real earnings.
The Chief Secretary made some astonishing comments today. One of his 404 major justifications for the cuts in corporation tax was that company profits had been low. I suppose one could argue that corporation tax should be cut even more so that companies have no incentive whatsoever to increase profits because they will get substantial increases from this beneficent Chancellor whatever they do. The Chief Secretary's argument today was very strange. It is clear that what most companies are doing is simply pocketing the benefits of the cuts in corporation tax and waiting for signs of prospects of selling the goods they produce. But there is absolutely no sign that the cut in corporation tax is achieving the purposes which the Chief Secretary has outlined. He told us that the effect on companies in 1970–71 would be a cut in corporation tax of £60 million.
Despite the prospective cut of £60 million, there has been no increased optimism in companies about their prospects. Indeed, when the Chancellor of the Exchequer made his forecast of what companies would be doing in investment he was not very optimistic, to put it mildly. Therefore, if his assumption when he made the cut was that there would be a great upsurge in company activity, it has not happened yet. Perhaps he convinced himself, when deciding to make the cut in corporation tax, that the international comparisons argued for a cut as a means of increasing growth and company liquidity to achieve his objective. But it could not stand up, because international comparisons in taxation are very complex and it is impossible to argue that one can prove by international figures that there is a need to cut corporation tax to achieve the objective.
When the Chancellor made his decision to cut corporation tax, he had no evidence that it would achieve any of the purposes which the Chief Secretary has outlined. I suppose that one could argue that it was a policy made up of faith, hope and charity for his non-profit-making friends. This is presumably what the Chief Secretary was arguing—the less profits companies made, the better off they would be.
§ Mr. David Mitchell (Basingstoke)
Will the hon. Gentleman explain what tax advantage is gained by a non-profit-making company as a result of a reduction in corporation tax?
§ Mr. Barnett
The hon. Gentleman had better ask his right hon. Friend the Chief Secretary, who argued that because companies' profits were low it was important to give them cuts in corporation tax. This was the justification. No doubt the hon. Gentleman will be able to take up his interesting point with the Chief Secretary.
It may be that the Chancellor will achieve his objective and that the cut in corporation tax will result in high growth and higher investment. But it would be bound to be fortuitous. If it happened, there would be a strong case for cutting corporation tax regularly to achieve that objective. But is it happening'? That is the important question. We must look at the matter as a whole. The Chancellor said that he planned to achieve a 3 per cent. level of growth. I do not accept that this is the extent of our productive potential. I do not accept that this country has a lower productive potential than our industrial competitors abroad. But that is the estimate of the Chancellor and of other people of our productive potential. It is not mine. The right hon. Gentleman planned to achieve 3 per cent. economic growth by all his measures, including the reduction of corporation tax. We must examine whether he has any chance of achieving his object.
The most recent survey which I have seen, taken shortly after the Chancellor's Budget Statement, was reported in the Financial Times of 3rd May. One of the major comments, based on the figures in the article, was on the general outlook. It said:Order flows are barely keeping abreast of current production, and industry sees none of the boost that the Chancellor included in his Budget coming through for some considerable time yet.Perhaps the cut in corporation tax will achieve something at some time, but there was no evidence on which the Chancellor could base such a judgment, and there is no evidence now that companies have taken his measures to mean that they should go ahead and expand in order to achieve his target. The major difference since then has been that unemployment has continued to rise. It clearly shows that, whatever the Chancellor had in mind about the cuts in corporation tax and his other measures, companies were waiting before they did anything.
406 I come to the real tragedy—the question of industrial investment. In the last Parliament we had speech after speech by the right hon. and hon. Members opposite on this matter. I remember the hon. Member for Horsham (Mr. Hordern) making some powerful speeches, with which I agreed, about levels of industrial investment which were higher than those being forecast by the Government. I have not heard one speech from the hon. Gentleman or any of his hon. Friends condemning the fact that the Government are now forecasting that industrial capacity will rise by a half of 1 per cent. Loyalty on the Government benches is being stretched very far. When for six solid years industrial investment was very bad—and I make no apology for it, and I condemned it at the time—and when the right hon. and hon. Gentlemen opposite made great speeches about the situation, it is strange that they should now say not a word of condemnation. It speaks volumes for something about hon. Members opposite, and I leave it to them to decide what it is.
The Financial Times survey, which was taken after the Budget, does not make pleasant reading because it found that order books were still thinning out. We were told that it would take time to get increased industrial investment and time for cuts in corporation tax to work. We at least expected to see orders coming through. But this has not happened. According to the survey:Across industry as a whole order books are expected to go on declining…More companies are now expecting declining order books than an increase, but the greatest number (over two-fifths of the sample) are still predicting no significant change either way.The survey goes on to say:Of the three industries surveyed last month, the mechanical engineers and the paper/packaging group are the least sanguine—the engineers because of the drop in the demand for capital goods…This is the situation after the Budget. And still not a word from right hon. and hon. Gentlemen opposite on this tragic economic indicator about industrial investment.
Government strategy about cuts in corporation tax have been ill thought out. First, we had the doctrinaire approach in regard to measures available to them in association with the Industrial Reorganisation Corporation, more effective 407 use of investment grant and the use of what might be called a pragmatic approach to the problem of money supply and bank lending. [Interruption.] I would define a "pragmatic approach" as not saying what one is intending to do for more than three months ahead. This is what the Chancellor has said. He told the House the other day what he was to do about money supply and bank lending over a period of three months, and he will not go beyond that period. The Chancellor must know that the 3 per cent. per quarter will in fact go on for a whole year. Therefore, his approach is to be regarded as pragmatic.
These things have been done for companies and the companies do not know what the devil is going on. They have had their tax cuts—which was all that was left to the Government to do since they scrapped all the other possibilities—and are still left bemused and waiting to see what will happen to the economy. As we see from the survey, what British industry has done—certainly the silent majority of British industry—by its actions is to pass a vote of no confidence in the Chancellor's measures.
One asks whether there there was a better way. I believe there was. It is not enough to improve company liquidity by cutting corporation tax. Of course, this will have a marginal effect and will have some effect on investment, but my experience is that the decision of many progressive and financially-sound companies not to expand is not because they are short of cash—they can get funds—but because of their inability to sell. They fear that if they buy new plant and increase production, they will not be able to sell the goods. They are not expanding at present since they do not know what will happen under the present Government's policy, particularly when they see unemployment rising at its present rate.
§ [Mr. JOHN ROBERTSON in the Chair]
§ 4.45 p.m.
§ Yesterday the Chancellor said—no doubt from some knowledge the details of which we shall discover in a day or two—that the underlying trend of unemployment over the next month or two will continue to rise. In those circum- 408 stances, is it surprising that companies pocket corporation tax cuts and refuse to expand? They have been given these tax cuts, and it still has not given them the confidence to expand. If the money had been used directly to affect prices through purchase tax cuts, with the incidental but important effect of improving the possibility of talks with the T.U.C. on wage inflation, combined with hire-purchase relaxations and passing on the £290 million cut in S.E.T. to help the lower and middle income groups, then one would have achieved the social purpose of lower unemployment, demand would have risen, and companies would have seen their prospects for sales increase and would then have increased their production. Only then would one get the increase in new plant which is desperately needed—and one would get it with or without cuts in corporation tax.
§ There would be one disadvantage in the effect on the balance of payments, a situation which was already strong and which has been improved by the recent Deutschemark crisis to the tune of anything between £100 million and £140 million. I would rather risk a temporary deficit in going for a higher rate of growth than gradual erosion of the balance of payments surplus with low growth and low investment, which is what this Government are bringing about.
§ Mr. Peter Hordern (Horsham)
The hon. Member for Heywood and Royton (Mr. Barnett) was kind enough to mention the speeches I made when the Conservatives were in Opposition concerning the level of capital and industrial investment, and I should like to reply to what he has said.
The hon. Gentleman did his best to make a good story of a poor situation. Fancy being put up to attack—and, I presume vote against—a cut in taxation! It is a novel experience for any right hon. or hon. Gentleman opposite ever to face a situation of having to consider a cut in taxation, but I suppose the hon. Gentleman at least made the best of a bad job. He attempted, as do many people when confronted with a difficult if not impossible case, to erect a great smokescreen which consisted of a little dissertation on one or two matters.
409 No one is more addicted to monetary matters than I, but I do not intend to get led by the hon. Gentleman down that particular path. The plain fact is that monetary matters, and the monetary policy of the Government, have nothing whatever to do with the state of company liquidity at present. At the moment there is no shortage of funds to be had for companies, or indeed for individuals. The difficulty, if there is one, is for the lenders of money to find creditworthy borrowers.
The fact is that there is a considerable shortage of money within companies for the very good reason that the Labour Government did their best to drive down company liquidity by every means at their disposal. It is amazing that they should now have the effrontery to criticise us for reducing corporation tax when they themselves when in power succeeded in raising it from 37½ per cent. to 45 per cent. I do not know how many hundreds of millions of £s that took, but it must have been close to £200 million of extra taxation from companies while the Labour Party was in power. They have the nerve to criticise us for not encouraging industrial investment sufficiently. That was just one gesture they made to deal with company liquidity—they raised taxation from 37½ per cent. to 45 per cent.
But that was not all, by any means. The hon. Gentleman also had the nerve to mention the I.R.C. I think that he almost used the word "purposive" in that connection. I am delighted to see that the I.R.C. has disappeared. It was always in conflict with the Monopolies Commission. One heard of the I.R.C. telling companies that they ought to merge and the Monopolies Commission telling them that they should not merge. It is no wonder that companies were in doubt as to how to proceed. They had no help from the Labour Administration.
§ Mr. John Hall (Wycombe)
Would not my hon. Friend also recall the severe blow dealt to company liquidity by the import levy, which was an interest-free loan to the Government?
§ Mr. Hordern
I am grateful to my hon. Friend. That was another example. Many others occur to me, notably selective employment tax on all service industries. When companies were not paying extra taxes, they were busy filling in forms for various Government Depart- 410 ments which proliferated under the Labour Administration. There was Schedule A also. It little behoves the Labour Party to criticise us for not encouraging companies sufficiently. Industrial investment is a very serious matter. Companies cannot be induced to invest for reasons other than a reasonable profit, or a profit—not "reasonable"—as a result of that investment. During the last six years the Labour Administration showed themselves so antipathetic towards profits, by increasing corporation tax and all the other devices that I have mentioned, that companies have found it very difficult to earn anything like an adequate reward on their investments.
The average return on industrial assets after tax has been reduced from 15 per cent. in 1964 to a little over 10 per cent. in 1970. Since the cost of borrowing under the Socialist Government continued to rise—when money could be obtained at all—and the cost of borrowing last year, and in 1969, was seldom less than 10 per cent., there was no point in the average industrial company investing in new plant and equipment. That is still the position today.
My right hon. and hon. Friends on the Treasury Bench have taken immediate action to try to put this matter right. In the Budget and in the Clause which we are discussing, they have reduced corporation tax, by two stages, from 45 per cent. to 40 per cent., and that increases company liquidity by an extra £60 million. But they have also reduced the level of Bank Rate. Thus the return which companies can now expect to earn from investments will be larger than the cost of borrowing. It is not a quick process—that is sure. But even though it is a gradual process, it will at least give companies the prospect of a really worthwhile return on investment. It is a very long time since that has been the case.
I do not think very much of the Opposition's case. The hon. Gentleman seemed to be suggesting that what we ought to have done instead was to cut purchase tax and thus, I assume, boost consumer demand, at the same time as having "useful talks" with the T.U.C. What were those useful talks to be about? I am glad that the right hon. Member for Ebbw Vale (Mr. Michael Foot) is present. I do not know what 411 he would have thought about those "useful talks" with the T.U.C. I suspect that, if there was any point in having useful talks with the T.U.C., they would have been about an incomes policy, possibly a voluntary one at first. But did not the Labour Administration try that to a considerable extent? What happened to that? Right hon. Gentlemen opposite will know. It finished up as a statutory policy. We had a "norm" and a Prices and Incomes Board dictating what the level of wages and prices should be. We had statutory orders by the dozen debated in the House on every occasion. I suppose that would have been the purpose of the discussions with the T.U.C. which the hon. Gentleman would propose. I wonder how many of his hon. and right hon. Friends would have welcomed that proposition. I do not recall seeing very much about it in their election manifesto. I wonder how many of them would care to fight an election on that policy. The hon. Gentleman knows all too well that he is talking absolute nonsense in suggesting useful talks with the T.U.C. He knows that the Labour Party would not support that suggestion, and that if there were such talks, they would end only in a statutory prices and incomes policy, which would never carry the support of his party, let alone the trade unions.
The Labour Party has no policy whatever for increasing industrial investment or for the economic progress of this country. It is high time that was said, and I am sure that it will be increasingly appreciated by the public.
§ Mr. Tam Dalyell (West Lothian)
The hon. Member for Horsham (Mr. Hordern) will not take it amiss, having returned to finance debates after a forced absence of seven years, if I say that his was a remarkably "South of England" speech. Those of us in the North would not make that kind of remark about the I.R.C. When he speaks in that tone it is a reflection of the fact that things are very different in central Scotland and, I suspect, in the Manchester area, from luscious, beautiful Sussex. I say that not to provoke him but as a rather interesting reflection which went through my mind while he was speaking.
I was interested in what the hon. Gentleman had to say about the consider- 412 able shortage of money in companies. My impression, for what it is worth, is that he is right when he says that there is a considerable shortage of money in certain companies. But that may not be the case with other companies. Any kind of blanket pronouncement on this issue could be a little misleading.
It is true that there is a particular shortage in the motor industry; but the motor industry has its special problems. I ask for a comment from the Treasury Bench, because this is a very important subject to those of us who want more investment in our areas.
§ Mr. John Hall
I apologise for interrupting the hon. Gentleman so early in his speech, but would he not agree that an examination of the accounts of the vast majority of companies which make a major contribution to our industry would reveal a very acute liquidity shortage?
§ Mr. Dalyell
My impression is that there is indeed an acute liquidity shortage in some companies. I doubt that it is the "vast majority". But I should like to have a comment from the Treasury Bench about this, because it is very important.
I have two questions. First, what is the Treasury estimate of the effects of a cut in corporation tax? Is there any evidence that a cut in corporation tax will in any way lead to expansion? It is certainly my impression, gained from talking to a number of industrialists, that this is not the kind of consideration that would lead them to expand. Any claim that a cut in corporation tax will lead to expansion needs at least to be supported by some evidence. I ask for the evidence.
My second question arises directly from the Chief Secretary's speech. It was not immediately evident to me what he meant by this measure being more effective and equitable in redistributing among companies. This may be true. For my part, it was not a self-evident proposition. I hope that precisely what he meant will be explained and expanded upon.
§ 5.0 p.m.
§ Mr. David Mitchell
I listened with considerable interest to the speech of the hon. Member for Heywood and Royton (Mr. Barnett). I was fascinated to 413 hear him say that a cut in corporation tax may well boost production but that there is no certainty about it. He went on to quote a survey which appeared in the Financial Times only four weeks after the Budget showing no increase in orders, suggesting that the Budget would be ineffective. If the hon. Gentleman cannot do better than that, it is hardly worth his trouble coming to the Dispatch Box. Before companies have even had time to hold board meetings in many cases, he expects to see orders flowing out to industry. I think that a little reality on the hon. Gentleman's part would do no harm.
The corporation tax reduction proposals in the Budget have to be considered against the background of a very serious level of unemployment and the fear that it may reach a million during the winter and against the background of inflation, the most inflammatory legacy left to the incoming Government by right hon. and hon. Gentlemen opposite.
I agree entirely with my hon. Friend the Financial Secretary, who spoke of the central need to encourage investment and of this being the first priority in dealing with the situation. If we are to stimulate growth and employment, this must be the absolute priority.
There are two worrying effects of low investment which should be kept in mind. First, if there is low investment, it means that there is less new plant, fewer new factories and less new machinery being installed, and consequent unemployment in the engineering and construction industries now. What is more, tomorrow, next year, in the future, there will be unemployment among production line workers who would otherwise have been employed in the new plant and the new factories and so on which should be going up at present.
The second worrying effect is that, if we do not have a substantial increase in investment, we shall lose many of the opportunities which going into the Common Market should bring us, assuming that the negotiations come to a successful conclusion. There is no value in having a tariff-free and quota-free market if we are not in a position to exploit it. Therefore, it is essential that there should be substantial encouragement to investment now so that we are able to grasp the 414 opportunities of increased production when the greater market in Europe becomes available. Those hon. Members opposite who have been calling for an increased market here and now should have in mind the broader and longer context of seizing the opportunities for a bigger market in Europe should the negotiations turn out well.
The Government's policy can be summed up as tight money and lower tax; in other words, profits which are hard to earn but worth getting. That seems to be the right course of action.
What are the alternatives? The hon. Member for Heywood and Royton claimed that the Government should be stimulating demand. In fact, he was going back to the old Keynesian approach. But Keynes is dead and, if we did not know it, the situation which the last Government bequeathed to my right hon. Friends of rising and high unemployment hand in hand with an inflammatory inflationary situation has surely made it clear that it is impossible now to apply the Keynesian solution.
If my right hon. and hon. Friends were to follow the advice of hon. Members opposite, all that they would do would be to provide the finance to pay the inflationary wage demands which it must be in the country's interests for employers to resist. Until the trade unions relearn the lessons of self-restraint and self-discipline which they had before the introduction of statutory control over prices and wages, there are enormous dangers for the country in pursuing recommendations like those which have come from hon. Members opposite, with the inflationary consequences flowing from them.
My second reason for believing that it would be dangerously wrong, at this time of all times, to stimulate demand by reducing purchase tax in the way recommended is that it would make us the soft underbelly of Europe so that, were we to go into the Common Market, we should be the soft, easy market to be penetrated by European manufacturers instead of our being the industrial potential setting out to seize the opportunities of prosperous markets in Europe. It is of almost overriding importance, should we go into Europe, to ensure that this country is ready to seize its opportunities. 415 It is right in the context of the Government's proposals to deal with the situation in this way.
The second alternative is that of massive investment grants. The effect of such a policy is to bring investment for the grant and not for the profit. It means the wrong motivation. It means encouraging basically uneconomic investment. It means enormous expenditure for the creation of a very small number of jobs. It means encouraging capital intensive industries which are not necessarily those which are most in need of stimulation at present.
Neither of those two alternatives is a satisfactory policy, and one is driven back to ask why investment is falling and why boards of directors invest at all. What is the motivation? I am not ashamed to say that the motivation is to make a profit. The House and the country should recognise that the driving force behind the private enterprise system is the prospect of making profits.
Profits are too low to make an investment worth while and to provide the cash flow needed to finance investment at present. I take up the point made by my hon. Friend the Member for Horsham (Mr. Hordern), who referred to the decline in the average industrial company profits on new investment from 14½ per cent. in 1964 to 10 per cent. in 1970. It cannot make sense, after tax has been paid, for companies to carry out new investment when that is the sort of prospective gross yield that they will make.
It is not popular to say that profits should be high and that the Government should make it more worth while for business men to invest. It is much more popular with the electorate to take the line of reducing purchase tax and encouraging a consumption boom. But, in reality, when I look at the present situation, I am reminded of a very wise man who once said: "You should use your heart to plan strategy"—we are agreed on strategy, we are agreed on the need for full employment and for growth—"but you should use your head to work out tactics." The Government are doing that at present. Our heads have to recognise that we do not help the wage earner by pulling down the wage payer. We do not create fuller employ- 416 ment by weakening the employer. We can provide work only by making it worth while for employers to go out and seize opportunities.
I believe that my right hon. Friend the Chancellor of the Exchequer is right in having made the 2½ per cent. reduction in the autumn and the further 2½ per cent. reduction in the spring Budget. I concur with the view of the hon. Member for Loughborough (Mr. Cronin), who asked whether there had been a change between the autumn and the spring. The answer was given to him that there had been a change, because the situation had deteriorated and there was a need for greater encouragement. It may be that, by the autumn, we shall see that there is still a need for further encouragement.
In supporting this reduction in corporation tax, I express the hope that the Chancellor will have a flexible approach to the possibility of going further with the policy on which he has already started.
§ Mr. A. E. Cooper (Ilford, South)
As I listen to hon. Gentlemen opposite I begin to think that I am at a kind of Mad Hatter's tea party. The kindest thing I can say to the Hon. Member for Heywood and Royton (Mr. Barnett) is that I am very glad that he does not audit my company's books and assist the board in its general policy for the future.
The hon. Gentleman tells us half a story. He talks about corporation tax and a reduction of 5 per cent. as if this were the sole reason that companies should have more money to invest and that we should not be doing this anyway. He should realise that we do not get this money for another year and a half. We are not debating corporation tax for this financial year. We are debating corporation tax which will be paid on profits earned in this year and remitted to us in the next financial year. So we have very little time in industry to recoup anything at all.
§ Mr. Barnett
The hon. Gentleman will get it in January, 1972, which is in approximately seven months.
§ Mr. Cooper
We have not yet got the money to spend. I hope that I shall not be thought unparliamentary in saying that it is a damned impertinence for hon. Gentlemen to talk in this way when 417 they, and they alone, are responsible for the lack of liquidity in our companies today. We never hear hon. Gentlemen opposite talk about the devastating effects of Schedule F. The hon. Member for Heywood and Royton should know—he is an auditor and accountant by profession—that every company which pays any kind of dividend suffers tragically under the effects of the Finance Act, 1965.
If hon. Gentlemen want evidence about this, I can give them one example which is the experience of thousands of companies in this country. There are many companies with a capital of between £4 million and £5 million, a turnover of, shall we say, £12 million to £14 million, and which make about £1 million profit. Before the 1965 Act and the introduction of Schedule F a company could expect to pay out in profits and income tax about 52½ per cent. of its total. It then had its dividend to find, and its retention out of the £1 million profit would be about £125,000 to £140,000. This was the experience of thousands of firms in this country. It was from this retention in excess of £100,000 that the money was found to reinvest and to expand in industry. The hon. Gentleman and his friends killed that with the introduction of Schedule F. Companies earning the same money and paying the same dividends, instead of having a retention of about £125,000, then had, if they were lucky, £5,000. I know of companies where the retention has been as little as £1,200 in a year. How do hon. Gentleman expect any company to invest that kind of money? What kind of confidence can any industry have in a Government who allow that kind of thing to go on?
Then right hon. and hon. Gentlemen opposite made it even more difficult. They put such a tight squeeze on the banks, that, even if a company was credit-worthy, it was difficult for it to get the money, and if it got the money it had to pay penal interest rates—the highest in the history of this country. This is one reason that we are in this situation.
Here we are, only nine months in Government, clearing up the worst mess that any Government ever inherited and being expected to promote miracles overnight. 418 The responsibility for the present situation rest fairly and squarely on the last Government, of which the hon. Member for Heywood and Royton was a firm supporter. We intend to wrap this albatross around their necks and to make it stick.
§ 5.15 p.m.
§ Mr. Robert Sheldon (Ashton-under-Lyne)
The hon. Member for Ilford, South (Mr. Cooper) said that he did not expect his Government to promote miracles overnight. I am prepared to accept that. However, I should have hoped that they might have done something in two years. I should have thought that two years, being approximately half the average length of a Parliament in recent times, would have been sufficient for them to have done something about the level of investment.—[HON. MEMBERS: "We have not been in Government for two years."]—If hon. Gentlemen will wait, they will see where the two years come from. Looking at the Financial Statement they will see that on the Treasury's own forecast, after this splendid Budget and this splendid reduction in corporation tax which they have welcomed so much and which I accept, by June, 1972, two years after this Government came into office, the level of private fixed investment will reach an increased figure of one half of 1 per cent. Apparently it will take two years to achieve that.
Promoting miracles overnight is not something which I expect from this Government, but I might have hoped for a level of competence. Based on this Budget judgment, given effect to by this House—we are discussing an important aspect of it today—if we see the investment which the hon. Member for Basingstoke (Mr. David Mitchell) rightly demanded as one of the important tests of the capacity, capability and understanding of the Government of British industry, we might have expected a higher figure than that which the Financial Secretary estimates will be the outcome of these brave, bold measures.
The Financial Secretary must be indicted by his own figures. If this is all that we get as a result of these measures. it is clear that, however much they may be lauded by the Chairman of the Economic and Finance Group and by 419 other hon. Members listening to the debates, they fail by the test carried out by their author.
§ Mr. Barnett
Will my hon. Friend consider giving some advice to some of the loyalists on the benches opposite about what happened to the loyalists on those benches in the last Parliament: how they were overtaken by events almost every month, when they were saying that we should not do this, and the Government did it; that they should not talk to the T.U.C., and presumably they soon will; or that they should not inflate demand anymore, and presumably they soon will. Will my hon. Friend consider advising loyal hon. Gentlemen opposite that they should not be too loyal?
§ Mr. Sheldon
That is a very good point. There will be a stage for some learning process to take place among back benchers opposite who defend their Government month after month for the action which they take and then express surprise when the Government change their attitude and leave the back benchers high and dry. There is a moral for this for all back benchers in all Governments. It is important to realise that an understanding of this will perhaps come as a greater surprise to some hon. Gentlemen opposite.
§ Mr. Hordern
Is the hon. Gentleman proposing to take up the time of this Committee in the way that he did on the House of Lords (Reform) Bill?
§ Mr. Sheldon
I should have thought that an intervention from the hon. Member for Horsham (Mr. Hordern) would have been rather better framed than that. He must know that the Government have stated that one of their important objectives is to increase investment, which is welcomed by the whole House. We say that if, after two years, we get only a half of 1 per cent. increase, then, with half of this Parliament gone, we must see some of the further measures which have yet to come.
There is another aspect to this, and it is one that must concern right hon. and hon. Gentlemen opposite. It is the level of bankruptcies. One of the sad aspects of industry over the last few months has been the inordinately high level of bankruptcies. We know that during the last 420 quarter of last year insolvencies were at their highest level for the past ten years. Will these companies be helped by the reduction in corporation tax? The answer is that of course they will not. It is irrelevant to them.
The hon. Member for Basingstoke (Mr. David Mitchell) talked about the folly of increasing demand and making us the soft under-belly of Europe. We have 800,000 people unemployed. Why not increase demand to make use of that manpower? At the moment this situation is a burden on our economy. It is not something that helps us to get efficient organisation throughout industry. It is a burden which will have its economic and social disadvantages made clearer as time goes on.
We know that the Government took a number of decisions rather too hurriedly, but the worst decision of all was the one to abolish investment grants at a time of industrial uncertainty. One can argue in favour of investment grants, or in favour of investment allowances of one kind and another. There are arguments on both sides. I am strongly in favour of investment grants, but I can understand those who say that the principle should be that of profitability. There is a case for that. Though I disagree with it, a case can be made for that view, but what was so bad was the timing of the Government's decision.
What one does not do is change over from one method of providing investment incentives to another at a time when industry is experiencing its greatest doubts about its own future. Industry might have been helped, even by those who wanted to change the system from one of grants to one of allowances, if the decision had been made to wait a few months to allow industry to carry on with its plans without asking it to reassess those plans at a time of diminishing confidence. This was not the time to change from grants to allowances. The Government might have waited until confidence had built up—if it is to build up—and made the change at some time in the future when industry was more prepared to look again at its investment policies.
The Government have made big, bold changes, but I believe their decision to change the investment grant system to be one of the most disastrous changes of all. On reading the Government's forecast in 421 the Financial Statement, which was prepared in the light of their Budget judgment, one can see that they have led industry astray, and the decline in investment is the direct result of the Government's bringing in these changes at this stage.
The change in corporation tax will provide very little assistance. I accept that the fundamental reason for investment is the prospect of profitability, arising from the sale of a company's products. A reduction in corporation tax does not help in that respect. It does not lead a manufacturer to expect an increase in his sales and, therefore, in his profitability.
What the Government should, and could, have done, faced as they were with a situation of massive and rising unemployment, was to use some of those people by increasing, though not massively, the level of demand. This would have increased the expectation of companies about their prospects for investment. If the Government had been prepared not to change from grants to allowances, companies would have been enabled, at a difficult time, to make their calculations in the way that they had been accustomed to doing.
Those are matters in respect of which the Government have failed. As a palliative, they have offered a useful but limited measure which is inadequate for the task given to it by the Government.
§ Mr. John Hall
I had not intended to take part in the debate, but I am driven to my feet in some bewilderment. When I first saw that Clause 8 had been selected for debate on the Floor I thought that that had been done because the Opposition attached great importance to it, and that the maximum amount of publicity would be directed to its provisions. One therefore expected to find the Committee fully attended, certainly on the benches opposite, by hon. Members who were anxious to attack the Government for introducing this Clause, and the philosophy that lies behind it.
I have found it difficult to recognise a coherent attack against the Government by the few hon. Members who have taken part in the debate from the benches opposite. The speech of the hon. Member for Ashton-under-Lyne (Mr. Sheldon), good as it was, was directed mainly to the question of investment grants. It is a little 422 puzzling to know precisely why we should be debating this Clause on the Floor, in view of the complete absence of any worthwhile attack by the Opposition, and I should have thought that they could well have allowed the Clause to go upstairs with the rest of the Bill.
I shall make only one or two references to the effect that the Clause might have. There has been some discussion about the liquidity of companies. There is no doubt that, under the previous Administration, many companies found themselves in difficulties. Quite apart from the burden of taxation, and the rate of corporation tax which ruled under the previous Administration, there was the problem of what I call the double taxation of distributed income. In an earlier intervention I referred to the fact that companies that were importing were forced to make interest-free loans, of considerable size, to the Government for a period of time, which threw a great strain on their resources, particularly as they had to do that at a time when it was difficult and expensive to raise money through the normal banking channels.
In recent months some major undertakings have had to raise large capital sums at high interest rates. One major company, which is a household name, raised money at a figure which was no lower than the return on its capital employed. There is not very much future or encouragement for any company to engage in further expansion, especially in the highly capitalised industries, if that is the kind of return that it gets.
It has been suggested that companies will not be encouraged to expand to any extent by the measures included in the Clause. The hon. Member for Ashton-under-Lyne said that the increase in investment between now and the end of the second year would be marginal. That seems to indicate that perhaps we are not doing enough. It is true that neither Government found the answer to the problem of stimulating investment to the level at which it should be. Perhaps we should consider measures other than that of reducing corporation tax. But there are a number of considerations which are taken into account by any company which is deciding whether to expand. The first was mentioned by the hon. Member for Heywood and Royton (Mr. Barnett) when he said that companies must be 423 able to sell, that if they think that the market is drying up, they are not encouraged to sell, and that a large unemployment figure discourages expansion.
It is true that one does not lay down plans for an expansion of plant and building if one thinks that the market is static, but one does not consider the market only in the immediate term; one takes a long-term view. It takes a long time to develop new investment. One does not lay down new plant and erect new factory buildings in a matter of months: it may be a matter of years. What we devoutly hope is that short-term unemployment will not affect long-term plans.
What does affect them is the likely profit on long-term investment after tax. Certainly, up to recent years, the profit which could be expected was in many cases too small to encourage further expansion. One example has been mentioned already, where the profit was almost non-existent after paying the cost of the new capital which had to be borrowed. Many cases can be cited of companies which have been dissuaded from expanding either at all or at the rate which they might otherwise have done, because they knew that their marginal profits after tax did not warrant the risk.
In the sophisticated industries of today, considerable investments are required. If one is to be asked to put down several million pounds, one has to have a reasonable expectation of profit within which one can pay a fair return to one's shareholders and put aside reserves for future development. So to that extent I welcome the reduction in corporation tax to which the Clause gives effect, and I should have thought that the Labour Party would have been prepared to welcome it as well. I gather from one or two of their remarks that they are not opposing it.
Like my hon. Friend the Member for Horsham (Mr. Hordern), I can understand their difficulty, because it is so unusual for them to be debating a reduction of taxation. It must seem to them that the atmosphere, the whole context of the discussion, is wrong, because it deals with tax reductions, and their philo- 424 sophy and the general direction of the policies of the previous Administration have been to increase taxation. I do not say whether that is right or wrong, but that is what has inevitably happened under every Socialist Administration.
I support the proposals in the Clause. By itself, it will not produce the revitalisation of industry to which we look forward, and other measures will have to be introduced. Also, to disabuse anyone of the idea, if it remains, that we welcome unemployment, I do not think that unemployment is likely to be a cure for our ills in the short or long term. Not to be using the vital part of our national wealth which lies in our labour is a tragedy and in the long term will be disastrous for the nation. So we have to turn our attention seriously to finding out how to cure this ill. We should not try to attribute to anyone on either side the idea that he welcomes unemployment, for whatever reason.
I doubt whether we shall find any strong or determined opposition to the Clause, whether or not there is a Division. I am certain that, in their hearts, the Opposition welcome this as a step in the right direction—although no doubt they want other things as well. I have no doubt that we shall be able to commend the Clause, with satisfaction and success, to the Committee.
§ Mr. Cronin
I am a little puzzled by the arguments of the hon. Member for Wycombe (Mr. John Hall), that taxation of company profits will reduce their incentive to invest further. I believe that he said that, because corporation tax was so high, the amount left after taxation was often too small to justify further investment. But surely that is a reason for seeking more profitable ventures, for increasing profits. I should have thought that it was more an incentive to increase efficiency, or that there was an argument in that direction.
§ Mr. Hall
The hon. Gentleman is right to say that, if one finds that one's returns are diminishing, it is an incentive to try to increase efficiency and reduce expenses. That is one of the reasons for the increasing unemployment. But it is a discouragement to invest large sums in new plant and buildings, when experience shows that, however, efficient one is, one's return after tax will be small.
§ Mr. Cronin
I believe that there is some agreement between us, although I do not follow the hon. Gentleman's main conclusion.
The Chief Secretary suggested that a reduction of corporation tax would increase company liquidity. No one will disagree with him there, but it will require a big jump in our intellectual reasoning for us to believe that it will necessarily increase investment. A substantial proportion of companies will simply sit on their increased liquidity. Hon. Members on both sides have made it clear that the whole incentive for increased investment is the prospect of future profit, and the mere fact that a company has increased liquidity is not necessarily an indication that it will increase its investment. Surely it increases its investment only if it sees an outlet for its goods which will bring it increased profits. So I suggest that the Chief Secretary is taking us a little too far when he jumps from increased liquidity automatically to increased investment. There is a very limited connection between the two. I do not think that any hon. Member with business experience will disagree with that.
The other thing to remember is that any increased liquidity which a company has will not necessarily mean that it will invest that additional money in the most effective way or so as to bring the best return on capital. We all know that quite a few large companies, some of them household names, are grotesquely inefficient, in that they have a very small return on their capital assets. I am not at all sure that few companies like that, given increased liquidity, would invest that money in the most effective way.
It is easy to assume that there is something intrinsically good about investment, irrespective of its quality. After all, when a company invests, say, £1 million in a new factory, that is £1 million worth of raw materials, labour and imported goods being set aside for a purely future benefit, but quite often some of these investments are written off completely. Ineffective investment by inefficient companies does not add materially to the economic prosperity of the country. I suggest, therefore, that not only is there some doubt whether increased liquidity will produce increased investment but there is considerable doubt whether this proposal will improve the efficiency of companies.
§ Mr. John Hall
Is the hon. Gentleman arguing that because some companies do not invest efficiently, taxation should not be reduced, and that in his view the Government should retain the money themselves and invest in place of private industry? If that is his view, would he say that experience had shown that to be successful?
§ Mr. Cronin
I am not arguing that. I am simply pointing out that the Chief Secretary put forward this proposal as an important cure for our present ills. I am merely suggesting that it is not necessarily a cure and that it will be of limited value.
There are more effective ways of increasing efficient investment. That we have 800,000 unemployed shouts in the most stentorian tones for companies to be encouraged to increase their investment. However, the circumstance demands a substantial reflation of the economy. What other measures does the Chief Secretary have in mind, apart from this reduction in corporation tax, to increase investment?
My hon. Friend the Member for Heywood and Royton (Mr. Barnett) said in his able speech that more effect would be obtained by a reduction in purchase tax, so channelling purchasing power into the hands of the low-income groups. As he pointed out, that would result in larger profits for companies and would be likely to result in increased investment. Changes in direct taxation directed to the lower-income groups would also generate more purchasing power, and would also be more effective. Changes in Bank Rate and credit restrictions would help investment. All these actions would increase the incentive to invest out of all proportion to the limited effect that this reduction in corporation tax will have.
Confidence is all important in investment decision. An important aspect of our affairs in which there is a lack of confidence at present is the steady continuity of labour troubles, with strikes and general industrial unrest. The Government have lost the confidence of trade unionists throughout the country, and that is one of the major causes of the industrial troubles that we have been witnessing. These troubles are themselves an inducement not to increase investment. By their mini-Budget, this Budget and 427 the Industrial Relations Bill, the Government have done everything possible to exasperate trade unionists and to cause the maximum amount of industrial unrest.
§ Mr. Cronin
It is likely that if I keep giving way to the hon. Gentleman my speech will seem like a dialogue between us, and that would be boring for all concerned. I am sure that he was about to make a weighty comment and I give him credit for it without his making it.
The Chief Secretary said, in favour of reducing corporation tax, that profits were falling, which seems a surprising argument to use. After all, does it mean that the lower a company's profits, the sooner the Government will step in to reduce its taxation? I would hardly have thought that lower profits were a good reason for reducing corporation tax. This reduction will increase company liquidity irrespective of whether it is used effectively or whether the company needs more liquidity. Indeed, this reduction of corporation tax will operate in the opposite direction to Darwin's theory of the survival of the fittest. This tax reduction will tend to bring about the survival of the fattest.
Hon. Gentlemen opposite claim that corporation tax operates as a disincentive to profits. I suggest that it can act as an incentive for making more profits. The same argument can be used for personal taxation. Not sufficient emphasis has been given to the fact that taxation gives a real incentive to increase income or profit as the case may be. The argument that corporation tax is a disincentive to making profits cannot be taken as an absolute fact.
I am a director of a company which during what hon. Gentlemen opposite describe as the terrible years of the Labour Government steadily increased its profits by about 25 per cent. a year. I believe that other efficient firms have done the same, simply because they do not regard corporation tax as a disincentive. It is an incentive to be more efficient and to make more profit, thereby obtaining more liquidity to invest and so making bigger profits still.
§ Mr. Cronin
This reduction in corporation tax will not be effective in curing our economic problems. It will merely increase company liquidity. It will be a bonus to companies which, from the point of view of hon. Gentlemen opposite, is probably not a bad thing in view of the way in which so many firms subscribe handsomely to the Conservative Party. In other words, the Government are showing their gratitude by handing some money back to the companies who contributed to their electoral funds. Gratitude is a worthy emotion, we are all sympathetic to those who feel grateful. I suggest, however, that the gratitude which the Government are showing in this Budget by handing money back to companies will not have any useful effect on our present economic situation.
§ Mr. Christopher Tugendhat (Cities of London and Westminster)
It is a pleasure to speak following the hon. Member for Loughborough (Mr. Cronin) because he made a number of fascinating points, among them the fact that his own company had increased its profits during those unfavourable years of Labour Administration.
His argument about corporation tax acting as an incentive overlooked a crucial point in the present state of our economy—the fact that a substantial proportion of the most important industrial investment in Britain is conducted by international companies.
It is no good saying that a company, whether British or foreign-owned, which has it in its power to invest here or abroad, will be encouraged by a high level of tax here to invest in Britain if other countries offer greater incentives, better markets and so on. It is an extremely dubious proposition that corporation tax acts as an incentive to anybody. It certainly does not act in that way to a company which is faced with the choice of building a plant here or elsewhere in Europe. To suggest that by jacking up the rates of corporation tax we shall encourage such a company to place its 429 plant here is to adduce an extraordinary proposition. I cannot help feeling that the hon. Gentleman must have overlooked the crucial place in our industrial investment position of international companies faced with that choice.
There appeared to be some disagreement or difference of opinion among hon. Members opposite on the general matter under debate. One hon. Gentleman suggested that there was not a liquidity squeeze and he wanted the Chief Secretary to produce evidence to support his contention that companies were short of liquidity. Another pointed to the present high level of bankruptcies. The high level of bankruptcies goes a long way to substantiate the argument that there is, in fact, a grave shortage of liquidity in the economy. I am sure that Opposition Front Bench spokesmen will agree on that, even if they do not necessarily agree with the means which we are taking to overcome it.
§ Mr. Dalyell
Yesterday, in connection with the regulator, there was discussion of the problem raised by the multinational or international company. Will not the hon. Gentleman go further and say that the whole tax system and the rules of the game relating to it must be altered as a consequence of the increasing, and welcome, appearance of the multi-national company? That alters a great deal beyond the corporation tax, does it not?
§ Mr. Tugendhat
I entirely agree, and I hope that the hon. Gentleman will read the book on the subject which I have written, which is to be published later this year, in about July. I shall be delighted to tell him when the publication date has been fixed. I have many suggestions to make in that book on the subject which he raised, and I thank him for the opportunity to give it a plug.
§ Mr. Barnett
The hon. Gentleman referred to the growing number of bankrupt companies. A cut in corporation tax is not likely to help that sort of company.
§ Mr. Tugendhat
I should not dream of crossing swords with the hon. Gentleman about that. It is true that, if a company is bankrupt, a cut in corporation tax will not help. But I am sure that he will agree equally with me that 430 if a company is subjected to a considerable liquidity squeeze and is having great difficulty in earning profits, a cut in corporation tax may well prevent that unhappy eventuality.
§ Mr. Tugendhat
I did not make myself clear. That is exactly it: it would prevent some bankruptcies.
The hon. Member for Heywood and Royton (Mr. Barnett) made great play of the Financial Times survey. I felt that he did not do himself justice in mentioning that survey without mentioning the previous one which also appeared after the Budget. I think it not unreasonable to take the two together.
§ Mr. Barnett
The hon. Gentleman will know—none better—that the Financial Times survey which I quoted showed, as it were, the running figures. I was referring to that.
§ Mr. Tugendhat
Yes, but there have been two surveys since the Budget. The survey which the hon. Gentleman mentioned showed the sad state that industrial investment was in, lending considerable weight to the Chief Secretary's argument that a stimulus was needed. The earlier survey, which came out a week after the Budget, showed that the overwhelming majority of business men believed that the Budget measuers will do a great deal to stimulate investment and that they were already envisaging this prospect.
It is unreasonable to suppose that in the three or four weeks which elapsed between the Budget and the publication of the survey which the hon. Member for Heywood and Royton quoted the flow of new orders would have been reflected in the figures. One would expect several months to elapse before companies began to take the decisions which would lead to new orders.
I agree with the hon. Member for Heywood and Royton, however, that one cannot look at the cut in corporation tax in isolation. One must look at the whole context of the economy, since the cut in corporation tax is only one factor among many. I differ with him, perhaps, in wishing to look at a rather different range 431 of factors in the economy from those which he took.
There are several reasons why we have had such a low rate of investment in recent months and why the outlook is not as promising as one would wish. Partly, it is the high level of inflation, partly it is our deplorable strike record, and partly it is the fact that British delivery dates in so many major capital projects tend to be extremely unsatisfactory in comparison with our competitors on the Continent.
The hon. Member for Heywood and Royton and other hon. Members referred to the growing number of British companies which now assess their investments on a discounted cash flow basis. The hon. Gentleman will be aware—none better—that, if a company is assessing its prospects on a D.C.F. basis and the project is completed in 24 months, say, instead of 16, this knocks any D.C.F. calculation for six. This, also, is a considerable disincentive.
In that connection, I refer hon. Members to the extremely interesting report on the chemical industry published last year by the "Little Neddy" for that industry, which inquired into why the level of investment in the chemical industry was so much lower here than on the Continent. One of the chief reasons which it mentioned was the fact that completion and delivery times on capital projects undertaken in Britain were much slower than on the Continent and were also unreliable. Our strike record in this country plays an important part in that, because strikes on site tend to delay completion of such projects. In the context of the international company, the chemical company, the aluminium company, the oil company and the motor vehicle company—companies which make the decisions which are the key to a great many investments in our economy—these factors play a most important rôle.
I return to the immediate question of the corporation tax. It is impossible to deny that, during the past six years, profits have been squeezed. The figures are well known: as a proportion of gross national product, gross trading profits fell from 14.8 per cent. at the beginning of the last Labour Government's period 432 of office to under 10 per cent. at the end. Of course, it would be desirable to push up gross profits as well as anything else, and a cut in corporation tax does not do that, but a cut in corporation tax certainly helps in regard to retained profits, and in the present situation that is an important gain. For one thing, it enables companies to keep more money for investment. For another, it improves the attractiveness of equity investment. I am sure that hon. Members opposite will admit that one of the advantages of a rising stock market is that it makes it easier for companies to raise money by rights issues and in other ways, and this also helps in the liquidity squeeze which we have been having.
Another advantage of the cut in corporation tax is that it does a great deal to restore confidence to the corporate sector. I find myself in some disagreement with those hon. Members, some on this side and some opposite, who have suggested that the most important reason why companies invest is the prospect of earning profits. For the very large companies, numerous surveys conducted on the subject show that the most important single reason out of many is the prospect of increasing sales, the prospect of increasing market share, and the desire to hold market share. For that reason, a high rate of investment tends to flow from high growth rather than to precede high growth.
The real difficulty for a country such as ours, which has had such a poor growth record over many years, is to set the virtuous circle going. By itself, a cut in corporation tax will not do that, and a great many other measures throughout the economy have to be taken to achieve it. The cut in corporation tax, however, has one important effect, and that is precisely on confidence. It is at this level that one can try to set the virtuous circle under way. It enables companies to see the possibility of earning reasonable profits. It changes the climate in which decisions are taken.
That is why this measure, although modest, is desirable. It is desirable because of its effect on companies which have had their profits badly squeezed in the United Kingdom during the past few years. It is desirable also because of the effect which it should have on the investment decisions of international companies 433 which can choose where to put their investments. It is desirable for both those reasons, although, as I say, it must be looked at as one measure among the many which this Government have taken and will continue to take.
§ Mr. Dick Douglas (Clackmannan and East Stirlingshire)
I am grateful to the hon. Gentleman for giving way, especially as I was not present to hear the whole of his speech. Will he not concede that a much more potent factor for international companies in determining the level of investment in this country is the prevailing situation as regards investment grants rather than taxation. That is particularly true in Scotland, is it not?
§ Mr. Tugendhat
I had completed my speech, but I shall add a few words in response to that point. I disagree absolutely when the hon. Gentleman suggests that investment grants are the most effective way of doing it. Investment grants, in effect, act as a bribe to companies to undertake investments which they would not otherwise undertake. To that extent, they do on many occasions succeed in distorting the normal investment criteria. Scotland presents a good example. Investment grants can be very effective in attracting new industry for a certain period, but the disadvantage of the way in which they bribe companies to take decisions which they would not otherwise take can be seen in the hon. Gentleman's own country.
§ Mr. Tugendhat
They bribe companies to take decisions which they would not otherwise take. The plants come in, therefore, on the basis of non-economic criteria, and they tend to be the first plants to be closed when the cold winds begin to blow. We have seen how successful Scotland has been in attracting investment from foreign companies by such incentives, but we have seen also how Scotland has suffered when those companies have been the first to start closing their plants and laying off workers when they ran into trouble in their overall operations. Investment grants have the great danger that they bring in companies which are apt to disappear as soon as the cold winds begin to blow.
§ [Mr. OSCAR MURTON in the chair]
§ 6.0 p.m.
§ Mr. Nott
The Member for Heywood and Royton (Mr. Barnett) is not present in the Committee at the moment, but I wanted to say to him—perhaps he can read it in HANSARD tomorrow—that he gave a remarkable discourse on the money supply, but it had nothing whatever to do with the reduction in corporation tax, which is a question of the retained profits of companies. He extended the debate into the whole field of the regulator, which was discussed yesterday.
Secondly, he talked of companies pocketing some of the corporation tax benefits which have just been given. But the reason why companies tend to pocket some of the corporation tax benefits derives directly from the 1965 Finance Act which my hon. Friend the Financial Secretary, in the Green Paper, is proposing to change. This debate should not pass this issue without reference being made to the relationship between the reduction in corporation tax and the proposals in the Green Paper on corporate taxation because the two are closely related.
At one stage the Member for Heywood and Royton, speaking with all the authority which his profession as an accountant commands, and backed by his status as an Opposition Front Bench speaker, corrected the remark made by my hon. Friend the Member for Ilford, South (Mr. Cooper), although this correction was inaccurate. He said that the corporation tax reduction would benefit companies only on 1st January, 1972. That applies to the 2½ per cent. in the Budget, but the 2½ per cent. announced in the mini-Budget accrues to companies on 1st January, 1971, so that part of the benefit has already been received by British industry.
The hon. Gentleman added—and this point was also made by his hon. Friend the Member for Ashton-under-Lyne (Mr. Sheldon)—that there is no evidence yet that the Budget measures will improve industrial investment. The hon. Gentleman was referring to the forecasts. It is very hard to understand how British industry six weeks and one day after the 435 Budget statement could possibly have decided on its capital investment programme for 18 months ahead. At this early stage that is too much to expect.
§ Mr. Sheldon
That is not the point I made. My point was that the Financial Secretary's own forecast was that investment up to the first half of 1972 would increase by only half of 1 per cent. That was his own forecast, based on his estimate of the effects of the Budget.
§ Mr. Nott
I had not taken that point, and I accept the hon. Gentleman's correction. I normally agree with my hon. Friend the Financial Secretary, but perhaps he will be proved mistaken. I am sure that he will be delighted if he is, and I think that he will be.
The reaction from the Budget, which is only now beginning to show, is such that the confidence of British industry is seen to have been substantially restored by the Budget measures. I expect that when the next survey of capital investment intentions is made it will be very much more optimistic than was the last survey. We shall have to wait and see.
There is no section of the Budget of which I approve more than that relating to corporation tax. When we debated corporation tax in Committee on last year's Finance Bill, my hon. Friend the Financial Secretary said:It is said that companies have no body to be kicked and no soul to be damned. But the simple fact is that companies and those who manage and work for them are responsible for the overwhelming proportion of the process of wealth creation which goes on in Britain today. If companies are hampered by too heavy a burden of taxation, or by the wrong kind of taxation, the effect on the national effort will be serious and all our objectives will be frustrated."—[OFFICIAL REPORT, 13th May, 1970; Vol. 801, c. 1259.]I could not agree more with that statement. Reductions in corporation tax should take priority over reductions in personal taxation. Until the company sector begins to work again I do not believe that we shall see the wealth being created out of which we can generate all the additional material benefits which this country needs.
The Green Paper, which is related to the corporation tax reduction, is the single greatest breakthrough of the 436 Budget, certainly in Parliamentary if not in economic terms, after six years of Socialist blindness to the fact that this country has the highest rate of tax on distributed profits of any country, except Holland, in the Western world. That lies at the heart of our industrial problems. The hon. and learned Member for Lincoln (Mr. Taverne) nodded assent when I referred to Holland. The Green Paper recommends that we should go for the German rather than the French system, and I believe that this is correct. But the Common Market Commission will in due course try to unify the company taxation systems of Europe, and we could be landed again with the system which we abandoned in 1965. I trust that that will not happen, but we do not have entire freedom if we enter the E.E.C.
§ Mr. Hugh Dykes (Harrow, East)
Does my hon. Friend agree that that was another argument implicit in the Government's reduction of corporation tax? When we moved from the 1965 system, whereby the company paid tax also on behalf of the shareholders, the previous Socialist Administration indulged in a much greater increase in tax overall than is taken into account when we merely compare the rise from 37½ per cent. to 45 per cent., followed by our reductions.
§ Mr. Nott
I understand my hon. Friend's point, but I was on a different question, related to the Tempel Commission Report. My hon. Friend the Financial Secretary said one or two things about Professor Tempel and his Report in Committee last year. I will not read them out, because now that he is in a position of authority and we are negotiating to enter the E.E.C. I think that he would prefer me not to repeat his comments on the Report. I hope that it is not adopted by the E.E.C., but it looks as though we are more likely to have either the French-Belgian system in the E.E.C. or the system recommended by the Tempel Report, than to have the German system. I like the German system best, and that is the Government's recommendation in the Green Paper, but the matter is open for debate.
§ Mr. Cronin
Did not Professor Van den Tempel in his Report for the Commission in Brussels make recommendations substantially the same as the changes 437 introduced by my right hon. Friend the Member for Cardiff, South-East (Mr. Callaghan) in 1965?
§ Mr. Nott
That is what I meant to say. I apologise. That is the system which we are abandoning. I consider that its introduction was a retrograde step.
In opening the debate, my hon. Friend the Chief Secretary talked about the fall in investment and company profits, and quoted a number of very interesting figures. I have figures showing that in 1956 company net cash flow amounted to 11½ per cent. of our gross national product and in 1969 to 8½ per cent. There is a whole host of figures that we could give to demonstrate that British industry has become extremely illiquid over the past 10 years. I shall not bore the Committee by giving the figures, because I think that this is generally known.
Even my hon. Friend's figures tend to understate the seriousness of the position. He took perfectly valid figures of published profits, but I think that they were net trading profits after depreciation. The depreciation which companies have been charging for a number of years has been increasingly inadequate. A debate is going on about the accounting procedures in this country to try to shift companies over to depreciating on a replacement basis rather than a historic cost basis.
I hope that I have understood my hon. Friend's figures correctly. If they were adjusted to show British companies depreciating on a replacement cost basis rather than a historic cost basis, they would show a far worse trend. To depreciate over 10 years on the basis of an investment made in 1950 gives no indication, with inflation running at 8 per cent. a year, of what a company will have to pay in 1970 when it has to replace the plant. With inflation at its present level, that is one of the major problems of the corporate sector in British industry. It is in a far more illiquid state than any of the figures demonstrate.
Nowhere is this clearer than with the nationalised industries, which also pay corporation tax if they make a profit. I remember well in my non-parliamentary days considering whether some of the docks and harbour boards were worthy of an investment. I remember looking 438 at the Mersey Docks and Harbour Board. I was aware, even if the poor widows and orphans of Merseyside were not, that there was no Government guarantee for the Board's borrowing. I remember working out just what the financial position of the Board, the London docks and every other dock and nationalised industry in the country would look like if they were depreciating their vast assets on a replacement cost basis. If I have misunderstood the position, perhaps my hon. Friend will correct me, but my view is that if the nationalised industries were depreciating on replacement costs, the whole basis of the return which they are required to make would have to be changed—and changed, I think, for the better.
A strong and virile balance sheet is a very beautiful thing to behold, and I am sure that the hon. Member for Heywood and Royton would agree. Steeped in solid assets, with plenty of ploughed-back earnings and full of working capital, all geared up with athletic poise by money borrowed from widows and orphans on Merseyside and elsewhere at derisory interest rates, when compared to the rate of inflation. A good balance sheet has some breeding. Like that declining band, familiarly known as the "Tory knights of the Shires", it is reliable and eminently creditworthy at all times. But I can see no such balance sheet on the benches opposite. I am afraid that their assets tend very often to fall short of their liabilities. There would be quite a number of Vickers opposite but few I.B.Ms.
§ Mr. Barnett
One of the points made by the advocates of one or other of the alternative corporation tax systems is to change the look of the balance sheet with breeding in so far as it would encourage, say, 100 per cent. distribution, leaving very little for plough-back, if any. This would totally change the accounts of a company which the hon. Member considers has most wonderful breeding.
§ Mr. Nott
Yes, and, of course, I would favour, rather than the 1965 Finance Act type of situation—which encouraged companies to plough back all their profits—going for the opposite extreme of 100 per cent. distribution. Maybe the balance sheets would then have less breeding, 439 because they would look thinner, but that is not something that would worry me very much.
§ Mr. Nott
Exactly. That is not an unusual situation. I only drew this rather absurd analogy to say that the profit-and-loss accounts of British industry can be made up in so many ways. It does not require a great deal of accounting expertise to show good profits for a number of years. In fact, by the time one has dealt with the inventory in particular ways and changed the basis of one's distribution from a declining balance to a straight line—all these are legal devices—and has invoiced one's goods in a particular way and done what Rolls-Royce did and capitalised research and development expenditure, one can look profitable for a given length of time even though one is making no profits.
My main point concerns the whole rate of distributed profits. I am thinking now of the 40 per cent. rate of corporation tax. I take 8s. in the £ as the standard rate as easier to calculate than 7s. 9d. I think, therefore, that the rate of fully distributed profits tax in the United Kingdom at the moment is about 64 per cent. taking 40 per cent. Corporation tax and income tax at 8s. in the £. This compares with 56 per cent. in the United States, 36 per cent. in Germany and 43 per cent. in Japan. Assuming that only half of the profits are distributed, I take an example which I quoted in Committee several years ago.
Suppose a company wishes to increase its fixed assets—its plant and machinery—by 20 per cent. a year, which admittedly is a big rate of increase, and that company has a sales-assets ratio of one-to-one. In other words, it has £100 worth of assets and £100 worth of sales. My example is not far different from that taken by my hon. Friend, but I think that it is probably the more accurate type of picture. In such an example, a United Kingdom company would need 47 per cent. net profit on its sales in order to plough back 20 per cent. into new assets every year, whereas a United States company needs to earn only 39 per cent. net profit on sales, a German company only 35 per cent. and a Japanese company only 32 per cent.
§ Mr. Barnett
I think that this is somewhat misleading. It does not take into account the various tax allowances. For example, in the United States, companies have only a 7 per cent. tax allowance.
§ Mr. Nott
I repeat my figures. A return of 47 per cent. on sales is required by a British company in order to plough back 20 per cent., compared with 39 per cent. by an American company, 35 per cent. by a German company and 32 per cent. by a Japanese company. I am meeting the point put by the hon. Gentleman. Let us say that the British company writes off its assets in five years, which is 20 per cent. a year. Let us take the 40 per cent. corporation tax and 20 per cent. of 40 per cent.—that is, 8 per cent. Therefore, if we take a 20 per cent. write off, that reduces the British figure to 41 per cent., assuming no tax allowances at all in any of the other countries.
I can quote these figures only generally. However one depreciates and whatever the tax allowances are, I suggest that the examples I am quoting are valid. I still say that a British company needs to earn far more on its sales than do German, Japanese or American companies in order to plough a comparable amount back into new plant and equipment. I am sure that that is correct.
§ Mr. Dykes
I am grateful to my hon. Friend for giving way again, because I know that he wants to be brief. He referred to the 64 per cent. rate roughly applicable to the full distribution situation under corporation tax. Does not he agree that there was an additional argument for the reduction of the tax because the initial changes in 1965 had brought about an increase in company taxation from 53¾ per cent. at the standard rate of 7s. 9d. to about 59 per cent. for the average company?
§ Mr. Nott
In 1964–65, we were on the basis, if I remember correctly, of 38¾ per cent. as the standard rate, plus 15 per cent. profits tax. That made up the 53¾ per cent. Now it is 64 per cent. on distributed profits. The conclusion which I come to from the figures of these four countries which I have quoted—although I cannot vouch for their complete accuracy, they clearly show the fundamentals of the situation—is that either a British company has to invest far less in plant and 441 machinery each year than does its German or Japanese or American competitor, because it is not generating sufficient after-tax profits, or it has to price its products at 22 per cent. more than the American company, 34 per cent. more than the German company or 35 per cent. more than the Japanese company in order to generate the same retentions.
I think that the evidence confirms that this is the situation because we know that we have a far lower percentage of our gross national product in investment than these other countries, and it is also the case that, where British industry competes best in overseas markets, it is not competing on price. Where British industry does fully compete with Japanese, German and American companies is where it is building custom-built products and has a particular system that it is not selling on price. That is where British industry is very competitive indeed. Where we compete, or attempt to compete, with Japanese, Italian and German companies in mass-produced goods. we are very often not competitive. This can be corrected either by tampering with the exchange rate or by increasing the amount of money which companies have to reinvest.
Supposing we were to get our rate of investment nearer to the United States level. The last figures I have—they have probably changed—show that we invested 18 per cent. of our gross national product as against 27 per cent. in Germany and 22 per cent. in Japan. Even if we got our investment up to 20 per cent., the effect would be to add substantially to the level of demand within this country. Where does that come from? We shall not be able to cut back on consumer expenditure. It has to come out of the public sector, and that brings us back to yesterday's debate.
I think that the Green Paper is excellent, and I applaud the reduction in corporation tax. But I am disappointed in the Bill in relation to one point affecting companies. I should have liked to see some recognition of the unsatisfactory position existing in British industry today with incentive schemes for executives. I make this point to my hon. Friend the Financial Secretary now, and I shall make it upstairs in Committee. At present there is no ideological barrier or conflict between the parties on this point because 442 the Inland Revenue is allowing all sorts of share incentive schemes, the proceeds of which are taxable as capital gains. But nothing is being done by the Government to correct the anomaly that it is only the old option schemes whose proceeds are taxed as income. All the other schemes being suggested day by day—schemes allowed by the Labour Government and which the Inland Revenue is letting by, such as partly paid shares—are taxed at capital gains tax rates. Options are, however, taxed as income.
This is an anomaly. It does not involve any ideological point between the parties. The anomaly arose out of the Finance Act, 1966, and I am sorry that it is not being put right this year, because it should be put right. In the last resort, although corporation tax reductions are vital, it is the quality of the management and the enthusiasm of the executives in these companies which count, and we all know that in American industry, and also now in French and German industry, option schemes are widespread. I think that we must provide comparable encouragement to our younger executives—I am talking of those without capital and not those with wealth—and provide them with a type of incentive arrangement similar to those which their counterparts enjoy in America and other countries.
§ 6.30 p.m.
§ Mr. A. E. P. Duffy (Sheffield, Attercliffe)
I apologise to the Committee for not being present at the beginning of the debate. I had to attend an urgent meeting elsewhere. I share the welcome extended by the hon. Member for St. Ives (Mr. Nott) to the Green Paper on the Reform of Corporation Tax, if only because of the opportunity that it undoubtedly will give to all hon. Members for ample debate of the whole areas of corporate taxation in the months ahead. No doubt the hon. Gentleman recognises that his acknowledgment that officials of the E.E.C. Commission are now considering aligning corporate tax systems within the Community on the lines of the structure from which the Chancellor is now threatening to depart represents a very serious criticism of the Paper's contents.
I am especially sorry that I was not present to hear the remarks of my hon. Friend the Member for Heywood and 443 Royton (Mr. Barnett). I have noted what he had to say in the Budget debate on corporation tax and I have particularly in mind his remarks in HANSARD for 1st April at column 1171. These still seem to be the kernel of the criticisms that have been advanced against the cut in corporation tax, from the time of the Budget debate down to this week. There are still a lot of people, not merely on this side of the Committee, but within the economy who are far from convinced that, in its present state, the economy can benefit sufficiently from a 21 per cent. cut even if we allowed for the previous cut last autumn, now in force.
There is a widespread feeling that this has come too late and that the first instalment was too little to have any possible effect in the next 18 months and hence to have any effect on employment. We are now able to look at this from a slightly different standpoint from that which we enjoyed during the Budget debate. In view of the further increase in the level of unemployment we believe that nothing the Chancellor has done in respect of corporation tax will have sufficient effect to alleviate this rise in unemployment this year.
I want to offer four reasons for my pessimism. One is that, demonstrably, inflation has still not abated. Increased income, whether received by a company or an individual, is increasingly regarded in this situation in the first instance as a defence against that inflation. This is despite the claim made by the Chancellor last night and made by the party opposite on several occasions that savings are high and rising. I find this slightly depressing because I interpret in part this buoyancy of savings as a function of rising inflation.
We cannot therefore easily assume that savings will be translated into investment, because confidence has not yet been restored to a sufficient level and will not be while unemployment is increasing. Nevertheless, I freely acknowledge the changed mood of the stock market. It might soon shape up into a market poised to provide the productive capital that our economy needs. The debate a week ago was whether or not this was a bull market. This week the debate is how long this bull market will last. Some people are prepared to talk in terms of two years.
444 This much more hopeful business climate could easily be undermined by doubts and uncertainties arising from: (1) the Common Market negotiations; (2) industrial relations; (3) the international currency situation; (4) major industries, notably steel in both its public and private sectors; and (5) the motor industry with its predominant American influence. Moreover, because of the Government's oft-stated intention that they will leave a great deal more decision to the business community, confidence there must be a great deal more fragile. I suggest that it needed to be bolstered by a larger reduction in corporation tax. The final reason why this climate could be undermined is because of he replacement of investment grants by tax allowances and the consequential effect of that change on regional development in the short term.
Otherwise, I have an open mind on this change of policy, although I agree with the hon. Member for Cities of London and Westminster (Mr. Tugendhat) that we are entitled to look for sustainable growth. Nevertheless, I wonder whether, in the short term, this ihange did not need to be counterbalanced by a larger cut in corporation tax.
One remarkable point that can be made about a Budget that was otherwise completely in fulfilment of electoral promises is that the Government have been so timid on this matter. I recognise the force of their argument that any such reduction in present circumstances, given the present business climate, would be inflationary but both circumstances and the resultant climate are now largely of the Government's own creation, whereas on earlier and more general expression of concern about unemployment would have prompted a greater stimulation of investment and that in turn would have required a greater boldness in respect of a corporation tax cut.
The Chancellor announced his intention in his Budget speech to reform corporation tax because in his view the present system distorts the capital market and wastes investment resources. Equity capital has become more difficult to raise. The pressure for efficiency and investment profitability has thereby been reduced. These were the justifications 445 put forward by the Financial Secretary during the Budget debate the next day. Increased corporate retentions had led not to higher profit but to depressed conditions in the market for new issues. Retained profits had come to seem a cheap form of finance and this had inevitably tended to produce profitless operations. We know the main arguments from which the reform proposals will start and we will be looking closely at these in the next few months.
We all welcome the notice that the Chancellor has given us in this early literature which I sincerely hope will be followed by more of its kind. I especially welcome the way in which lie has invited representatives of industry, commerce and the professions concerned to indicate their views to the Board of Inland Revenue.
I am concerned about two things at this stage. One is the implications of his proposals for investment and secondly the adequacy of those proposals, especially as found in Section D relating to companies which earn profits and pay taxes overseas.
To take the first point, I recognise that the essence of any corporation tax system is that companies are taxed as separate legal entities and that a separate tax, usually income tax, is charged on shareholders and others who receive dividends and other distributions out of the company's profits. Most western industrial countries have such a system. Most of them however, as we were reminded by the hon. Member for St. Ives, stop short before the point is reached where there is a full burden of corporation tax on the company and a full burden of income tax on dividends paid out of company profits. I recognise, moreover, that there may be only one other country in Europe where the burden is greater and I understand the consequences for company liquidity and therefore investment and confidence and, subsequently, employment.
But will such changes as are proposed lead inevitably to higher investment? It seems to me that the problem which will face us and which will not be easily resolved by the kind of arguments already advanced is how to gear corporation tax to the savings-investment mechanism. I do not speak for my hon. 446 Friends—they can speak for themselves and I am sorry that I was not present to hear some of them earlier—but I think that hon. Members opposite will acknowledge that we are very sensitive about investment, because we see clearly, as they do of course, its implications for employment. Many of us will be focussing our attention in the debates in the months to come on this part of the proposals and we shall need a great deal of convincing that the Chancellor's proposals for reform will inevitably mean higher investment.
My second worry is already recognised on page 2 of the Green Paper which says:A decision on the system to be adopted will be taken in the light of the comments and discussion which this paper seeks to encourage and of developments in company taxation within the European Economic Community".I apologise if that point has already been made this evening. As I said earlier, to the best of my belief the officials of the Commission are now interested in aligning all corporation tax systems within the Community on the basis of the very structure in Britain from which the Chancellor now wishes to depart. I therefore hope that any changes which he finally undertakes in the corporation tax structure will be fully compatible with the Common Market and our overseas commitments.
§ Mr. Maurice Macmillan
I understand, Mr. Murton, that this is the first time that you have taken the Chair in the Chamber. I do not know the appropriate form of words, but I should like to express our pleasure, which I am sure is shared on both sides of the Committee, at seeing you there. Perhaps I ought to hope that none of us incurs your displeasure.
My hon. Friend the Member for Horsham (Mr. Hordern) suggested that hon. Members opposite were trying to make bricks without straw. In some senses, the debate has reminded me of that old story of the examinee who was asked to give a list of the major and minor prophets in the Old Testament! Not having mugged up that part of his work, he said, "Far be it from me to distinguish between such holy men, but here is a list of the Kings of Judah." Far be it from anyone to say that the rate of corporation tax should not have 447 been reduced, but there were many other things which were a great deal better and many other things which in their way would have been a great deal better for doing what it is alleged a corporation tax cut should do. That more or less sums up the totality of the criticism of hon. Members opposite. They asked, "What about money supply: what about selective employment tax; what about investment grants?".
I hope in this connection that the hon. Member for Ashton-under-Lyne (Mr. Sheldon) will forgive me if I say that his comment that this was the wrong time to do away with investment grants when industry was in such a terrible state was in itself a criticism of his own Government's policy, for only that Government could have been responsible for whatever state industry was in at the time we decided to do away with investment grants; but that is a relatively minor point.
Much of the criticism of the Government has been that they have not yet reversed the trend of the past six years or so, and have not yet undone the damage by the previous Administration and, finally, that the Budget measures have not yet operated, although everyone admitted that they had not yet had time to operate because of the nature of our system. There was a certain contradictoriness in the points of view expressed by hon. Members opposite which I shall try to isolate as I come to them.
I was a little worried by the evidence that some of the things which the Labour Government did hon. Members opposite would do again. The Budget will have the effect of increasing demand and raising from 2 per cent. to 3 per cent. the growth in total productive potential. I hope that the hon. Member for Heywood and Royton (Mr. Barnett) does not think that by "productive potential" we mean the best that the country is capable of, and that he understands that we mean it in its rather more technical sense as being the rate of growth which we can hope to achieve at the moment without producing over-heating. He implied that we thought of 3 per cent. as a constant possible growth in the productive 448 potential, but I assure him that we do not imply that it will always be so.
§ Mr. Barnett
I am delighted to hear it. Perhaps the right hon. Gentleman will tell us what figure he has in mind.
§ Mr. Macmillan
The greater figure which we shall succeed in due course in achieving. We have set a target of 3 per cent., a far greater rate of production than hon. Members opposite ever succeeded in getting anywhere near in their six years of Government. It is not up to them to complain that in 11 months we have not yet achieved what they failed to achieve in six years, or that we have not yet succeeded in undoing the damage which they did.
The hon. Member for Heywood and Royton went rather further and implied that we should have had a considerably greater reflation. So did the hon. Member for Ashton-under-Lyne and the hon. Member for Loughborough (Mr. Cronin). I was very concerned about this. It showed an almost Bourbon capacity to avoid learning from experience. If that policy were followed, it would seem to have all the seeds of disaster which led to the events of 1967. It also showed a considerable change in the attitude of hon. Members opposite since they were in office.
In office their methods of creating investment were very largely those of subsidies and creating capacity in industry to invest. Seldom or never was it argued that it was necessary to increase profits and demand in order to increase investment. Now they have come round completely to the argument that the most effective way in which to increase investment is by increasing consumer demand. They suggest that my right hon. Friend should have increased it more, regardless of the dangers to the balance of payments of which the hon. Member for Heywood and Royton made light, or the domestic inflationary situation.
Both the hon. Member for Loughborough and the hon. Member for Heywood and Royton showed a touching faith in the willingness of companies and those who run them to go on making profits at a higher and higher rate in order to pay an ever-increasing rate of corporate taxation, and they also show a touching faith in their capacity to do so. Indeed, the hon. Member for Loughborough showed 449 a touching faith in the willingness of the directors of companies to contribute to Tory Party funds in return for measures which he himself described as ineffective.
The answer to hon. Members opposite was given by my hon. Friend the Member for Horsham and my hon. Friend the Member for Wycombe (Mr. John Hall) when they pointed out that the need of companies was for a proper return on capital to enable them to make a reasonable return which took into account the cost of borrowing, and that it was the totality of the Budget measures rather than the corporation tax cut alone which would effect that, but that that did not mean that one should underrate the value of this reduction in corporation tax as an important part of the measures. Combining incentives to invest with the capacity to do so is the most one can do by fiscal and monetary methods to help industry. I do not think that any change in the structure of corporation tax can be said inevitably to lead to more investment. It can make it easier or harder, or more or less likely. It can facilitate it in different companies. But it cannot be said that changes in the structure of any tax will inevitably lead to more investment.
No claim has been made that by itself this reduction in corporation tax is enough. Incidentally, I agree with what my hon. Friend the Member for Wycombe said about unemployment. The reduction in corporation tax may not be enough, but it is all that is proposed in the Clause and all I am proposing this evening. Corporate incentives cover a wider field. I notice a slight difference in emphasis, according to whether people think in terms of small or large companies, great public corporations, or the smaller closed companies.
My hon. Friend the Member for the Cities of London and Westminster (Mr. Tugendhat) pointed out, reasonably, that in larger companies the seeking of profit was probably a secondary motive to the seeking of a larger share of the market in order to widen their capacity to sell and increase the opportunity for increasing turnover. My hon. Friend would probably admit that for some of the smaller companies and perhaps the closed companies the need to make a profit is paramount if they are to con- 450 tinue to finance their expansion and provide working capital out of retained profits which is, in this type of organisation, one of the main sources of investing.
My right hon. and hon. Friends have emphasised that confidence is one of the major factors involved and that it is the help which we have given in respect of retained profits and to attract equity investment which is the important factor.
§ Mr. Dalyell
The effect on multinational companies of the cut in corporation tax has been raised. It is a quite important point.
§ Mr. Macmillan
The treatment of international companies is likely to be affected by some of the proposals in the Green Paper.
The hon. Member for West Lothian (Mr. Dalyell) asked me to expand on the question of greater fairness as between companies and greater incentives to adopt a better economic policy which the changes are likely to bring about. I do not wish to go into great detail on this matter, particularly as my hon. Friend the Member for St. Ives (Mr. Nott) gave a disquisition on the possibilities of a change in corporation tax which has almost done my work for me. But the effect that the proposed changes will make to corporation tax is neutral as between retained and distributed profits, but there are some suggested consequential adjustments in respect of closed companies which might otherwise be adversely affected. This seems to be fairer to foreign income and to do more to create a stable and continuing capital market.
I hope that hon. Members will forgive me if I do not go into more detail on that matter. We shall have ample opportunity to discuss it in the months ahead. I also hope that the hon. Member for Sheffield, Attercliffe (Mr. Duffy) will forgive me if, for the same reason, I do not go in great detail into the points he raised. I am only sorry that the membership of the Standing Committee will not be larger so that it can comprise all the Members who have spoken this evening.
I should like to say a few words on the question of the harmonisation of the European Economic Community. It is fair to say that harmonisation, in the sense that the structure, rates, allowances, and so on, are brought together, will be a 451 very long job. The formal process within the Community will be long. The problem for the more immediate future is likely to be the attempt progressively to eliminate the important ways in which the different company tax structures and administrative practices distort the free flow of capital—in other words, making a more ad hoc judgment about removing anomalies without necessarily fully harmonising the tax structures.
It is true that the Commission has before it Dr. Van den Tempel's report which favours a classical system of company taxation. But it has not yet made any formal proposals to the member countries. It must be borne in mind that a classical system would not be compatible with the tax systems as they exist or seem likely to develop in France and Germany. Therefore, there are problems of adjustment there as well as for ourselves.
On the other hand, the French imputation system can be said with confidence to be compatible in its practical effects with either the two-rate system or the imputation system described in the Green Paper. I hope that that is some reassurance to hon. Members. I should not like to go further because these matters are open to negotiation in the Community and as between ourselves and the Community, whether we are members of it or not.
I hope that my hon. Friend the Member for St. Ives will forgive me if I do not try to distinguish between what I might call his search for beef and for breeding in balance sheets. I was not sure which he was going for. I hope that he will raise that point when we debate these matters in more detail. My hon. Friend answered some of the points raised by the hon. Member for West Lothian and made some interesting suggestions, as did the hon. Member for Attercliffe. I should like to study in greater detail what was said. One of the unfortunate facts about this type of debate is that it ranges over so many topics that it is difficult to pay as close attention to the interesting points made as one would like.
The other topic to which reference has been made—rather curiously in some ways—is money supply. I say "curiously" because my hon. Friends 452 demonstrated very clearly that it has no relevance to the effect of corporation tax on liquidity. My hon. Friend the Member for Horsham made it plain that he was referring to the effect of corporation tax on company liquidity and the shortage of money in companies rather than the supply of money in general. He said that the situation was partly due to the Labour Party in a previous incarnation. My hon. Friend the Member for Basingstoke (Mr. David Mitchell) made the point clear when he referred to the need for tight money and lower tax, making profits harder to earn, but more worth having.
The factor which emerged from the debate, however wide it ranged and however great its diffuseness, was the enormous importance of measures designed to improve, not only the quantity, but the quality of investment. It is fair to say tint the Committee, divided as it might be on the methods best suited to achieve this object, was wholly united on the need for its achievement. It is perhaps unfortunate that there is evidence from the Continent and other parts of the world that at this moment investment in, for example, the machine tool trade is tending to fall in those areas as well as in this country. This is not an easy time for some of the more cyclical trades of that sort. This only enhances the importance of the point made on both sides of the Committee as to the need to expand the rate of investment, to improve its quality, and to achieve a stable rate of growth and a stable increase of employment.
§ Question put and agreed to.
§ Clause 8 ordered to stand part of the Bill.