§ 11.1 p.m.
§ Mr. Michael Neubert (Romford)
Adjournment debates, by convention, normally deal with minor matters. I wish tonight to take a major issue, the problem of poor productivity, and to focus attention on a narrow and specific aspect—namely, the discouragement to improved productivity contained in the provisions of the Price Code.
My starting point is the astonishing fact that in the first quarter of 1974, during a substantial part of which Britain was working a three-day week, production was 96.5 per cent. of the level achieved by full-time working in the same quarter of the previous year. From then on it seemed to me that the secret was out and that the solution to many of our problems was crystal clear. If only we were able to improve productivity as dramatically again, our difficulties would disappear as fast as traffic wardens melt away at the first sight of rain.
Since then the skeleton of productivity has been brought out of the cupboard and exposed to the bright light of day. In particular the appallingly low level of production in the car industry has been highlighted by three official reports in quick succession. I refer to the Ryder Report, which on this subject was partially expurgated, the Report of the Expenditure Select Committee, and, most 547 recently, the Think Tank Report. In singling out the car industry, I do not wish to suggest that it is any better or worse than industry at large. Far from it. It is merely that in the case of the car industry these documents and the evidence contained in them are so ready to hand and the facts they expose are also available.
We have a serious situation in the car industry, the most trenchant comment on it being the conclusion by the Think Tank that, given the same job conditions with the same power at his elbow, the British car worker achieves only half as much per shift as his continental counterparts.
It is obvious that the right hon. Gentleman the Chancellor of the Exchequer has become aware of this grave problem. In a newspaper article only last month he said that OECD figures had again shown that the British industrial worker produces well under half the amount produced by the French, German and American workers, and not much more than half the amount produced by the Japanese worker. Therefore, one can assume that this point is well taken at the highest level of Government. That being so, the average person would be amazed to learn that the Government through the Price Code appear to be discouraging productivity. However, since the average person does not have a very high opinion of politicians, he may not be so surprised after all.
In suggesting that the Price Code is responsible for low productivity, I do not refer to the immense burden of paper work involved in such a bureaucratic system of control, involving the creative energies of those in industry. I am seeking to draw attention to the fact that there is a natural disincentive to improved productivity within the provisions of the Code.
Let me try to explain how it works. If a company, by improved organisation, manages to achieve a reduction in costs, the saving that is achieved must, under the Price Code, be passed on in the form of lower prices to the consumer. As the company, again under the Price Code, has its profits limited to a fixed percentage of costs, this means in turn that its overall profit is reduced. We have the result that there is a disincentive to improve productivity as a consequence of the provisions of the Code.
548 It stands to reason, particularly because most reductions in cost these days would involve protracted negotiations with intransigent union leaders about manning levels, that no company manager will make the superhuman efforts necessary to ensure that his company is financially worse off than when he started. The Price Code, which is intended in its highest form to be a means whereby prices are kept down, is in this respect at least, the instrument by which the Government ensure that prices are higher than they need be. The effect on investment is equally discouraging. Some companies can actually be involved in losses let alone managing to achieve an adequate return on investment.
I hope that I have not made this explanation too clear because if too many people understand the absurdity of this they might rise up in rebellion and storm the Palace of Westminster tomorrow. Such are the facts. They should be made known.
On 6th November last at the annual convention of the Institute of Directors at the Albert Hall the Secretary of State for Prices and Consumer Protection claimed that the Government's new strategy was the regeneration of industry. She said that its objective was to ensure a profitable and effective private and public sector. Moreover, she said that the Government's task was to release sources of finance so that higher levels of investment could be achieved. That was on the glad, confident morning—the morrow of the Chequers conference when there was a call for a new high-output high-wages economy. Since then many things have happened, notably the Chrysler crisis and the Government's proposals for solving it.
There must be considerable doubt now whether the Government's intentions are to be upheld. This question of productivity is, therefore, a useful test case and an important one for those in industry and commerce who would like to play their part in a drive to achieve much better productivity in the interests of the nation as a whole. If the Government mean what they say and want to achieve better productivity and higher output it is time for their words to be matched by deeds.
On the other hand, it is true that the Secretary of State may, on that occasion 549 in November, have been offering soothing saccharine words to stop members of the Institute of Directors from choking on their packed lunches. I hope that that was not so. I hope that she has a sincere aspiration to see the much freer, more prosperous and profitable industry which she said she sought, which aspiration has since been confirmed by her most senior colleagues. What the Under-Secretary should do in his reply is say whether the Government can declare that they intend honouring their intentions of removing the Price Code impediments to improved productivity. If his answer is that they do not, I fear that people will conclude that the Government lack the political courage of their innermost convictions and that their belated brave words are no more than an empty gesture.
§ 11.10 p.m.
§ Mr. Giles Shaw (Pudsey)
My hon. friend the Member for Romford (Mr. Neubert) has done a service to a thinly attended House by seeking to explain the devices the Price Code employs in the name of productivity. The problem is that the Government have seen fit to use the word productivity, which is an incentive word dealing with reducing costs and increasing output, but have applied it in an opposite direction. In past debates on amendments to the Code, we have seen the word productivity used to describe something which has the opposite import.
We have frequently questioned the Secretary of State about investment allowances and reviewing the Code and she is on record as saying that she is most unwilling to review the Code in any marked degree, even though she believes it is necessary to stimulate investment and improve the situation relating to costs and returns.
Having issued a second consultative document on selective price restraints scheme involving a number of new measures necessitating amendments to the Code, the Government have shown that it is possible for them to amend the Code, accept the points put by my hon. Friend the Member for Romford and admit that the productivity argument is a myth. The word has been used to disguise certain restraints on costs to the detriment of efficient companies and it is high time we liberated our industrial energies to the full.
§ 11.12 p.m.
§ The Under-Secretary of State for Prices and Consumer Protection (Mr. Robert Maclennan)
May I first answer the points made by the hon. Member for Pudsey (Mr. Shaw)? The amendments proposed to the Price Code or the selective price restraint scheme are of an altogether different order from the amendments which would be necessary to give effect to the propositions put forward by the hon. Member for Romford (Mr. Neubert). The Secretary of State has never suggested that certain minor amendments to the Code could not be embarked upon, but she has tried to make clear on a number of occasions that there can be no major amelioration of the Code during the current phase of wage restraint policy. That remains the position.
I am grateful to the hon. Member for Romford for raising this subject because he has reminded us of a point that can be all too easily overlooked in debates about prices. He has raised it before and I understand that he hopes to bring it up again in a different context. The struggle to contain the rate of increase in the price level and to keep our prices competitive in export markets is not just a matter of scrutinising costs or of dealing with excessive or monopolistic profits, important as these things may be.
We do need to do what we can to keep industry's input costs down. The price of imported food and raw materials may be outside our control, but the rate of increase in the money we pay ourselves in wages and salaries is not. The Government's strategy for attacking inflation tackles this head on. The results of this policy are apparent in the latest statistics for price movements, which are encouraging.
But it is equally important that means should be found to squeeze the most efficient use out of inputs, whether of men or materials. The Government's strategy for industry, endorsed recently at Chequers by representatives both of the unions and of management, drew attention to some of the factors which may underline the relatively poor performance of United Kingdom industry by international standards. These are set out in paragraph 5 of the White Paper "An Approach to Industrial Strategy". Such factors are commonly considered to include the low rate of investment in this 551 country, inefficient use of capital, low labour productivity and changes of Government policy which make it difficult for industry to plan ahead.
These factors have been persistent in our industrial history since long before the introduction of the Conservative Counter-Inflation Act of 1973. They have been with us since the war. It does not help to attribute them to Government of any one complexion. Their roots lie deep in our industrial, economic and social history. We require a deliberate effort to improve our industrial performance at all levels. The initiative of the Chequers meeting now has to be followed up, and there is no prospect of that not happening. It has been progressed systematically through the organs of the National Economic Development Council. Only today the Council was considering further papers on how the Chequers strategy might be carried forward and applied to the problems of particular sectors.
At the same time, as the Chequers document concluded,the main responsibility will lie with both sides of industry in the sectors and firms involved".The Government's policy for prices, and the present instruments of the Price Code and the Price Commission have to be set against this wider context. Last July's White Paper "The Attack on Inflation" said that the Governmentrecognize and share the concern … that if pay is restrained prices must also be restrained".This is almost now a conventional wisdom. Sir Campbell Adamson has added the weight of his voice to that view only recently. The White Paper went on to point out that severe action on pricesis simply not possible after nearly three years of strict price control without depressing investment and causing additional unemployment".The White Paper emphasised the need to increase the level of productive investment, if the standard of living in this country is to be adequate in the future. It pointed to the fact that increased investment in a mixed economy has to be mainly paid for out of profits, and that if the private sector is to increase investment in the future it will need adequate resources for the purpose.
552 The hon. Member made that point himself at Question Time on 8th December and the Government do not question it. It is common ground between us. But tonight he drew a further conclusion which I cannot so readily accept. I understood him to suggest that the Price Code should be immediately relaxed to a major degree. The Price Code as it now operates is not a serious constraint on firms improving efficiency or re-building profits. The White Paper proposals are a package. The limit on incomes, which has proved itself 100 per cent successful, is closely linked with other policies deployed in the White Paper for price control and the protection of the consumer. We cannot simply keep one and do nothing about the other.
The co-operation which people of all walks of life have given to the pay policy has been on the understanding that the Government for their part will keep faith with the measures they have promised to keep price increases to a minimum and to protect the consumer. That is one reason why my right hon. Friend the Secretary of State for Prices and Consumer Protection told the hon. Member on 8th December that it was not her intention to make fundamental changes in the Price Code controls before the end of the current phase of the counter-inflation policy next July.
Between now and July, as the hon. Member will be aware, the Government and the two sides of industry will have to consider and agree on the next phase of counter-inflation policy, and what it implies in terms of pay, prices, productivity and investment. The policies we follow after July of this year may or may not involve the continuance of anything that would be recognisably based on the present Price Code.
§ Mr. Giles Shaw
The Minister suggested that he did not believe that the operation of the Price Code had seriously reduced the ability of companies to increase profits. Surely, the Price Commission's report demonstrated that, with profit margins of 54 per cent. or 56 per cent. of the reference level, the Price Code has been a major restraint upon profitability, and profitability is the major source of investment income. When the Minister comes to discuss the review of the Code with the other side 553 of industry, I hope that he will have this point in mind.
§ Mr. Maclennan
I shall have in mind that the major factor has been the recession through which the country is passing, which I believe to be the major cause of the depression of company profits.
My right hon. Friend has made clear on many occasions that the complexities of the Code do not lead her to believe that it is necessarily the ideal instrument for the purposes for which the Conservative Government introduced it. That means that I can deal only in a hypothetical and contingent way with the more technical criticisms that might be advanced, and criticisms of the kind made by the Gentleman, against the present Code as it affects productivity.
The hon. Gentleman attacked the Price Code as a positive disincentive to firms which want to improve productivity and efficiency—and it has been attacked in other quarters for the same reason—because firms are required to limit their increases in prices to those which can be justified in terms of increases in costs per unit of output. Costs "per unit of output" are a function of two quite different things. The first is the efficiency with which those inputs are used. To illustrate—for the tailor, it is not only the cost of the bale of cloth but the number of garments he can cut out of it; not only the assistant's wages but whether the assistant could turn out more if he was given a new sewing machine.
The rule in the present Price Code means that normally any improvements in efficiency in this sense have to be reflected in the price. The benefits must be passed on to the consumer, because they result in a reduction in "costs per unit of output" and hence in the degree to which the firm can make a case to increase prices.
This has been a feature of the Price Code since it was first introduced by the Conservative Government in 1973. I do not know that it is necessarily an objectionable feature—certainly not from the standpoint of the consumer. From the standpoint of the firm itself, I find it difficult to believe that any firm can be put at a positive disadvantage by introducing ways to cut costs. If lower 554 costs are reflected in prices, then the firm is likely to improve its competitive position vis-à-vis its competitors, to increase its sales and to increase its profits by the margin on every extra unit sold.
At the same time, I understand the contention that there might be a greater incentive to firms to search for means of improving productivity if the Price Code permitted the benefits to be split rather differently, with a proportion retained to widen profit margins.
When the present Government reviewed the Price Code in 1974, we examined whether the rule about costs per unit of output could be modified in the direction technically known as input costing. Representatives of industry at the time were not, I must admit overly enthusiastic about these proposals because they were at that time potentially unattractive to firms whose output was declining. But I believe that the possibility of a move to input costing could well be worth study, particularly as we might now be moving out of the present trading phase. We shall be studying its feasibility—I give that categorical assurance—as part of the wider review of the options for the next policy phase.
I hope that it will not be drawn from that statement, however, that it is a commitment to do more than review the situation, because the undertaking to review and consider the next phase is itself a much wider commitment than this narrower option.
As to the more general effects attributed to the Price Code on industrial confidence and industrial profits, I must remind the hon. Member that the Government have substantially amended the Price Code, which they inherited from the last Administration, in ways which have been acceptable and welcome to industry. The amendments pay more than lip service to the need to stimulate productive investment.
Twelve months ago, the Government reduced the standard rate of productivity deduction from 50 per cent, to 20 per cent. We also improved the safeguard levels in the Price Code so that there is now a large number of firms which are not affected at all by the rules about allowable costs and the productivity 555 deduction. The £6 pay ceiling is dealing with the problem of rising labour costs, and the more slowly labour costs rise, the less the effect of the productivity deduction. At the current level of pay increases, the effect of the productivity deduction on industry's profit is a good deal less than it was in 1974.
The other major change at the end of 1974 was the introduction of a new investment relief. This is designed to enable companies to generate additional funds through prices and profits to help finance new investment. In the Price Commission's most recently published report, it estimated that the total relief claimed between December 1974 and August 1975 which may be reflected in prices and profits amounted to £344 million, covering 332 firms in Categories I and II.
Since then, my right hon. Friend the Secretary of State for Prices and Consumer Protection has announced her intention of extending the investment relief until the end of the present policy phase in July. Firms will be free, if they wish, to make a claim for further relief, based on a further 12 months' investment.
No one disputes that firms have been under very severe pressure during 1975. The Price Commision's most recently published report deals with the situation only up to August. There were signs then of some recovery in profit margins of Category I companies in the second quarter, but by and large the improvement was not significant. With falling industrial output, there is no reason to expect, I fear, an improvement in the 556 results for the third quarter when they are available.
What I cannot accept is that any simple cause-and-effect relationship can be set up between this poor performance and the Price Code. The market situation has prevented many firms from raising their prices, even in cases where price increases would be fully consistent with the rules of the Price Code. Firms' profits are low because we have been in a recession. When the outlook improves and output expands, one would expect the normal recovery in profits which accompanies this phase of the economic cycle.
As my right hon. Friend the Chancellor of the Exchequer indicated in his New Year message, there are now signs that the recession is bottoming out. There were hints of recovery in the CBI's Monthy Trends Inquiry for December. The Department of Industry's latest Investment Intentions Inquiry expects the decline in investment to be much less in 1976 than in 1975, and for 1977 a strong increase in manufacturing investment is forecast.
The next phase of the Government's counter-inflation policy therefore must be a policy suited to expansion. It is not possible to speculate at this point of time on the ingredients of such a policy—
§ The Question having been proposed after Ten o'clock and the debate having continued for half an hour, Mr. DEPUTY SPEAKER adjourned the House without Question put, pursuant to the Standing Order.
§ Adjourned at half past Eleven o'clock.