§ 7.22 p.m.
§ THE PARLIAMENTARY UNDERSECRETARY OF STATE, DEPARTMENT OF THE ENVIRONMENT (LORD SANDFORD)
My Lords, I beg to move that this Bill be now read a third time.
§ Moved, That the Bill be now read 3a.—(Lord Sandford.)
§ LORD BALOGH
My Lords, in rising to make some remarks on this Bill, I owe your Lordships' House and the noble Lord, Lord Sandford, a double apology. First of all, I did not speak on the Second Reading because I was unavoidably delayed by the running of trains. Secondly, I want to speak now because I want to draw attention to this Bill as one of the mosaic of measures anticipatory of entry to the Common Market which really do not add up to a consistent and helpful policy. As I shall not be able to speak in the provisional debate on entry into the Common Market, I should like to use this occasion to make certain remarks.
In the last few days, we have been exposed to very intensive propaganda about the advantages of entering into a larger market, the Common Market, and becoming members of the Community. We have been told that this will be especially advantageous to us, because the existence of a large market will enable our firms to adapt themselves to mass production much better than is the case at the moment, when they are restricted by the size of our market, and that we can therefore hope for a sudden transformation of our economic destiny—which at the moment I do not think even the Government would regard as very attractive. However, I fear that the policy behind this measure not merely does not add to our capacity to adapt ourselves to the Common Market, but deals a very severe blow to our capacity to resist the increased competition in the Common Market.
576 I know that the Prime Minister has a general euphoria about our present position, and believes that our current balance-of-payments surplus is sufficient to take the shock. I myself find it a little puzzling that that is the appreciation which he has been given because, on the whole, it is certain that our imports have risen in volume which, considering the increase in unemployment and the decrease in production which we have suffered, is an extraordinary conjuncture of events. Not only has that happened, but at the same time our exports rose in value, as a result of price rises, by two-thirds, but by only one-third in volume. The relative increase in imports was much greater than the relative increase in the volume of exports.
That is not a healthy situation, but that is not all. The direction of our market has changed. Whereas before we had a very healthy expansion in our exports to the Common Market, lately the Common Market has lagged behind as a market for our exports while the sterling area has been much the more prosperous market. According to the latest information which has been issued, the figures were 9 per cent. and 14 per cent. respectively. We shall undoubtedly undergo a shock when we go into the Common Market, because their protective duties are less than ours. Therefore, we shall immediately be faced with a situation in which their prices in our market will decrease more than our prices in their market. This can obviously be parried if intensified investment can be procured. Unfortunately, our general situation, which has made the current balance of payments so very favourable to us, is not conducive to an increase in investment; indeed, investment has fallen, not increased.
It is obvious that the firms which are going to be most hit are the smaller and less productive firms, and under this measure we shall move from outright grants, giving immediate relief and liquidity, to tax allowances which really amount to a delay in the receipt of the liquid resources. This Bill will favour only the bigger and more prosperous firms which have profits to be written off against their allowances. I fear, therefore, that the"think-tank"of Mr. Heath has not exactly been functioning well; or, to express it in a different way, the principles to which the Government 577 adhere so strongly have in one more case resulted in policies which are contrary to the professed aims of the Government.
Although we cannot do anything in this House about this Bill, I should like to put down a marker to the Government, through the noble Lord, Lord Sandford, that this is perhaps the least propitious measure which has been proposed apropos of our entry into the Common Market. If we go on in this way, I fear that the very great hopes which have recently been expressed by the Prime Minister—whose very great hopes at the time of the Election have already been very rudely refuted by events—will be further refuted by events, and Britain, instead of becoming a prosperous and dynamic member and leader of the Common Market, may become the Ulster of Europe.
§ 7.29 p.m.
§ LORD BROWN
My Lords, on Second Reading I spoke at length, and I think with some vehemence, because I have very strong feelings against this Bill, and I should have had nothing to say this evening, except to welcome the comments of my noble friend Lord Balogh, were it not for the fact that there have been three extraordinary coincidences since the Second Reading. The first thing is the publication of the rate of investment for the first quarter of this year, which I note, according to The Times this morning, has fallen by 13 per cent. It is a horrifying figure. We were worried when the Labour Government were in office because the rate of rise was too small: we now have an absolute fall. The second thing which has happened is the debate in another place, in which the Prime Minister, in facing the fact that investment grants were in use in the E.E.C. and that there was likely to be some limitation on the size of the grant for all members of the E.E.C., in order to create non-competitiveness in this business of investment, undertook that if this situation emerged he would be prepared to reintroduce investment grants in this country at the rate then operating with our future partners in the Common Market. That was an extraordinary thing for him to commit himself to, in the light of the fact that the Bill abolishing investment grants is not yet through this House.
578 The third and perhaps even more important thing, again reported in The Times today (and I hope the noble Lord, Lord Sandford, will be able to confirm that it is true, because I welcome it), is a very substantial move indeed. In relation to investment allowances the practice followed by the Inland Revenue for many years, where such allowances applied, has been to allow companies to write off the capital value of plant, up to the limit of their investment allowances, against the profits of the previous year or of the current year. What is reported in The Times to-day is that this practice is going to be changed, and that in future firms will be entitled to set their investment allowances against capital depreciation, up to the limit allowed, against the last three years' profits. This is quite staggering. Admittedly, this applies only to capital investment in the development areas, but it is going to make a staggering difference; and it is a recognition of the fact that many of the heavier industries, and the more important industries, particularly in the development areas, have not got current profits against which to write off their capital allowances—the very point I made on Second Reading. I am not conceited enough to imagine that my speech caused the Government to change their mind, but if ever one thing followed another in logical progression those two things did so.
My Lords, this is extremely important. It is an alleviation of the rigours of the total abolition of investment grants. But I would point out that, taking into account that investment grants are not apparently being abolished in Northern Ireland because, economically, it is regarded as a very depressed area; taking into account the fact that this alleviation for capital expenditure in the development areas is being produced even before this Bill is through to alleviate the rigours of the abolition of investment grants; taking into account the drop in investment; taking into account the fact that the Prime Minister himself has now agreed that in certain circumstances he will be prepared to reintroduce investment grants at the 20 per cent. level, I think that this exercise of introducing a Bill to abolish investment grants progressively continues to look more and more absurd. I am very sorry that we can do nothing about it.
§ 7.34 p.m.
§ LORD SANDFORD
My Lords, it is fortunate that we have a fairly flexible procedure and can discuss the Common Market and Amendments to a Bill going through the other place in the context of the Third Reading of this Bill. Nevertheless, I am glad to be able to confirm the development which the noble Lord, Lord Brown, noticed from to-day's newspaper—and I am glad he welcomes this development. The fact is that since we last debated this Bill, on July 2, the Government have introduced a significant improvement to the free depreciation allowance in the development areas. A Government Amendment to the Finance Bill introduced in another place on July 7 has had the effect of permitting companies, as the noble Lord said, to carry back any excess of free depreciation over current taxable profits and to set it off against their trading profits in the preceding three years. Previously, as he said, companies could go back only one year.
The effect of that Amendment will be that companies which have traded profitably in recent years but which are not now trading at a profit substantial enough to cover fully the free depreciation on their investment in machinery or plant in development areas will be able to reclaim corporation tax paid on the basis of trading profits of two more earlier years than was previously possible. This will provide immediate liquid funds for investment. Moreover, it will not be a requirement that the trading profits of those earlier years should have arisen from activities in a development area. Thus a company operating a new establishment in a development area will be able to offset free depreciation on development area immobile machinery or plant against profits of its trade earned in the previous years outside the development area. This new provision is therefore a valuable addition to the improved incentives available to firms moving into or expanding in development areas. I am glad to be able to confirm what the noble Lord said in those terms.
Turning to the remarks of the noble Lord, Lord Balogh—
§ LORD BESWICK
My Lords, before the noble Lord turns, as I hope he is 580 going to, to the very interesting and relevant speech of my noble friend Lord Balogh, surely he is going to answer the questions that were put by my noble friend Lord Brown. He was not asking for an explanation of what has been done in another place. We know what has been done in another place. We are perfectly capable of following the Report of proceedings there. What I think my noble friend was asking was: what is the logic of passing a Bill of this kind, even though we have got as far as the Third Reading, if it is now found necessary to back-pedal in the other place and to enhance the value of the investment allowances? What is being done there is carrying out a policy which is completely contrary to the policy of this Bill, and we cannot understand why the noble Lord, on behalf of Her Majesty's Government, should wish to persist with this Bill when it is now being found essential to do something completely contrary.
§ LORD SANDFORD
No, my Lords, I cannot agree that that is so; it is not back-pedalling. The Bill is a change from investment grants, which was the policy of the previous Government, to tax allowances; and the change which has been made in the Finance Bill in another place is not a change back from our system to their system; it is a development of the system which this Bill introduces.
Perhaps I may now turn to the noble Lord, Lord Balogh, who was speaking of this proposal in the context of our entry into the Common Market. The noble Lord has used this occasion to develop the theme that our capacity successfully to overcome the impact of entry into Europe has been undermined by the Government's decision to replace investment grants by taxation allowances. I do not think there is any dispute between us as to the need for increased investment in industrial plant and machinery. The need exists, and it will continue to exist whether or not we join the E.E.C. The argument is much more about means, not about ends. On means, we have on many occasions made our position quite clear and there is no need to repeat all that I said at Second Reading. Put simply, our view is that investment grants were wasteful of resources because they were given to 581 profitable and unprofitable firms alike, whereas taxation allowances—
§ LORD BALOGH
My Lords, I am sorry to interrupt the noble Lord, but is it not clear that the people who most need an improvement in their capital structure, their plant and machinery, are the unsuccessful firms? The Government have already changed the tax allowances by allowing back-clawing of profits tax into the current situation. Cannot they go further and really acknowledge that capital grants have not been wasteful? The grants enabled an increase in productivity and would have allowed further increase in productivity, which at this particular, very critical juncture is more important than at any other time.
§ LORD SANDFORD
My Lords, I do not think we can go back over that ground again. I recognise that there is a gulf between us and I certainly cannot bridge it. It was revealed for the umpteenth time at Second Reading. I appreciate that noble Lords opposite think that investment grants are the best way of helping in intermediate areas and development areas and in investment generally; we think taxation allowances are the best way. I do not think there is any point in continuing with that discussion; it was fully discussed at Second Reading. But I should like to continue on the point about the relevance of all this in our approach to the Common Market. Our view is that investment grants were wasteful of resources, whereas taxation allowances will encourage investment.
§ LORD BROWN
My Lords, the noble Lord has said twice that investment grants were wasteful of resources. This is highly offensive. There is no evidence in the possession of the Government to support this. In order to get evidence, if there was any, they would have had to intervene and explore the efficiency of every industry in the country to see how they used the money to invest. It is really distressing to hear the Government repeat this statement that investment grants were wasteful, as though all the companies who had received these grants had wasted them. That is the general inference. The Government have a different opinion from the Opposition on this, but to go on castigating thousands 582 of industries that they were wasting the support that the Labour Government provided for them through investment grants is really most painful to us.
§ LORD SANDFORD
My Lords, I do not want to go on saying it, and if noble Lords will let me get on I will deal with the point the noble Lord, Lord Balogh, raised. I will not go back over the paragraph I tried to reach the end of. It has been suggested that the move away from cash grants towards the new and improved system of taxation allowances, at least as a regional incentive, may be in conflict with E.E.C. policies. Now we come to the particular point the noble Lord wanted to raise. We do not think this is the case. The E.E.C. at this moment is only in the early stages of formulating a regional policy for the Community as a whole, and so at present individual countries follow their own regional policies. A basic aim of the Treaty of Rome, stated in the Preamble, is the reduction of disparities between regions. The Community recognises the major role of member States in this and makes special provision for them to pursue their own regional policies. These individual policies vary, and some at least have similarities to our own. We see no reason why we should not be able to continue to operate vigorous regional policies in areas suffering from problems of unemployment and structural adjustment.
Nor, as we understand the position, are our own policies likely to conflict with the principles behind proposals recently made by the Commission. A major objective of the Commission's proposals is to prevent member countries from outbidding each other for investment, especially in their prosperous central areas. This appears to us entirely reasonable and, indeed, to our advantage. The Commission's purpose in proposing a common policy—they have only just begun to do this—to provide balanced economic development, coincides with our own purpose. Finally, it is our understanding that any objection which may be expressed by the E.E.C. to tax-based incentives rests on the principle that investment incentives of whatever kind should be"transparent"(the term they use) in the sense that the amount of benefit is clear to all concerned and 583 that there is no element of hidden subsidy. We believe that the new system provided for in this Bill would be regarded as quite as transparent as any of the systems now in operation in any of the E.E.C. countries, a number of which use accelerated depreciation allowances as well as grants. I hope that what I have said answers, even if it does not satisfy, the point the noble Lord raised.
§ On Question, Bill read 3a, and passed.
§ LORD MOWBRAY AND STOURTON
My Lords, I beg to move, That the House do now adjourn during pleasure until ten minutes past eight o'clock.
§ House adjourned during pleasure.
§ House resumed.