§ 4.32 p.m.
§ Second Reading debate resumed.
§ The Earl of MANSFIELD
My Lords, coming to perhaps rather more contentious matters, first may I congratulate the noble Lord, Lord Oram, upon what was a commendably brief exposition of his Bill. I am bound to say that I welcomed the lack of heat with which he performed his task. I listened with considerable interest to whatever justification he might bring forward for the introduction of his Bill which, no doubt, the Government hope will become an Act. If I say that to me, at any rate, the noble Lord was somewhat coy, it may well be that he had excellent reasons for adopting that particular stance.
At one moment in his speech the noble Lord said that this is a Bill to which the Government attach great importance; and indeed it is. However, when it first saw the light of day, the other place was told—and certainly the Press were told—that one of the principal ideas which motivated the Government was their attack on the still intolerably high rate of inflation. That has now more or less disappeared as one of the Government's arguments. Little 1249 reliance is placed upon it, although I shall come back to it a little later in my speech. However, what has certainly happened is that this Bill has aroused great anxiety in industry.
The objections of industry are that the Bill will do little to keep down prices but that it will do a lot to create uncertainty in industry and commerce. It is this state of uncertainty which is the principal line of objection and what noble Lords on this side of the House regard as so undesirable. Unless there is confidence in the world of business and, more especially, in industry, there is unlikely to be that degree of investment which alone, in the long term, can create industrial expansion and jobs and bring down the present record levels of unemployment. Unless the economic situation of the country becomes more settled—unless, indeed, the pound remains steady—there is little hope, bearing in mind matters that are outwith the control of the Government (and among these I include the price of raw materials which are imported mostly from abroad) that the rate of inflation can be brought down to a satisfactory level.
I say this because, I repeat, important though the Government regard their Bill, the greatest misgivings have been vouch-safed by industry. I wish, in a way, that the noble Lord, Lord Oram, had mentioned them and at least tried in some way or another to show that these misgivings were either without foundation or at least did not need to have placed upon them the importance which they assume. It is also a pity that so far, at any rate, there are no Back-Bench speakers from the Government side of the House; nobody has put down his name to speak. From what I read, I gather that the TUC played a leading part in the thinking behind the Bill and a leading part not so far behind the scenes during its passage in the other place. It is a matter of regret that noble Lords on the Benches opposite, with a wealth of experience of both the unions and industry, are not here to give us the benefit of their advice and experience and to allay our fears.
When I came down from Scotland this morning and heard on the radio that a certain body of opinion of noble Lords opposite wished to disfranchise me, I hurried to get the report of the Working 1250 Party. I see that the Working Party, headed by the noble Lord, Lord Champion, says:We propose a system of voting Peers limited as to numbers and reflecting in their selection the Party balance in the House of Commons. This, together with the proposals for the composition of the House, would end, once and for all, the in-built one-Party domination in the second Chamber".It will be an ill day for the future of this House and for the country if there is to be substituted for debate the clump-clump of the feet of voting Peers nominated by a Select Committee of the House of Commons.
It is quite certain that the only way in which this Bill can control inflation is by reducing profits. Therefore the first question one has to ask oneself when considering the matter is whether the level of profits before tax and interest is too high, speaking generally, throughout industry. The rate of return on capital has been steadily declining since the 1960s. in that decade it averaged, I believe, about 11 per cent. Last year I believe it was about 3½ per cent. This figure is generally regarded as being much too low. I believe that the Government acknowledge this fact. Indeed, official thinking is that a higher level of profits is needed to produce more investment and more jobs. What is incontrovertible is that if the general rate of profits is too low, the prospects for investment and job creation, the containment of inflation and a rising standard of living are indeed bleak. So we can forget any intention on the part of the Government that this Bill on its own will have any material effect on prices or on anything else. Indeed, the Secretary of State conceded, in effect, in the other place, that if this Bill had been in force soon after the Labour Government took office three years ago its effect on price rises would have been minimal.
Then we turn to the argument that the Bill will provide some form of lever, if that is the right word, for helping to continue a measure of wage restraint. It is not, I suggest, profitable at present to speculate upon the likely character of any new agreement or Phase 3, if ever it should exist in a meaningful form at some time in the future. Even if a meaningful wages policy is hammered out, I suggest that this Bill will have no more than a cosmetic effect on such negotiations, because it is 1251 clear that only a certain number of investigations into specific price increase proposals will take place each year. If the Secretary of State was right when he said that an effective, socially responsive firm has nothing to fear in the future—and I assume that the noble Lord, Lord Oram, agrees that the vast majority of manufacturing and distributing firms in this country come into that category—then the effect of the Bill will be minimal.
It seems to me, and indeed to others, that the real motivation for the introduction of this Bill is that it gives the Government the opportunity to produce the means for permanent Government intervention within industry, and indeed I do not think it unfair to say that the Secretary of State not only said as much but gloried in it. No doubt there is a sense of disappointment on the part of the Government that planning agreements which it was thought would have a desirable effect, at least from the Government point of view, have not worked and they do not exist. Equally no doubt it is hoped that this Bill will achieve much the same ends by a somewhat different route.
What I suggest is really intended is that this Bill should become part of the Government's permanent powers which they will use in both the fields of competition and monopolies, and also to control sectors of industry. But it is not suggested that even when prices are brought under control the power to investigate them should end. Indeed, it is proposed that they should continue into the future. But it is suggested that such powers should exist and should be used to promote competitive efficiency and to influence to some degree industrial performance.
It is this charter—if I may so call it—for permanent Government snooping into areas which should be outside their everyday concern which gives rise to our opposition to this Bill. Let me make it plain. I believe noble Lords on these Benches are not opposed in principle to the control of prices in the short term for specific purposes or reasons, but bearing in mind that control of prices can never be wholly effective in this country, relying as we do so heavily on imported foods and raw materials, such control must of necessity be short term.
1252 Equally the distortion of profits through price control is bound to make for a stagnant economy and limit the creation of wealth. One of the matters which we so often complain about is that this Government and those who support them are far too concerned to slice the cake and far too little concerned to increase its size. I suggest that the mixed economy demands the maximum flexibility in the allocation of resources in order to meet changing demands, and a lack of flexibility merely limits the redistribution of resources according to national and international demands. Equally I should make it plain that where a firm takes unfair advantage of its competitive position, more especially if it is in what might be termed a monopoly situation, any Government must be in a position to correct any abuses which may occur. I do not think that is altogether a contentious statement on my part. I think nobody on this side of the House would disagree with that philosophy.
If this Bill was called, for instance, the Fair Trading (Amendment) Bill, if it was designed to fortify the powers of the Office of Fair Trading, or more especially the Monopolies Commission, so that all the Government's power in respect of what I might term competition policy was contained in one Act and exercised by one body, that would be an objective which would command at least some degree of sympathy. Whereas the noble Lord says that one day we shall have some sort of consolidation Act to make sense out of the various measures since 1973 and which, as he himself has said, make for rather difficult reading of this latest attempt, that does nothing so far as this Bill is concerned to, as it were, make one body where at the moment, and under the terms of this Bill, three will exist. In my submission, what the Bill does is to introduce a new body which will exist alongside the other two and which will have a responsibility which is bound in some degree to overlap the other two. It will be a further measure of bureaucracy which, as I tried to show, will have little effect on prices and none on efficiency, except some effect which may well be detrimental.
I do not intend to go into any of the detailed provisions of the Bill because, after all, this is a Second Reading debate on the principles of the Bill and the motivation 1253 of the Government which has prompted its introduction. So far as noble Lords on these Benches are concerned, we shall not seek to delay the Bill, either unduly or at all. We take the noble Lord's point that it has already had an airing in the other place—I was going to say, ad nauseam, but I had better not. It has already had an airing in the other place, although whether 28 or 29 concentrated hours on the trot is the best way to ventilate and discuss Parliamentary business is not perhaps for me to say.
On these Benches we believe that there are a number of distinct drawbacks to the Bill which will operate unduly harshly on industry. For instance, we think there should be some sort of annual review which will monitor both the performance of the Price Commission and, more especially, of the Secretary of State. We think that there are a number of facets of the Bill which will tend to operate harshly and unfairly on companies which find themselves the recipient of an inquiry on the part of the Price Commission. We shall try to make the Government think again in an endeavour to remove such areas of unfairness, but we shall not have an all night sitting, unless the Government make such a nonsense of their other business that there is no other time in which to consider this Bill.
§ 4.48 p.m.
§ Baroness SEEAR
My Lords, from these Benches we give our support to this Bill for two major reasons—the contributions that it makes to two areas of policy to which we attach the very greatest importance. In the first place is the contribution which we believe it can make to obtaining, and continuing to obtain—and I underline "continuing to obtain"—an effective pay policy. It was said in another place and it has been implied by the noble Earl, Lord Mansfield, that the effect of this Bill on pay policy would be very slight. I think it has been accepted by all Parties that, if a prices policy can indeed produce a satisfactory pay policy, then that is a price that is worth paying, even for those who are opposed to the policy as a whole.
I gather there is a suspicion that no such satisfactory pay policy is likely to emerge, and that if it does emerge it will be short 1254 lived. I believe the importance of this Bill in relation to pay has not perhaps been fully grasped in the context of the changing kind of pay policy that we shall certainly get, if not this year then in the years to follow. We on these Benches believe that it is of the greatest importance that we should continue to have restraint in pay. The noble Earl, Lord Mansfield, said this Bill would not cure inflation. Of course it will not, but if it enables a check to be made on inflationary pay claims, then indirectly it will be contributing in an important way towards the control of inflation. I say that it is in the changing context of pay policy that this Bill is of particular importance for this reason.
For the last two years, until now, we have had a very rigid form of pay control negotiated through the mechanism of the Social Contract. It is quite clear that even if we get a Phase 3 it will not be in those terms, not in terms of the same kind of rigidity, the same kind of inflexible policy we have had over the last two years. This is apparent from the reaction that has already come from the TUC. The point I want to make is that it is not only the trade unions who do not want a very inflexible pay policy; it is the companies, the employers, the managers themselves who do not want that very rigid pay policy to continue year after year. Anyone who is at all acquainted with what is going on inside enterprises knows the manifold difficulties at various levels which flow from the application over a two-year period of great rigidity and pay restraint. Therefore, we are not going to get the same kind of agreement we have had in the past.
And yet we must have pay restraint. This means that pay restraint must come because the rank and file in industry are converted to the idea that inflationary pay settlements are, in the long run, highly undesirable for them as well as for the country as a whole. Pay restraint cannot be enforced any longer in rigid terms from the centre. It has to be controlled by consent from the grass roots. It seems to me there is not the faintest hope that you are going to get public opinion to back restraint in pay claims—by "public opinion" I mean not merely the leaders but the generality of employed persons—not just this year or next year, but as a continuing process, unless they believe that there is also power to control prices.
1255 It may be that this Commission will not do anything very much in terms of controlling prices. But it is there. It means that you can say to people, when you are asking them to see that their pay claims are kept within reasonable bounds, that if indeed prices take off there is a mechanism for seeing that they are controlled. This is in terms of developing the kind of pay policy which, in our view, needs to be a permanent part of national policy; one which can only operate with the flexibility which is seen to be essential on both sides of industry. It can only operate permanently and flexibly if it has widespread support, and that support will come only if there is on the other side a mechanism for controlling prices. For this reason, if for no other, we would go along with this policy, with this Bill.
Our second reason for supporting the Bill is that it seems to us to be an instrument for a competition policy, for a more effective development of a more efficient economy in both the public and private sectors. It was made quite clear in the debates in another place, and it is also plain in the Bill itself, that this is the second very important purpose of this piece of legislation. We on these Benches have always been and remain firm supporters of the market economy, and the market economy within a mixed economy. We are delighted to see in this Bill what seems to us to be the reconversion of the Government to the idea of the mixed economy, which they are now apparently prepared to back in terms of legislation of this sort. Let me admit that there have been times when we doubted whether the Government really did believe in a mixed economy, really did believe in the promotion of competition. We have always assumed—though there have been moments when we have doubted it—that the Opposition believed in competition and the market economy. Doubts about the Government's determination to pursue that policy have arisen from time to time in our minds.
But, my Lords, it would surely be naive in the extreme to think that nowadays the market economy operates entirely freely to see that resources are allocated as they should be, and that the consumer gets a fair deal as a result of the operation of the market. That was at best, or at worst, according to your point of view, 1256 a 19th century dream. We all know that it does not happen like that in these days of, not only monopoly, which is relatively easy to recognise, but of all those shades of oligopoly which limit the effective working of the market mechanism. If you want competition to work, if you want an effective mixed economy, then you have to see to it that these oligopolistic tendencies do not so weaken the operation of the market that competition is not a reality.
Those who are opposing the development of a competition policy, opposing the need for some Governmental instrument to see that it takes place, have to answer two questions. Why has the market system in this country not operated more effectively than it has done over the last 30 or 40 years? None of us can pretend that with our growth rates, our overseas trading record, we are a great demonstration of how well the market system, left to itself, has been working. They will also have to say why so many other countries which believe, as we do, in the mixed economy and in the operation of the market also have mechanisms for intervention in relation to prices. It is well known that in most, if not all, of the free market countries of the Western World such mechanisms do exist.
So we welcome the Bill for these two reasons. Of course there are doubts; there have been and still are legitimate doubts in the minds of persons who would be affected by this legislation. One of the doubts, which I must say I shared when I first examined this Bill, is the degree of arbitrariness of the powers left to the Commission to make its decisions within the framework of the proposed legislation. "Why pick on me?" Why is this particular concern to be investigated?" Then, what are the criteria by which the Commission will decide that a particular price increase is or is not justified? This was a question which was raised by many people with whom I have discussed this matter. I think I am satisfied by the answer, that you have no choice. In this Bill the Government wish to get rid of the system of the code, a detailed rigid code; that has been the practice for price control in the past. A code is complicated, it is elaborate, it takes up a great deal of time, a great deal of paperwork; it leads to a great deal of argument, and inevitably it becomes out 1257 of date. There is a rigidity; it tends to be frozen, and as time moves on and circumstances change, a code becomes less and less appropriate as an instrument for deciding what should be done.
If you reject the whole approach of a code, for the reasons I have given, there is no option, if you are going to have any kind of control at all, but to give to the people who are operating the system a degree of freedom of judgment which is the opposite of the rigidity of the code. You need to have flexibility, which may well lead to the question, "How will they make up their minds? How can we be sure that the decisions they make are right?" You either have to say: "We are prepared to leave it to the judgment of the Commission", or you have to settle for codes, with all the limitations and disadvantages that they bring.
When you are choosing to leave it to the Commission to use its judgment, there are, it seems to me, two safeguards which should satisfy some, at least, of those who express anxiety under this head. One, surely, is the names of the people chosen to man the Commission, people of very great experience—at least most of them are who have so far been named—in the world of industry, finance and commerce. This should be some reassurance that at least they will have a deep grasp and wide understanding of the problems of the concerns which they are investigating. The other safeguards are to be found in Clause 2 which lays down—it is true in general terms, but inevitably surely in an Act in general terms—the criteria which justify both investigation and control. It may be that on Second Reading ideas will be brought forward for strengthening Clause 2, though I do not propose to do so. Even as it stands, Clause 2 gives substantial ground for reassurance to those who fear that the Commission can operate in an arbitrary manner.
There is also the fear that has been raised from the Opposition Benches that the existence of the Commission, with the power to investigate, will have a deterrent effect on industry, will limit investment and, by limiting investment, will harm the prosperity of the country and harm the consumer; and this, after all, is primarily a consumer Bill. When one looks at the criteria in Clause 2 and sees the scale of investigation that is 1258 likely to take place—it has been suggested that about 40 cases a year will be the sort of level of operation—surely it is not unreasonable to say that any organisation which is operating in a reasonably efficient manner, which is not abusing its market position or which knows that it has so small a share of the market that it can defend its case in straight market terms, has very little to fear. It seems to be a very exaggerated argument that because of the possibility of investigation, given the safeguards and the setup that is outlined in the Bill, a large number of organisations will be so fearful of investigation that they will hold back from the development of their businesses. It is possible that that will be the case in some circumstances, but as a general problem for the country as a whole, affecting the development of the economy overall, that surely is a very exaggerated case which is being advanced.
However, we on these Benches would join with the Opposition in the objection to yet a third body. After all, we already have the Monopolies Commission and the Office of Fair Trading. Why on earth do we need a third body on top of those others? It would add to the bureaucracy, complexity and cost. If it is suggested that we need a sharp instrument to help make for more effective competition in this country, I would point out that that is something that we on these Benches have asked for not recently but over decades.
I agree that it is not in the Bill, but can we not have confidence in the statement made by the Secretary of State in the debate last week in another place in which he said, in response to an Amendment urging that the Price Commission should be merged with the Monopolies Commission, that we should move towards a single body:… which has the power to present mergers when they are socially undesirable, the power to break up monopolies when they are similarly found to he against the public interest, the power to take action against agreements for restraint of trade, and the power to attack what the hon. Member for Colne Valley rightly called the symptom of that condition which is unreasonable price increases".—[Official Report, Commons, 21/6/77, col. 1575.]The Secretary of State has not put a time on it, but there he has given an undertaking that we shall move towards this single body with improved powers to 1259 control monopoly—I am not being critical of the present Monopolies Commission, but it does take between three and three and a half years to produce a report—and deal more widely with matters which inhibit the really effective working of competition.
We must believe that the Secretary of State means that steps will be taken, and taken soon to move in that direction. We on these Benches support the Bill in the belief that that will happen. We intend to keep reminding Her Majesty's Government that this has been promised to us and should take place.
§ 5.6 p.m.
§ Baroness ELLIOT of HARWOOD
My Lords, I shall be very brief. I am not an economist, but I speak today in a dual capacity. I was the chairman of the first Consumer Council and I know how apprehensive all housewives are about price rises, particularly those affecting the cost of food. Being a producer in particular of agricultural products, I know how hopeless it is if the cost of production and the sale of products do not pay or leave only a small margin of profit. How to reconcile these conflicting interests is largely what this Bill is about.
However, I believe that there is more trouble for the Government—any Government—when prices decrease and the demand for subsidies increases than when industry or agriculture makes profits and the State in consequence benefits by taxation and by those profits. There is no doubt that there is heavy pressure today from all the unions, and we appreciate that that is a pretty formidable matter with which the Government must deal. But to prevent profits also prevents wages increasing and, as we all know, there must be some wage increases. In the long run, everyone benefits from profitability. Loss discourages everyone and costs the Government a great deal of money. I am afraid that some aspects of the Bill may well discourage rather than encourage industry.
I was brought up with a very old principle, which no longer operates—namely, freedom of trade. It is no longer sponsored by any political Party, not even by the Party of the noble Baroness, Lady Seear, from which I sprang in my early life. 1260 But freedom to trade in all markets, both here and abroad, is still vital. If there is no profit in it and there is so much control, it will not succeed, and that would be disastrous.
The Price Code is a restrictive measure and a somewhat uncertain one as regards producers, as only the Commission can decide the policy which governs the Price Code. The market price—whether through auctions, as in agriculture, in retail competition or in other ways—enables the sellers to estimate the market fluctuations. Although this is a variable figure, given the freedom to make profits and the chance of competition, the manufacturer must take the drop himself, if it comes—not subsidies from the Government.
I agree with those who say that under this new proposal Parliament should have the right annually to review the discussions of the Price Commission. My noble friend Lord Mansfield made that point very strongly, and I entirely agree with him. As most prices fluctuate, particularly prices of food and seasonal products, to try to keep prices at the same level all the year round would defeat its own ends, and sometimes I believe it might even keep prices up rather than let them find their own level. To prevent by whatever means companies from making profits is a hopeless method, and will not enable companies to expand or to develop, nor enlarge their plant or machinery, nor create more employment.
Those are the principles which I am quite sure will lead to prosperity in this country. If this Bill hampers that in any way it will not be to the advantage of the country. This Bill was debated at great length in another place. As my noble friend Lord Mansfield said, I hope that in this House, we have no intention of opposing it as was done in another place, but we could improve it by Amendments, and I hope that we shall show our views in this way and have the opportunity of discussing it clause by clause in order to improve the Bill which we have before us now.
§ 5.11 p.m.
§ Lord MOTTISTONE
My Lords, I am afraid that this is a Nosey Parker Bill, and one cannot really like it, although there are good reasons for it. I am heartened by the fact that in another place there were many areas in which the 1261 Government appeared quite conciliatory, and indeed in some cases acted in a conciliatory fashion. I hope—particularly as we have the noble Lord, Lord Oram, whom we know is such a friend of us all, taking the Bill from the Benches opposite to us—that we might be able to carry this a bit further.
With that in mind I looked slightly closely to see what areas looked as though they had a prospect of agreement within them. It seemed to me that one such point was that there was an agreement between us—and indeed the noble Lord, Lord Oram, almost said as much in his speech earlier on—in the need for powers to investigate the prices of businesses in a monopoly or near monopoly situation. I think we would agree with that. In fact, I could go on to quote from the Minister of State in another place, who said, on 21st June, among other things, at column 1187 of the Official Report:We need those powers to sharpen competition and to protect the consumer from the abuses that flow from lack of competition".I think that we would entirely agree with that, and no doubt the Liberals, if the noble Baroness, Lady Seear, was still with us, would endorse that. In passing, perhaps I might suggest to my noble friend Lady Elliot that the noble Baroness may not now agree with free trade but she certainly agrees with freedom of movement.
Going on to quote from the Minister of State—and the noble Baroness, Lady Seear, rather confirmed this—he said at column 1188:I hope that my right honourable Friend the Secretary of State will make clear that we do not see a permanent separation of the identity and existence of the work of the Monopolies and Mergers Commission and that of the Price Commission".It would seem from that that the Government are well on the way to agreeing with us that a separate Price Commission as a permanent basis is probably one which we would not press for. So perhaps it might be that the Government would go with us in concentrating on this business of protecting the consumer from the abuses that flow from lack of competition.
It would be churlish of me to point out in too great detail that most of the abuses flowing from lack of competition are in the sacred cows of the Party opposite—the nationalised industries. It 1262 is perhaps they who need to have their prices watched, as we have learned in the case of the gas industry in the very recent past. We would not expect the Government rapidly to sweep away the nationalised industries, but perhaps we can see them agreeing to proposals for examining from time to time the usefulness of the Price Commission as a separate statutory body. It could perhaps be that they would look kindly on possible Amendments which worked in that direction.
Another area in which there might be agreement between us is in making modifications to the safeguards established under Clause 9, of which a draft has been published, and more meaningfully to the Bill itself, to take account of swingeing increases in the costs of raw materials, especially in relation to the food and drink industries. I expect your Lordships are aware that the prices of raw materials, on which we have to depend because we are not self-sufficient in this country in an agricultural way, have lately been going up so dramatically that on the shape of what is likely in the future, let alone what has happened in the past, it is very possible for an increase of the final product to have to go up by more than 5 per cent. in as short a period as six months. If, therefore, any business on an annual rate can only expect to make a profit of the order of 10 per cent., it is going to find itself in a position not to be able to make any profit at all if in six months it is going to have a raw material price which will put it up by 5 per cent. That is common arithmetic.
In fact, as my noble friend Lord Mansfield said, the rate of profit which is being made by many industries is nowadays nearer 3 per cent., which means in effect that raw materials without price adjustments over a period of as little as six months can cause a small company to go out of business completely. I know that the small companies are not the ones which the Price Commission will be invited to investigate, or would take the initiative in investigating, in the normal course. Thye will go for the bigger companies; perhaps the market leaders. But when they do this, the market leaders will inevitably set the pattern for the industry concerned, and the result will be that the smaller companies will have to follow them, and the smaller companies 1263 will be the ones who take the rub and have not got the resources to overcome this sort of trouble.
It is for that reason that the ability of the Price Commission to impose a price freeze during investigation—particularly as the investigation may turn out to prove nothing other than that the company is being perfectly sensible and a freeze is not necessary—and a freeze which can be applied in effect for at least four months, and maybe longer, will create a condition in the market which can put in severe jeopardy, possibly not the biggest companies which may have extra resources (though even they are going to find it difficult), but, very much, the smaller companies who had resources perhaps five and six years ago but have gradually had them eroded by various policies that have been applied in the last five or six years. This is a serious issue, on which one would hope that the Government will go with us in making sure that there are sufficient safeguards, and possibly—as the Secretary of State has said many times he will not—relent on their insistence that freezing must be applied when an investigation is taking place.
If your Lordships will allow, I should like to spell out in a little detail why it is that controls are not really of any practical value in holding down the prices of the more common processed foods. What I am attempting to point out is that not only are we under threat from the actual provisions of the Bill, but in fact experience during the last five years has shown that such price controls as we have had have had no effect at all except to create extra labour for the people who have to apply them, and extra costs which, in due course, put prices up rather than put them down. Before I do so, I must declare an interest as the Director of the Cake and Biscuit Alliance, the trade association looking after the interests of the cake and biscuit manufacturers. For this reason, my examples will relate to biscuits, but the principles they show can be taken to apply to most processed foods.
There is no evidence that price controls have held down the prices of biscuits more effectively in recent years than market forces have done by themselves. On the other hand, price controls have in the short-term added a considerable 1264 administrative burden and cost to manufacturers and have increased the complexity and uncertainty of forward planning.
The key factors governing pricing decisions in the biscuit trade are, first, costs; secondly, the need to maintain margins for ploughing back into the business; and, thirdly, the desire to maintain the value for money of biscuits relative to other foods. The first two points need little comment. It is well-known that costs have risen sharply, have continued to do so and that previous and present price control procedures have not made adequate allowance for all cost increases to be recouped or indeed to be reflected quickly enough to maintain the necessary margins in the short-term.
Little however has been said about the third point. The fact is that biscuit manufacturers, in common with other food manufacturers, have always been acutely aware of the need to maintain the value for money of their products in relation to alternative purchases, as seen by the consumer. The point is that the competition is not only within the manufacture of one particular product but is also between that product and others which the consumer may buy in lieu. For example, if biscuit prices go too high while bread does not concurrently do the same people, may buy more bread and less biscuits. The biscuit industry's substantial tonnage was built up on this basis. There is clear evidence that when prices rise disproportionately in relation to other foods, volume—that is, sales—suffers accordingly, and there is a very direct relationship in the biscuit industry between volume and profitability. Volume, I should explain, is a phrase covering both sales volume and manufacturing capacity. Hence, on occasions when tax or cost increases have made chocolate biscuit prices rise out of line with other products, their tonnage has declined markedly—as in 1962–63 and in 1974–75—and this has affected the total market.
Up to, and particularly during, 1973, biscuit market volume was on a stable healthy footing while prices rose less than other foods. Chocolate biscuits were especially buoyant in 1973, with artificially low prices. Prices were frozen from November 1972, just when they were 1265 about to go up, then in April 1973 tax was removed. Hence, in the short-term chocolate biscuits became much better value to the consumer; volume rose by 20 per cent. or more and manufacturers could not meet demand. From mid-1973 prices were allowed to rise and, with ingredient costs escalating, they went up sharply. Tax was reimposed in April 1974, exacerbating the situation, and volume was immediately and severely reversed.
The severe price rises of 1974–75 resulted in a drop in consumption of about 7 per cent. in 1975, concentrated however on the higher priced lines, particularly chocolate, which declined by 20 per cent, to 30 per cent. It should be noted that these very steep price rises occurred while price controls were operating and it is most unlikely that if there had been no controls manufacturers would have risked putting up prices further at that time because, as I have attempted to explain, to do so would have reduced sales even further.
In 1976, as biscuit price inflation dropped below that of related foods, consumption and market tonnage began to recover. With more difficult trading conditions in the last three to four years, biscuit manufacturers have endeavoured to maintain volume, and hence profit, by introducing smaller packet sizes and by developing lower-price ranges and have been largely successful in these aims. This is further proof of the significance of relative food values in efficient manufacturers' planning processes, and noble Lords will have noted that emphasis was laid on efficiency by the noble Lord, Lord Oram—indeed, it is mentioned in the Bill. It is efficiency which I have just been talking about; adjustment to meet the market as it occurs.
If anything, the presence of price control mechanisms and the uncertainty which these have brought in recent years, with the ever-present threat of tighter controls, of freezes, have led manufacturers to take whatever price rises they could justify in the short-term whenever there have been cost increases. As a result, what has tended to happen is a less smooth, more concentrated and exaggerated series of price increases than would have occurred if manufacturers had been able to adjust prices solely 1266 according to the normal market-place and competitive considerations.
Noble Lords will see from this brief view of the effect of price controls on a typical food item that they have no effect on keeping prices down, but they add to overall costs in administration and distort such price adjustments as are made necessary by increasing the costs of manufacture. I would not argue at this time for no price controls at all for all food products because, sadly—and I think erroneously—people in the country have been led to believe that they have some effect on keeping down the retail price index.
I noted that the noble Baroness, Lady Seear, made great play of this point and emphasised that one of the main reasons why the Liberal Party were supporting the Bill was because they saw it as the only way of convincing people that they should restrain their wages. I suggest that people in this country are not as stupid as all that; they could surely realise that there are better ways of controlling prices, as I have endeavoured to show, than in statutory controls the effect of which may be very damaging to business and, in turn, to labour prospects.
It would seem to me that what we would be much better advised to do—perhaps not immediately because so much propaganda has gone into the benefits of price control; here I am not particularly blaming the Party opposite because my noble colleagues in the past have been just as enthusiastic in imposing price controls—is to accept that experience has shown that this is not the way to restrain prices. So, if it is necessary to produce some bargaining element when one is talking to people about restraining wages, probably the best bargaining element is for the Government to promise to cut their cloth according to their means, which indeed they are trying to do, or saying they are trying to do, and one hopes that they could demonstrate that continuingly and point out that this is the way in which the greatest contribution to reducing inflation will occur.
What I think is reasonable is that we should endeavour to educate the country into understanding that prices are best controlled by a free market and that if we need any form of control it should be 1267 applied to those businesses which have a near monopoly situation. As I said earlier, I think that the Minister of State was going a long way with us in his various speeches, but I am a little concerned about the Secretary of State, who, it seemed to me, made some very frightening speeches at both Second and Third Reading in another place. I would hope that all he was doing was putting on a front so as to appear to be a hard man, in order to appease the distressed British "Lefties" whom the poor Labour Party still has around its neck as ballast to keep it in Parliament. Let us hope that, when it comes to the point in this House, the views expressed by the Minister of State are the ones which will prevail in giving advice to the noble Lords opposite, and that the Secretary of State's contribution is treated as being just a bit of light relief to encourage the troops.
§ Lord PEDDIE
My Lords, I did not wish to interrupt the noble Lord's flow of argument earlier, but I wish to refer to the fact that he made an assertion that the average rate of profit is 3 per cent.— but 3 per cent. of what? Is it 3 per cent. of capital employed, or 3 per cent, of turnover? I think that that assertion needs some explanation, and so I should be glad if the noble Lord opposite would explain precisely what he meant by his statement on average rate of profit.
§ 5.31 p.m.
My Lords, the noble Lord, Lord Oram, when introducing the Bill made the point that he and his colleagues regarded it as a very important Bill. I would agree with him on that. Therefore, I was rather surprised when I saw the very small number of noble Lords who had put down their names to speak in this important debate. Looking through the list of speakers, I think that I am right in saying that I am the only speaker who can claim to have been a manufacturer during a great deal of his career. But, regrettably, under the rule of three score years and ten, which applies whether one looks in the psalms or in the Companies' Act, I am no longer in that position, and therefore have no interest to declare.
1268 Accordingly, I shall come to one or two points which seem to me very important. As I think my noble friend Baroness Elliot of Harwood pointed out, we are none of us pleased when we go into a shop to buy something, only to find that what we want to buy has gone up considerably in price since we were last there. Without pausing to think, we at once tend to blame the poor manufacturer—and we may even use an unparliamentary word before the word "manufacturer"—for trying to make, as one often hears it said, "immoral" profits out of the pockets of the poor customer. Alternatively, we may condemn the distributor for adding indecent mark-ups.
Had we stopped to think, we might have remembered how commodity prices, wages, and the high cost of many services affect prices. All are largely outside the control of manufacturers. We might also have reflected on the time that the effect of many of these things takes to filter through to the goods actually on the shelves in the shops. Had we been prepared to probe just a little deeper and to examine some figures—and here I am coming to the point that was raised a moment ago when my noble friend Lord Mottistone sat down—we should have found that, whereas in the 1960s the average return on capital of industrial and commercial companies, on a replacement cost basis and before tax and interest, was about 11 per cent., the figure for 1976 was that which was quoted a moment ago of 3½ per cent. I hope that I have made it exactly clear to what the 3½ per cent. in fact related.
Clearly the case for continued price control cannot rest on excessive profits, nor indeed on any lack of competition, when, for the vast majority of markets, competitive pressures are considerable, particularly in many of the more essential markets which influence the retail cost of living index. The noble Lord, Lord Oram, will, when he replies, no doubt confirm that, on more than one occasion, spokesmen for Her Majesty's Government have argued—and rightly so—that as part of their so-called industrial strategy profits must be allowed to increase to provide the funds for increased investment.
I assume that the Bill must therefore be within the scope of that general policy. 1269 In other words, the Bill cannot have the purpose of reducing profits and profitability. One is therefore forced to the conclusion that the case for the Bill is in no way economic, but rather is political, and, I would add, political on two counts. The first count is that it is a gesture—a quid pro quo, or whatever one likes to call it—for continued pay restraint. Human nature being what it is (and it is often very gullible) and bearing in mind the importance of establishing a Phase 3, to which the noble Baroness, Lady Seear, has referred, I am prepared to accept the quid pro quo argument, however regretfully. However, I accept it conditionally. The condition that, as I see it is needed to make the purpose of, or the case for, the Bill really credible is that the Bill (or the Act when it becomes an Act) should become operative only if, and when, a Phase 3 really does emerge on a generally acceptable basis. By a "generally acceptable basis", I mean at any rate a basis which would be generally acceptable to, for instance, the CBI. A further part of the condition would be that the Bill should last no longer than Phase 3, or possibly, again as the noble Baroness, Lady Seear, suggested, if there were to be what, for want of a better phrase, I would call Phase 4, or Phase 5, the Bill should last only as long as that lasts. But, as has been clearly pointed out, that is not what the Bill says. The Bill says quite categorically—and I think that the noble Lord, Lord Oram, said this himself—that it is designed to go on indefinitely.
That brings me to my second political point. I have no doubt that the present members of the Commission—and I noted what was said about the new chairman being mentioned just a week or so back—are very respected, sensible individuals who can be relied upon to do their best and to make wise, sensible, unbiased decisions. But members of the Commission will come and go. They are appointed by a political Secretary of State—I am not saying anything about the present Secretary of State—and Secretaries of State come and go, too. It is all too easy to see how the Bill, when it becomes an Act, could be used as an instrument to gain more and more control over private industry.
My Lords, let me explain how I see the matter working out. Assisted by inflation, profits could be gently and quietly 1270 brought down to a level which was quite incapable of providing resources for essential investment. So, what would happen? A generous Government would come forward with a tantalising offer of cash, provided, perhaps, under the Industry Act or the NEB, but with strings; and those strings would progressively enmesh the company concerned in the Whitehall web. While, in so doing, this might well achieve the purpose of some (although, I suggest, not all) noble Lords on the opposite side, it could, in my view, all too easily, in time, provide a sedative to enterprise, and therefore clamp down competitiveness, which I think is the most important point of the whole issue, and therefore be adverse to improving employment.
For that kind of argument I should like to see the Bill definitely limited to a term of 12 months. That may be something of a pipedream; but, failing that, at any rate I should like to see it, as other noble Lords have said, subject to renewal, perhaps by Order in Council, on an annual basis, so that, at least, year by year Parliament can keep the matter under review and see how things are going along. Especially is that important—again referring to a point which my noble friends have made—where you have an agency such as the Commission, with such a very wide degree of discretion.
My Lords, there is one further point I want to make. I do not think it is a Committee point, though it may come up again when we discuss the Bill in Committee. Under Clause 5(3) companies can be prevented from putting up their prices while they are being investigated. This looks to me dangerously like treating a company as guilty until it has been proved to be innocent. In practice, it could be extremely damaging, and certainly, in my view, it needs amending. But, my Lords, that clause does something else which worries me quite a lot. It panders to the rather nasty, if prevelant, point of view that manufacturers as a class are inconsiderate tycoons, seeking only their own profit regardless of the interests of anyone else. Of course there are black sheep in every flock: there are black sheep in the manufacturers' flock, there are black sheep in the trade union flock. But in my view the average manufacturer is a good, responsible citizen. He is anxious to do his best, often under great difficulties 1271 —to do his best for his employees, for his customers, for his shareholders and for his suppliers. He is jealous of his own good name and of the quality of his products. He is proud of his plant and is anxious to invest in it to improve it still more; and he is proud of his company's contribution to the national good.
I am afraid this is not always the picture of manufacturers which is painted by the political cartoonists; yet I feel it to be far more often the case than otherwise. This Bill does not encourage the picture of manufacturers that I myself have tried to paint. Nor does it make one think that that is necessarily the view of manufacturers taken by Her Majesty's Government. I hope I am absolutely wrong when I say that. At any rate, my Lords, I have given the noble Lord, Lord Oram, an opportunity to put the record straight, and I hope he will do so.
§ 5.45 p.m.
My Lords, many interesting and a number of controversial points have been raised in the debate. I shall not be able to deal with them all, of course, but I shall do my best; and, if I may, I will take the speeches almost entirely in the order in which they were made, dealing first with that of the noble Earl, Lord Mansfield. He called me coy in relation to the importance of this Bill. Of course, we all prefer our own adjectives for our own description, but I would have thought I was balanced and realistic in summing up the importance of this Bill. I did not over-exaggerate its importance because, although I believe it to be a most important anti-inflation measure, I stressed in my opening speech that it is to be seen only in conjunction with other measures. In itself, no one is claiming that this will overcome inflation, but it is a most important part of the general strategy for overcoming inflation.
I wonder whether I may use an adjective, without any offence, about the noble Earl. I thought he was sober in his approach to this Bill, certainly by comparison with the more excitable leadership which has characterised the debates in another place; and I welcomed the general tone of his speech, even though, obviously, I did not welcome all its content. He complained that the Bill would lead to uncertainty in 1272 industry. I believe he was fully and adequately answered by the noble Baroness, Lady Seear, who pointed out that within the criteria which are set out in Clause 2, within the safeguards which are to be provided and within the general range of procedures which are laid down, there is ample assurance to industry that there will not be excessive investigations and that investigations will be pursued in a responsible manner which need arouse no fears in the breasts of those in charge of industry. I accept what the noble Earl said about the great importance of confidence in industry, and how confidence does indeed condition investment and employment.
The noble Earl asked—and I think the noble Viscount, Lord Rochdale, and others, perhaps, also made this point—about the level of profits. The noble Viscount said that the case for this Bill cannot rest on excessive profits, and the noble Earl, Lord Mansfield, was making a similar point. I agree, and the Government acknowledge that, in real terms, profitability is now at an all-time low. This reflects the effect of inflation and the low level of output resulting from the recession. But we hope and expect that, with a reasonable recovery in world trade and industrial output, profitability will increase over the next year or so. We have taken various steps to help, such as modifications in the price code, capital allowances, stock relief and so on, to give companies a more favourable situation with regard to profitability. But I stress that real improvement can come only with growth in the economy, and the proposed Price Commission to be set up under this Bill will not be the enemy of that growth; it will be one important help towards that growth.
The noble Earl, as did, certainly, two other speakers, raised the matter of the relationship between price control through the mechanism of the Price Commission on the one hand and wage restraint on the other. This relationship of course exists. I thought that the noble Baroness, Lady Seear, spelt this out admirably. I wish to disagree with not one word of her analysis. Of course, wage restraint can be acceptable to public opinion only if there is seen to be price restraint. The noble Lord, Lord Mottistone, in his speech said that this was suggesting that the British public was stupid. I would suggest that it clearly proves that they are 1273 hard-headed rather than stupid. Of course, it is in all reason that, when people are subjected to influences, requests and demands to keep their wages down, they will look to see what is happening to the prices in the shops and will ask that the Government which demand wage restraint of them should also do something to restrain prices.
Then the noble Earl, Lord Mansfield, raised the question of permanence—and here, again, he was joined by the noble Viscount, Lord Rochdale—because, as they quite rightly pointed out, the Bill proposes that the investigatory powers shall be permanent. What was remarkable about the noble Earl's speech was that I do not think he once mentioned the word "consumer". He does not seem to recognise that, as the noble Baroness, Lady Seear, pointed out, this is largely a consumer Bill and that the consumer interest, and the need to protect the consumer interest, is not the short-term emergency that he was prepared to accept but a long-term interest; and that, therefore, the machinery we have devised for protecting the consumer interest in this way must also be permanent.
My Lords, there has been talk of the relationship and the overlapping between the Price Commission and the Monopolies Commission. This is true; but I hope that no one will suggest that the Monopolies Commission should last for only a year. We see the Price Commission as doing a job comparable with that of the Monopolies Commission and we believe that it should have permanency just as the Monopolies Commission has permanency. There was one final point which the noble Earl made and which I warmly welcomed. He said that he and his colleagues certainly were not going to cause any unnecessary delay to this Bill. I very much appreciate that this should be the attitude with which we go into the remaining stages of the Bill. There will be need for a good deal of discussion and, in this connection, I would welcome also what the noble Lord, Lord Mottistone, said in his opening remarks. It is not that I am a friend of all. He may find that I am sometimes a little unfriendly, but I welcomed his remark about my right honourable friend having shown a spirit of accommodation when faced with reasonable Amendments. I hope that we can do the same in this House. Indeed, a 1274 number of Amendments which were made in another place were made by common agreement between the two sides of the Committee, though there were plenty that divided them. I hope that we can make reasonable Amendments as we go along.
I have already commented not a little on the speech which we heard from the noble Baroness, Lady Seear, and, particularly, on the relationship between pay policy and price policy that she so admirably spelled out. I found myself in agreement with her on practically all that she said, including the question of the approach to a possible merger between the Price Commission and the Monopolies Commission. She quoted from my right honourable friend the Secretary of State. I assure her what he said expresses his longer-term view; but there are real differences of policy related to the two bodies in the short term. It would not be possible to use this Bill to bring about that merger but it would be our hope that, in the future, the overlapping could be eliminated.
There was just one point upon which I am sorry to disagree with the noble Baroness. It was when she felt that there had been some doubt whether the Party for which I speak believes in a mixed economy. It does, I do and she does; and I am glad that that is so.
Perhaps I may now turn to the speech of the noble Baroness, Lady Elliot. She raised my hopes with her opening sentences when she referred to the fact that, as we all recall, she had been chairman of the first Consumer Council, and pointed out that consumers were most anxious about rising prices. But, immediately after having made that encouraging introduction, she went on to talk as a producer. She looked back with nostalgia at the times when it was possible to think of the free market economy as the cure for all economic ills. I am not sure that it ever was. Obviously, she at one time thought that it was; and I agree that very few people—although there are still some—really believe that the free market economy is the means of reconciling conflicting interests between consumers and producers. Some mechanism of regulation is needed in order to produce the right balance; sober consideration of all the facts in relation to particular situations is required. We 1275 believe that the Price Commission will be one of the important pieces of the mechanism to achieve that balance.
My Lords, I have referred already to the noble Lord, Lord Mottistone, at one or two points. I am sure that he will not expect me to follow him in his close analysis of the biscuit trade. Certainly, I am very fond of biscuits, but I have not all the analyses of the problems that he mentioned at my fingertips. However, I noted a number of his points with considerable interest. He made the point that prices in nationalised industries need to be watched as much as prices in the private sector. I agree.
My Lords, certainly not "instead of". I would say "equally with". Our new price policy makes no difference between the treatment of nationalised industries and the private sector. The criteria in Clause 2 of the Bill will apply to the nationalised industries in the same way as they apply to all other enterprises. Nationalised industries can, therefore, be subject to investigation or examination on the same basis as industry generally. It may not entirely satisfy the noble Lord but its satisfies me that there should be equal treatment between the two sectors.
The noble Lord made the point, from his considerable experience in the food trade, that price controls had not been effective there. I recognise that, in the realm of food in recent years, the effective control has been competition. But this Price Commission will have a much wider scope than the particular area to which the noble Lord draws attention, and there are considerable areas where competition is not so full as it is in the area to which the noble Lord made special reference.
Though I have not replied specifically to the noble Viscount, Lord Rochdale, I have taken up a number of his points during the course of my answers to other speeches. I reiterate my thanks to those who have indicated that, though we shall in the following stages of this Bill need to examine many problems again very carefully—less fully perhaps than in 1276 another place—nevertheless, we shall go into those debates in a constructive spirit to make the Bill what it should be.
§ On Question, Bill read 2a, and committed to a Committee of the Whole House.