§ Motion made, and Question proposed, "That the Clause stand part of the Bill."
1496§ 7.47 p.m.
§ Mr. BENSONThis Clause raises some rather considerable points. It proposes to take power to lend money at not less than 2¾ per cent. to local authorities and others who are entitled to borrow from the fund. Sooner or later, if lending continues at rates as low as that for any length of time and for any great amounts of money, the Local Loans Fund will become seriously unbalanced. I do not know how much loans money the fund has in hand, but let us assume that it continues to finance itself out of repayments without any necessary issue of fresh local loan stock. Every repayment that is made is a repayment of money which has hitherto been lent at a higher rate averaging 4½ per cent. over the whole loan. If, for instance, under the higher rates some money is lent at 6¾ per cent. and it is repaid and lent out again at 2¾ per cent., there will be a loss of 4 per cent. in the earning power of that money. That sort of thing cannot go on for ever. I am well aware that there is a reasonable surplus annually at the present moment, but it is possible that there will be heavy borrowings in the future at low rates of interest, and gradually the loans at a higher rate of interest will be paid off and ultimately the fund, which is paying 4½ per cent. on the money that has been borrowed will show a deficit. Has the hon. and learned Gentleman any idea what the Treasury propose in such circumstances.
§ 7.49 p.m.
§ Mr. W. S. MORRISONI would again remind the hon. Gentleman of the effect of this Sub-section. There were in previous Acts governing the activities of this body a provision that a certain minimum rate of interest should be charged. We wish to be armed with power so that should we be able to make certain conversions and reorganisations of this fund we may dispense with that minimum and lend to borrowers at a lower rate. The hon. Member has put a number of questions indicating that if we adopted that course it would impoverish the fund, but I can assure him that the whole matter has been carefully considered and that no action of that sort will be taken. The fund will lend at the lower rate which is here envisaged only if and when it can do so, and there is no question at all of 1497 indulging in any such philanthropy as would impoverish the fund and impair its usefulness in future Parliaments.
§ 7.50 p.m.
§ Mr. PETHICK-LAWRENCEI am afraid that the answer which the hon. and learned Gentleman the Financial Secretary has given shows that he does not fully appreciate the point. The point is this—and I do not think that he can get away from it, because there is, to a certain extent, power in his hands. A certain amount of money is borrowed at the present time at very high rates of interest—my hon. Friend the Member for Chesterfield (Mr. Benson) was putting this point—and gradually these loans are being repaid, a little every year. Because of the amortisation rates which apply to loans of this kind, every repayment of capital means that there is a loss of the interest at higher rates that that capital is earning. Every time that capital comes to be re-lent it has to be re-lent at a low rate. Every time that happens there is a reduction in the amount of money the Treasury is receiving. Something like £10,000,000 of capital was repaid last year, and that 10,000,000 was presumably re-lent this year in the neighbourhood of 3½ per cent. Therefore, as a result of that transaction—the Treasury cannot get away from it—they cannot lend money above the market value, and there is a loss to the fund of something in the neighbourhood of £150,000.
The point my hon. Friend was making, and which, I think, the Financial Secretary has brushed aside, is that if this process goes on and the present rates of interest prevail, the time must come sooner or later when there will be a deficit on the income side of the account. I am not saying that this can be avoided or that this Clause necessarily makes the position better or worse, but it is no good the Financial Secretary brushing the point aside as one that has been fully considered, one that the Treasury advisers know all about, and that we need not concern ourselves at all. It is a very serious point to which he ought to address himself in a serious manner.
§ 7.53 p.m.
§ Mr. W. S. MORRISONI am sorry if the hon. Gentleman thinks that I have brushed it aside. I meant what I said to be taken in conjunction with what I 1498 said when I moved the Second Reading of the Bill. The position is as follows: If the rates of interest fall to such a point that we could charge 2¾ per cent. to those who were borrowing from us we should not be doing that because we alone were affected. That would presuppose a surrounding set of financial circumstances in which we with our plans could get the money cheaper. I not only made it clear that we generally allowed a ¼ per cent. margin, but that we should not lend at 2¾ per cent. unless we could get the money cheaper.
§ Mr. PETHICK-LAWRENCEYou might do something with the money you got back. It is not fresh money.
§ Mr. MORRISONIf the hon. Member considers the position as it stands now, it is true that, if we had had no power to convert outstanding loans at higher interest, the position against which he is warning me would arise. But he must bear in mind that in the Finance Act of this year power was taken by the Treasury to convert these outstanding loans to a lower rate. Assuming that that state of affairs to which he draws my attention had arisen and you had a monetary situation of general application which enabled us to lend the money at a lower rate of interest, presumably we would be able to get our money cheaper. Such conditions might result from such a conversion as he had envisaged. We have taken legislative power to deal with it, and I can only assure him that I am not in any way attempting to brush it aside.
§ 7.55 p.m.
§ Mr. BENSONThe Financial Secretary has entirely failed to answer my point. In order to simplify the matter let us avoid any question of conversion and assume that the Local Loans Commissioners are lending at 3 per cent. No conversion will help the hon. and learned Gentleman there for the simple reason that they have already had 3 per cent. They have issued stock, 420 million-odd pounds, at 3 per cent., but they have only received 300 million pounds for that stock, and if they continue to lend at 3 per cent., sooner or later they will find that they are receiving interest on 300 million pounds cash which they can lend, and are having to pay interest on 400 million pounds of stock which they borrowed. That is the position. At the moment we 1499 are very close to that. We are to get 3¼ per cent. It is obvious that if the Commissioners have borrowed money at an average rate of approximately 4½ per cent. they cannot for ever continue to lend money at 3 per cent. without ultimately landing themselves with an annual deficit. No conversion would help them in that case, because they have already borrowed at 3 per cent. Clause 5 covers two entirely different points. In Subsection 2 there seems to be some reconstruction of the accounts. The annual balances accrued and likely to accrue are to be carried to the capital account of the fund. Can the Financial Secretary give any reason why there should be this reconstruction?
§ 7.57 p.m.
§ Mr. W. S. MORRISONI do not know whether the hon. Member was in the House when I attempted to explain this matter in some detail. The position is that in past years, when the fund was in its youth so to speak, Parliament provided that any surplus arising out of the income of the fund should be carried to a separate account from the surplus income account. Parliament did that with the object that it would hold any surplus it was using in suspense, and money in the account could then be devoted to any purpose that Parliament directed, either to being lent again or being reinvested, or to anything that Parliament thought fit. That practice was perfectly proper in the years before the War, when interest rates were low and when the stock was issued at approximately its par value. In the years that followed the War, when interest rates advanced sharply, stock was issued at a discount and the capital side of the account stood this loss. We have thus in the present condition this most misleading form of account and have, in fact, owing to the discount at which the stock was issued, a large deficiency, and we have at the same time a surplus income account. The income is not really surplus at all. The money that comes into it should really be appropriated to make good such losses as arise from these discounts.
This having gone on for a long time, and this particular form of surplus income account having been set up in circumstances which no longer prevail, 1500 its sole effect is to present a misleading picture, and to give the idea that there is actually a surplus, which is the result only of the artificial account. We believe that the reorganisation of the accounts which is effected in Sub-sections (2), (3) and (4) of this Clause would enable the accounts to be kept in a manner which will give, prima facie, a more correct account of the true balance.
§ Mr. BENSONTheir if I understand correctly the balance which is held in the surplus income account will be put against the deficits amounting to £142,000,000 on page 5.
§ Mr. MORRISONIt would be carried to capital account. It would be applied exactly as the Clause says. Instead of being carried to a separate account it would be credited to the capital account of the fund.
§ Mr. BENSONThat why I asked the question. The accounts as issued show a capital account which has nothing whatever to do with the deficit the hon. Gentleman mentioned. The capital account deals with the amounts repaid by the local authorities and others and the loans issued by the Public Works Loans Commissioners. What the Bill intends to do is to carry not to capital account but to the Local Loans Fund. If that is so, why does it not say so? Why does not the Bill use the correct name for the accounts, or if the Bill is correct why are accounts issued in incorrect names? It is most confusing.
§ Mr. MORRISONThe words used are "capital account of the said fund"—that is the Local Loans Fund. That is where the money will be carried. The hon. Member complains of the obscurity of the account. I can assure him that if the accounts have suffered from that in the past he will see an improvement in the accounts which follow.