PUBLIC WORKS LOANS BILL. (Hansard, 1 December 1938)

§ The Financial Secretary to the Treasury (Captain Euan Wallace)
I beg to move, "That the Bill be now read a Second time."
The Public Works Loans Bill can fairly be described as a very hardy annual. Although it does not occur precisely at the end of every 12 months, I do not think it is any exaggeration to say that about 50 such Bills have been presented since the system was started in 1887. Last year we asked Parliament for £25,000,000. It is estimated that that 732 sum will be exhausted before the House reassembles after the Christmas Recess, and, in those circumstances, it is the duty of the Government to come to Parliament and ask for another sum with which to carry on this work. The sum mentioned in this Bill is also £25,000,000 and as soon as this Bill passes, the outstanding balance, which to-day amounts to £2,280,000 odd, will be extinguished and we shall start fair with the next £25,000,000. If that sum looks like failing to last for 12 months, the Treasury Ministers will have to come to the House so much earlier. Last year the Public Works Loans Bill contained one innovation because power was taken in it to enable the Public Works Loan Board to lend money to local authorities for the acquisition of land on which no works were to be undertaken. That power having been given last year remains permanent and does not require to be reenacted on this occasion. Therefore, the Clauses of the Bill follow what I may fairly describe as a very familiar form.
Clause 1 authorises the National Debt Commissioners to issue up to £25,000,000 to the Public Works Loan Commissioners. Clause 2 writes off certain debts as detailed in the two Schedules from the assets of the Local Loans Fund. Clause 3 remits the amount of principal and interest due to the Exchequer this year in respect of the Eyemouth Harbour Loan, and Clause 4 remits in its entirety the outstanding principal and interest due from the gentleman named in Part II of the Second Schedule. The other two gentlemen whose names appear in Part I of the Second Schedule remain indebted to the Exchequer. This is a Bill upon which a good deal could be said, but I believe that I shall be serving the House best if I move the Second Reading without further ado, and if hon. Gentlemen have any questions to ask, perhaps the House will give me permission to reply to them.

§ Mr. Benson
As the Financial Secretary has said, this Bill is a hardy annual, and unfortunately, like many hardy annuals, it has some prickles. Year by year we have to write off a certain sum which represents, apart from the perennial £200 for Eyemouth Harbour, an unfortunate legacy from the Agricultural Credits Act. This year we wipe out 733 some £4,066. While we wipe out that figure from among the assets of the Local Loan Commissioners, it has to be made good elsewhere, and will appear ultimately upon our Votes. I hope that the House will note that this £4,000 is not the only loss in which the Agricultural Credits Act has involved us, and which this House has to make good to the Local Loan Commissioners. The annual loss on default that we have to meet is a small fraction of the loss which we have to meet year by year as the result of the legacy of the Agricultural Credits Act.
I want to raise one or two questions in regard to these losses. They arise owing to the premature repayment of loans under the Agricultural Credits Act, and during the last five years they have amounted to the considerable sum of £297,000, which is vastly greater than the losses owing to default. If I explain how this loss owing to premature repayment arises, the House will, perhaps, understand better the criticism of Treasury policy that I have to make. The Local Loan Commissioners have to borrow on the open market money which they lend either to the local authorities or to other borrowers to whom they have the power to lend. The money under the Agricultural Credits Act was borrowed when interest was high and the Commissioners themselves have to pay high rates, but they borrowed on terms which, whatever they may be theoretically, were in practice in perpetuity. They lent this money to borrowers under the Agricultural Credits Act at 5 per cent., but they also lent it on terms of repayment which, for the most part, was for periods of between 50 and 60 years. There were shorter terms of repayment, but in the bulk of the cases the period was 50 or 60 years.
Since that money was lent there has been a big drop in the rates of interest, and it will very handsomely pay the farmers who borrowed under the Agricultural Credits Act to repay the money they borrowed at 5 per cent. and replace their mortgages at 4 per cent., as they now can in the open market. They save 1 per cent. per annum in interest. A number of them are repaying, and what they make in this way is, of course, the Commission's loss, because the Commissioners borrowed this money at 5 per cent. on the understanding and on the agreement that they were lending it to the farmer 734 sat 5 per cent. for 50 years, and if it is repaid in 10 or 12 years, at a time when the market enables them to get only 3¾ per cent., obviously they face a considerable loss of interest. This question of premature repayment does not concern only the farmers who borrowed under the Agricultural Credits Act; it concerns every local authority which borrowed when rates were high, and every public utility company; and in order to meet this problem of premature repayments the Treasury were compelled to write a Minute to the effect that in any case of premature repayment which involved loss of interest to the Commissioners the borrower should pay a premium which was actuarially equivalent to the loss of interest.
That is a perfectly reasonable arrangement. It would be utterly unfair if a borrower, taking advantage of the Public Works Loan Board's facilities, were to borrow when money was high for a stated period, and then, when rates of interest dropped, throw the money back on to the Commissioners, who can then only let it out at a lower rate. I think the Treasury Minute on that point is perfectly justifiable. But for some curious reason the Treasury wrote another Minute under which they excluded the farmers from this arrangement, allowing farmers who borrowed under the Agricultural Credits Act to repay their loans without any premium. That involved a loss to the Local Loan Board, a loss which has to be made good, and is made good by our Votes, and appears in our Estimates. In the last five years we have had to pay some £297,000 of losses occasioned to the Commissioners by reason of premature repayments by farmers.
On the Public Accounts Committee some years ago I asked why this second Treasury Minute was issued, and I was told that the Treasury regarded farmers as bad borrowers, as being a bad security, and that in order to tempt farmers to repay their money at the earliest possible moment they gave them this advantage, with the idea that they would ultimately reduce the losses that invariably occur when the Government deal with farmers. I have every sympathy with that aim, but I think that on this occasion the Treasury, a Department for which I have the greatest respect, took an extraordinarily inefficient means of achieving their ends. It will 735 not achieve the results they hoped, it will not save them any loss by default, but it will involve them in a very considerable loss owing to the fact that our Votes have to bear the premiums which the farmers themselves ought to have paid.
The reason is obvious. To begin with, the farmer who takes advantage of the Treasury Minute for premature repayment is obviously one who can re-mortgage his land for the amount he owes to the Local Loan Commissioners; in other words a farmer who has adequate security for his loan. He either re-mortgages his land to a private mortgagee, which is evidence that the farm is adequate security for the loan, or, if the farmer himself has other resources, those are collateral security for the Commissioners. The farmer who can afford to repay now will not default, because there is adequate security for his loan. The farmer whose farm has dropped in value to such an extent that he cannot meet the loan is one who will occasion loss to the Commissioners, and who cannot take advantage of the Treasury Minute for premature repayment. If his security is bad he cannot raise the money. He is the man who is likely to default and to whom, apparently, the Treasury offer this inducement in order to get him to repay. What happens is that this inducement of the waiver of premium can attract only the well-secured money which will not involve default.
Another point which I want the Treasury to note is that practically all these loans were on an annuity basis and on annual repayment. Year by year the money on loan becomes better secured. Somethig like £500,000, apart from actual total repayment, has ben paid in reduction, and year by year the security of the Treasury or of the Local Loan Commissioners grows. Under this system of waiver of premium we shall certainly get no reduction in the loss by default and we shall get a steady increase in loss to the Treasury. The loss of premium which the Government have had to bear is very much greater than the actual amount of loss involved by default, which during the same period has amounted only to £35,000; whereas the premium repayments have amounted to £300,000. The loss in which the Treasury has involved itself by this waiver is nine times as much as the loss by default 736 over the past five years. That seems an extraordinarily doubtful policy.
Another interesting comparison is that if we compare the amount of our loss with the default on the loans involved, we find that the loss on the well-secured loans was 31.3 per cent., whereas on badly-secured loans it was only 23 per cent. Not only is the total amount of the loss of premiums greater but the number of losses is very much greater. I suggest to the Financial Secretary that this policy requires revision. A policy to minimise loss by a method which costs a great deal more than the loss actually sustained is a bad policy. We cannot attract the bad money because it cannot be repaid. We attract only the good money, and where a farmer's loan is well secured I see no reason why the Government should subsidise his repayment.

§ Captain Wallace.
The hon. Member's speech was so clear and his point was put so succinctly that I really need not go into any details of the loans made under the Agricultural Credits Act. I am glad that he accepts the general principle of the necessity for a premium in the case of premature repayment of these loans, and therefore we need not go into that. What he takes exception to is one particular exception which has been made to this principle of exacting a premium for premature repayment. He is quite right in saying that as the result of this waiver we are obliged every year to make up the Local Loans Fund—we too must not let it become insolvent—the amount of the premature repayment premium which would have been paid by these people if this waiver did not exist. The House may be interested to know that this year the Votes of the Ministry of Agriculture and Fisheries carry £40,000 for this purpose and the Department of Agriculture for Scotland £2,000. So far, I think, we are in agreement.
Where I must now part company with the hon. Member is as to the reason for this procedure. These premiums have been waived to honour a pledge given in the House on 16th June, 1923, on the Report Stage of the Agricultural Credits Bill. It was given by the then Minister of Agriculture, Sir R. Sanders, to the right hon. Baronet the Member for North Cornwall (Sir F. Acland). I looked it up and it was a perfectly definite pledge 737 that the recipients of these loans under the Act should have the option to repay when they wanted to without premium. I think the hon. Member will see, therefore, that in these circumstances it would not be possible for the authorities, without the most flagrant breach of this undertaking, to try to exact a premium. As these premiums cannot be got out of the farmers who are lucky enough to be able to repay their loans, they are put on the relevant Votes every year for two reasons; first of all, as the hon. Member will admit, so that the Local Loans Fund should not suffer, and secondly on general principles of good accounting, because, if we were simply to waive these premiums and say no more about them, the House would really be misled every year as to the actual cost to the taxpayer of the Agricultural Credits scheme of 1923.
There is one other point. I think the hon. Member referred to the method of calculating the premiums due. In 1922 there was a Treasury Minute which laid down the method of calculating premature repayment premiums, and in 1933 another Treasury Minute merely substituted a new method of calculation in any case where a premium of this kind was payable. It is only natural that what I may call the unpaid premiums under this Act, which are now borne on the Votes of these two Departments, should be calculated upon the latest, that is upon the 1933, method.
I hope that I have met the point put by the hon. Gentleman, and that he will see that, in view of the pledge which was given in this House, we have had to waive these premiums as we are doing.

§ Mr. Pethick-Lawrence
I only wish to add that it seems to have been a very extraordinary act to have given that pledge. I was not in the House at the time, and have not looked up the point, but I wonder whether the House really understood what the Minister was doing, and whether he took any pains to make it clear that he was thrusting on future generations this very considerable annual burden. I very much doubt whether the House, in allowing that statement to be made in a light-hearted manner in the 738 course of debate, was at all conscious of the very serious burden it was throwing on the future.

§ Captain Wallace
As I read that pledge—and I looked it up this evening—it was not made in a light-hearted way during a general speech, but was made in reply to a question, and the question was repeated. I think, therefore, that the right hon. Gentleman will see that it was a pledge which must be honoured.

§ Mr. Pethick-Lawrence
I do not wish that it should not be honoured, but was only asking whether the House was made aware of the effect of this very grave financial burden.