§ The Chancellor of the Exchequer (Mr. James Callaghan)
I now come to the external aspects of the corporation tax and to exchange control. Before I describe my proposals in detail I must break off and outline the situation of our external capital accounts. During the last 10 years, while we have an the average earned a surplus of only about £25 million a year on our current account, we have invested net abroad, in all forms, private and official, an average of £170 million a year. Our income £25 million, our outgoings £170 million. This has been so even in years when our balance on current account has been heavily in deficit, as in 1964. No nation can go on doing this year after year with impunity.
Let me illustrate what has happened by taking private and Government overseas investment together. In the 13 years between 1952 and 1964—there is no significance in taking that period—the total flow of our new investment overseas in all forms, private and official, good, bad or indifferent, has amounted in the aggregate to around £4,000 million. Our total stock of long-term assets abroad has risen to something of the order of £11,000 million in value by the end of 1964. Over £1,000 million of this is official assets. The rest, about £10,000 million, is in private assets, of which it is estimated that rather under £4,000 million 262 is in portfolio securities at market values and about £6,000 million is direct investment of all kinds at book values. That, I think, would make very goal hearing on the foreign bourses.
Yet, over the same period from the end of 1951, our reserves have moved hardly at all, and are now much smaller in relation to our imports than they were. At the same time our short-term monetary position, excluding the change in the reserves, has deteriorated by over £750 million. No one looking dispassionately at these figures could fail to agree that, whatever the strength of our assets overseas, our national balance sheet is badly lopsided in its emphasis on long- rather than short-term assets.
It is significant that our tax arrangements, particularly since the Second World War, have been so fashioned as to give a positive bias towards overseas, compared with domestic, investment. Some part of the responsibility for what has occurred must, therefore, rest on the tax system. In many respects we have tilted the balance in favour of overseas investment to an extent that is unique in the world. There might have been a case for such exceptional treatment in the nineteenth century when the capitalist system generated a volume of savings that could not all be profitably employed in Britain—or so it was thought. But, in fact, most of our tax provisions, which are of such remarkable generosity, are of more recent origin, and were introduced at a time when our balance of payments was already under considerable strain and when we were not in a position to give special advantages to overseas investment.
The time has certainly come to do something to correct this. In approaching this problem the Government are very mindful of both the benefits which accrue from overseas investment—particularly the contribution which overseas companies with strong British ties make to our exports—and also the contribution which income from investment can make to the balance of payments in the long run. [HON. MEMBERS: "Hear, hear."] We are in absolute agreement. There is no difference between us. For these reasons overseas investment will always he bound to play an important rôle in the nation's economy.
263 However, nothing in present circumstances is exempt from critical scrutiny—not even overseas investment. I offer two thoughts for consideration. The first is that, whatever the annual yield in terms of profits on such investment may be, the adverse impact in the short run on our balance of payments is often many times as large; and it is in the short run that our problems will be at their greatest and that the contribution which a reduction in the capital account deficit can make will be most valuable. These are, after all, the considerations which have prompted some of the measures recently taken by the United States to deal with its own balance of payments difficulties, measures which already appear to be having a substantial degree of success.
The second point I wish to make—I think it important that the Committee should analyse and examine this—is that the return we receive from our long-term investments overseas is, in fact, a moderate one, and is on average considerably less, from the point of view of the national economy, than the return on home investments. This is because income earned abroad bears tax in the country of origin, so that the benefit to the United Kingdom is measured by what is left after the payment of foreign taxes. In the case of home investment, on the other hand, the benefit to the national economy is measured by the return before tax; the fact that the State takes a slice of the profits does not diminish the advantage to the nation as a whole resulting from the investment. The additional tax receipts benefit the nation in the same way as the additional profits accruing to the proprietors. They are available to meet public expenditure, or to remit other taxation.
From the point of view of the private investor, on the other hand, since his payment of foreign tax is generally fully relieved by a reduction in his United Kingdom taxation, it is a matter of comparative indifference to him whether he pays his taxes to a foreign Government or to the United Kingdom Exchequer. Indeed, our existing tax arrangements in some ways go beyond this.
Without going into too much detail, I should like to illustrate my point with some figures. As I have said, our private 264 direct investments abroad came to about £6,000 million at the end of last year. The return on them, after overseas tax, was around 8 per cent. on the book value of the assets employed, and about half of this figure—some 4 per cent.—brought no immediate benefit to our economy since it was reinvested abroad. On the other hand, the average yield on industrial investment in the United Kingdom in 1964 has been estimated at about 15 per cent. before tax, or, say, just under 9 per cent. after full payment of Profits Tax and Income Tax as abated by investment allowances.
So much for a comparison of the direct return on overseas, as against home, investment. It should also be borne in mind, however, that investment, wherever it is undertaken, brings indirect local advantages in increased productivity and higher incomes generally, over and above the financial return measured at so much per cent. on the capital employed. When we invest at home, the true measure of the benefit to us is greater than the financial return on the investment. Similarly, when we invest abroad, we assist the economic development of the overseas countries to an extent that is greater than the bare profit which we receive in return.
No one, of course, would wish to go back on the principle of giving relief for overseas taxation which has been gradually built up over the last 40 years and has benefited considerably the developing countries. If every country followed the strict logic on this matter and treated overseas tax on overseas investment simply as a sum to be deducted from the profits sent home, and then taxed the remaining profit at full rates, overseas investment would be restricted to only the most highly profitable ventures. But I have to face the fact, as does the Committee, whatever may be our interest or our approach to this problem, that our present tax arrangements go well beyond what is justified in existing circumstances and mean that in a number of cases the United Kingdom investor incurs a lower tax burden by investing abroad than by investing at home. For example—this really puts the whole thing in a nutshell—we treat a British investor in the United States better for our tax purposes than we treat a British investor in our own country and better than a United States investor is treated by his country for tax purposes 265 if he invests either in the United States or in the United Kingdom. [An HON. MEMBER: "Time for a change."] It is time for a change.
To sum up: the tax system we have been operating is too favourable to investment abroad compared with investment at home. Partly, though, of course, by no means entirely, as a result of this, our long-term assets abroad have been built up over the years to a massive amount. But, at the same time, our vital gold and dollar reserves have remained stationary, and the short-term liabilities to which they constitute the backing have risen excessively. This is the problem, and the one which brings us to a halt every few years.
I have decided, therefore, that the time has come to change the direction of our policies. My object is threefold. First, I propose to go some way towards correcting the present bias in our tax system in favour of overseas, as compared with domestic, investment. The rewards in future will be more nearly equal. Secondly, I intend to make certain changes in exchange control which will have the result of increasing our foreign exchange revenues in various ways. Thirdly, I propose to make arrangements under which we can reinforce the official reserves by channelling into them some of the proceeds of the large accumulation of portfolio assets in private hands at the point of sale. These measures will strengthen the balance of payments, will help us in financing the overseas investment which will still go on, and will improve the present unsatisfactory relationship between our short-term assets and our short-term overseas liabilities.