§ Order for Second Reading read.
§ 3.55 p.m.
§ The Financial Secretary to the Treasury (Mr. Niall MacDermot)
I beg to move, That the Bill be now read a Second time.
When the right hon. Gentleman the Member for Altrincham and Sale (Mr. Barber) moved the Second Reading of the 1963 Finance Bill, a modest document of some 103 pages, he succeeded in the short space of 55 minutes in explaining to the House with great lucidity and care the contents of that Bill. When my right hon. Friend the present Chancellor of the Duchy rose to congratulate him he suggested that the right hon. Gentleman's speech might have been published beforehand as a White Paper. My right hon. Friend the Chancellor has this year presented not one but two White Papers, composed, as I am sure the House will agree, in lucid prose, which explain the contents of the major part of this Bill far better than I could ever hope to do. I am tempted to sit down at once and thus earn the gratitude of hon. Members on both sides by introducing one of the longest Finance Bills with one of the shortest speeches. But I fear that the gesture might be misinterpreted.
However, the House will be relieved to hear that I do not intend to attempt a traditional Second Reading exposition of the contents of this Bill. The two great tax reforms which make up the greater part of it have already been fully outlined, not only in the White Papers but in the statement which my right hon. Friend made to the House last December, and, above all, in his masterly Budget speech. I will not seek to go over that ground again.
Equally, I think the House would find it tedious if I were to start commenting on the very many Committee points which are likely to arise at a later stage. Perhaps the most helpful course I can adopt is to comment upon some of the points of more general interest which have been the source of misunderstanding or of misguided criticism 45 since my right hon. Friend published his proposals.
The first point I may mention is in connection with vehicle excise duties. Some people have complained that it is inequitable that anyone whose licence expired on 31st March but who took advantage of the so-called 14-day grace period and did not renew it until after 6th April had to pay duty at the higher rate whereas someone who had renewed his before 6th April was able to do so at the old rate. In both cases the licence itself will run from 1st April, as the Vehicles (Excise) Act, 1962, does not provide for part-monthly licences.
I cannot accept that this is inequitable. Increases in the rates of tax on expenditure are normally brought into effect immediately to prevent forestalling, and this increase in the vehicle excise duties followed the general pattern in applying to all licences taken out after Budget Day. To have put off the date of operation of the increase would have enabled holders of current licences to surrender them and take out new licences valid for 12 months at the pre-Budget rate. It would have been impracticable, and also, I think, unfair, to have withdrawn all those licences running from 1st April that were issued before 7th April and compelled the holders to take out new licences at the higher rate. That would indeed have been retrospective taxation.
Perhaps the only matter on which I need comment in Part II of the Bill is Clause 14, which contains the disallowance of business entertainment with the exception of entertainment of customers, or prospective customers, from overseas. As my right hon. Friend indicated in his Budget speech, so far as possible the disallowance will be made in computing the business profits. Thus, where a company pays the bill for entertaining or makes specific reimbursement to its directors or employees for business entertaining done by them the payments will be disallowed in arriving at the tax liability of the company. The same rule would apply where a director or employee receives an allowance which is specifically earmarked for business entertaining. That is contained in subsection (3). In these cases the burden of this allowance will fall on the employer, and the closing words of subsection (3) indicates that the 46 tax position of the director or employee in these cases remains unaffected. It is impracticable to make the tax disallowance in this way when the director or employee receives a general expenses allowance out of which he has to meet other expenses besides entertainment and also where the entertaining is done by a director or employee out of an inclusive salary. In those cases the disallowance will have to be made in Schedule E in a tax assessment of the director or employee.
Entertaining is defined in subsection (5) as including any kind of hospitality, and gifts. I suspect that many firms feel that the practice of sending Christmas presents to customers or suppliers has been rather overdone and will be glad that it is to be discouraged. There is an exception in subsection (8) for gifts of his own products which the trader makes "with the object of advertising to the public generally". We have two things in mind here. The first is free samples which any member of the public can have and, secondly, such things as free tickets which are sent to the Press for the first night of a play.
The right hon. Member for Bexley (Mr. Heath), speaking in the Budget debate, asked why if we had found abuses we had not got the Inland Revenue to stop them. The answer is that it would be quite wrong to ask the Revenue to engage in long or detailed inquisitions into the scale of necessity of this type of business expenditure. Nothing would be more calculated to cause bad blood between inspectors and the business world.
In any event, it is not always easy, when a taxpayer claims that his expenditure was necessarily incurred on business account, for the Revenue to demonstrate that it was not, and I have no doubt that there have been widespread abuses, in the sense that relief has been claimed and allowed for private expenses which do not qualify under the law. It is not merely this kind of abuse, which is simply cheating, that is in question. It is also the exploitation of the law, under which some businessmen have been giving themselves the benefit of every doubt and spending more money than is justified because the Revenue meets most of the bill. It is this kind of thing which has 47 led to the lush living at the taxpayer's expense which everyone must deplore.
Clause 14 makes a clean cut and disallows entertaining expenditure generally, except for the overseas buyer. I do not think this will do any real harm to the many businesses that have been scrupulous in this matter, for the disallowance will have no great effect on them. Those who want lavish entertainment can do it at their own expense.
I come now, Mr. Speaker, to the Capital Gains Tax. I do not think I need deal at great length with this. The general purpose of this tax is well understood, and I think widely accepted. It is to tax substantial sources of revenue which have hitherto escaped the tax net and so remove an obvious social injustice and one which has been a major obstacle to achieving an incomes policy. It will also discourage or render less profitable many avoidance devices aimed at dressing up as capital what is essentially income.
There are a few matters in connection with this tax which I should like to refer to. Firstly, may I remind the House of the assets that will not be subject to charge. The tax will not apply to a person's only or main residence; to chattels disposed of for £1,000 or less; to Savings Certificates, National Development Bonds or Defence Bonds, or to the proceeds on maturity or surrender of normal life assurance policies. It will not apply to gambling winnings. [HON. MEMBERS: "Why not?"] Hon. Members ask why not. It is for the simple reason that it is not an apt subject for a capital gains tax. Such winnings are not an asset as defined in the Clause prescribing what is covered by the tax. Hon. Members who have studied tax matters know that taxation of gambling is an exceedingly complex subject with which previous Chancellors have unsuccessfully wrestled. If we had found it possible to solve that problem by the simple expedient of making the Capital Gains Tax apply to gambling no doubt my right hon. Friend would have been very tempted to do so. It is not a tax apt for that purpose. He has, however, made clear that he is continuing to study this subject and hon. Members may think we have brought forward sufficient proposals for tax reform for 48 one Budget this year. If my right hon. Friend is minded to bring forward a general tax to cover gambling next year it would be interesting to know in view of these comments whether he will have the support of hon. and right hon. Gentlemen opposite.
In addition to exempted assets, there are also exempted bodies. Charities, approved superannuation funds, trade unions (in so far as gains are applied to approved provident benefits), friendly societies, and local authorities will be among the exempted bodies.
There is no retrospection. It will apply only to gains since Budget Day, and where an asset was acquired before Budget Day at a value greater than its Budget Day value, it is only the actual gain since acquisition which will be taxed. The same principle applies the other way to the calculation of capital losses, which can be set off again capital gains.
§ Mr. Frederic Harris (Croydon, North-West)
Would the Minister say that actually applied to gifts of money from one person to another?
§ Mr. MacDermot
I do not see how a gift of money can be the subject of a capital gain, but if the hon. Gentleman has a more detailed point in mind perhaps he will write and I will be glad to help.
Some people have suggested that the rate of the tax, at 30 per cent., is on the high side. In our view it is a moderate rate; it is less than three-quarters of the standard rate of Income Tax, and for an individual who is a Surtax payer it can fairly be called light. For the less well-to-do there is the alternative of paying Income Tax—and Surtax also, where applicable—at ordinary rates on two-thirds of the gain. This means that a person whose ordinary income is not big enough to make him liable to tax at the standard rate will be able to set the balance of his personal allowances and reliefs against the two-thirds of his capital gains. For example, take a married man with two children over 16, undergoing full-time education, whose income is nearly all earned; if his earnings are £5,000 and his income from investments is £200 the alternative basis will still be to his advantage if his capital gains do not exceed £600. This shows 49 that the tax is by no means an oppressive burden on people of moderate means.
On the taxation of gilt-edged securities, it is argued that the Government are in some way in breach of contract, or are under some moral obligation to provide exemption for these cases. I cannot accept this. People who enter into any kind of financial transaction have always had to take their chance in regard to future changes in the tax law. In 1962 when the right hon. and learned Gentleman the Member for Wirral (Mr. Selwyn Lloyd) imposed Estate Duty on land situated abroad, he rightly refused to make any exception for land which had previously been bought in the expectation that it would be exempt from Estate Duty. On that occasion the then Attorney General, Lord Dilhorne, regarded it as a "startling proposition" that a person who entered into a transaction should claim a right to have the Estate Duty law frozen for his benefit as it stood at the time of the transaction. This was in the OFFICIAL REPORT, 3rd May, 1962; Vol. 658, c. 1348.
The introduction of the Capital Gains Tax affects other securities issued at a discount just as much as Government securities, and the fact that the Government are the borrower does not provide a valid argument for a special concession. It would rightly be considered unfair if Government securities issued at a discount were to be exempted from a new tax to which other comparable securities were made subject.
Some doubts have been expressed about the definition of the "market value" of quoted shares and securities in Clause 40(3) of the Bill. As the White Paper says, the intention is to follow the well established estate duty practice, which is briefly, that the market value is either the middle market price on the relevant day as derived from recorded bargains, or "a quarter up" from the lower price in the stock exchange quotation. The market value is whichever is the less of these two, and this is what we have intended to state in the Bill. It has been questioned whether the drafting achieves this result. We will have another look at it, and if necessary propose suitable amendments to make the meaning clearer.
50 I should perhaps draw attention to the relief proposed in the Bill for unit holders in unit trusts and shareholders in investment trusts, in respect of that part of the gain arising on a sale of shares or units which represents gains already taxed in the hands of the trust. The arrangements for apportioning the gains realised by the trust among the unit, or shareholders, are set out in Clause 63; the provision for the allowance to the investor is in Clause 34. Briefly, what is proposed is that each investor shall be notified by the trust of the amount of his proportionate share of the net capital gains realised by the trust in the relevant period—that is, the net amount after payment of tax by the trust. This amount will then be allowed to the investor as a deduction from the sale price of his shares or units when he comes to sell them.
We realise that the trusts would much prefer the simple solution of having their own gains exempted from tax altogether, but we do not think it would be right to go as far as that. I appreciate that the charge on capital gains raises difficulties for the unit trusts in regard to the valuation of units. Nevertheless, to exempt the trusts would place their investors in an unduly favourable position compared with other taxpayers. The taxpayer who makes his investments direct will have to pay tax when he changes his investments and realises a gain, and it would not be right to give investors in the trusts the privilege of deferring payment of tax on the gains realised for their benefit on such occasions until they sell their shares or units, or indeed until their death.
I come now to the Corporation Tax. To listen to some of the speeches of hon. Gentlemen opposite, and to read some of the criticisms in the Press, one would think that we were laying sacrilegious hands on a perfect tax system which had aroused universal admiration and respect. Memories are short, and to anyone who holds this view I would commend a study of the Press, technical journals, and the debates in this House in the past few years—not to mention the election manifestos of all the parties. There was universal agreement that our tax system was out of date and in urgent need of reform. Scarcely a voice was raised in defence of the existing 51 arrangements. The only doubt was whether any Government would ever find the time or the courage to tackle the problem.
Let me remind hon. Gentlemen that our existing income tax system was born in an era when joint stock companies as we know them hardly existed, and has never been radically overhauled. For some years there has been a growing feeling that it must be brought up to date. The right hon. and learned Member for Wirral flirted with the idea of a Corporation Tax two or three years ago, but somehow he never quite reached the point of an actual engagement.
§ Mr. Selwyn Lloyd (Wirral)
It was a Corporation Tax which bore no resemblance at all to this rather ancient hag which the hon. and learned Gentleman is bringing in now.
§ Mr. MacDermot
I am sorry that the right hon. and learned Gentleman flirted with a hag. I am sure he will find that the maiden we are presenting for his attention is far more attractive.
Other Members of the party opposite have lent their support to the idea that the time had come when company taxation ought to be divorced from personal taxation. A pamphlet called "Taxes for Today" published in 1958 by the Conservative Political Centre on behalf of the Bow Group came down strongly in favour of a Corporation Tax. One of its authors was the hon. Member for Wanstead and Woodford (Mr. Patrick Jenkin). That challenging body "The Young Conservatives" in January, 1963, issued a pamphlet saying:A simpler direct tax system for companies is required urgently. We would support the creation of a Corporation Tax to replace the present income and profits tax.One of a series of articles on Tory policy in the Daily Telegraph on 27th July, 1964, advocated the replacement of Income Tax and Profits Tax on companies by a Corporation Tax. This, it said,would at last enable personal taxation and company taxation to be handled separately.There are, of course, as the right hon. and learned Gentleman indicated a moment ago, many possible varieties of Corporation Tax, and there is room for 52 differences of opinion on particular features, but I hope that we shall be able to count on hon. and right hon. Gentlemen opposite supporting at any rate the general idea of the Corporation Tax.
The arguments in favour of a Corporation Tax were briefly deployed by my right hon. Friend the Chancellor of the Exchequer in his Budget. First, it is a contribution towards the simplification of the tax system. [Laughter.] Hon. Members may laugh at the idea that this Bill represents a simplification. I did not say that the Bill was simple. I said that it would result in a simplification of company taxation. To cut a path through a jungle is not a simple matter, but once someone has succeeded in doing it, it greatly simplifies the task of anyone who has to try to get from one side of the jungle to the other.
The first and elementary simplification is that whereas at present there are two separate taxes in company profits, calculated on similar but by no means identical rules and on different and unrelated base periods, in future there will be only one. Secondly, the separation of company and personal taxation will remove some of the major anomalies in our tax system, in particular the absurdity that the Revenue may be compelled to pay large sums of so-called tax which has never been received.
One of the great advantages of the Corporation Tax is that it gives a strong incentive to all companies to plough back more of their profits for expansion. A great deal of ink has been spilt in arguing whether the Corporation Tax will in fact encourage retentions, or whether the low distributors will retain no more, and the high distributors retain even less, because they will feel obliged to keep up their dividends. The answer to all these speculations lies in past experience. When the differentiated Profits Tax was abolished in 1958, and tax incentive for retentions was removed, there was an immediate upsurge in distributions, and this has continued to the present day. There is every reason to believe that the Corporation Tax will result in an increase in retentions, and it is from retentions that the great weight of money comes for industrial and commercial expansion. Even the Issuing Houses Committee, in evidence before the Radcliffe Committee, volunteered the view that the amount of new 53 money raised through the market is marginal in relation to the total investment. It is retentions that are responsible for far the greater part of capital investment in the private sector.
"Ah", say the critics, "but there is no need to believe that these retentions will necessarily be used productively". To answer this, one need only refer to the many progressive companies who have financed virtually the whole of their expansion over a long number of years out of retentions. I do not know whether the right hon. Member for Bexley would include the oil companies in his strictures about the survival of the fattest? By and large, commercial and industrial businesses do not salt away retained profits in passive investments. They find a more fruitful use for the money.
§ Sir Tatton Brinton (Kidderminster)
If one accepts the hon. and learned Gentleman's argument, may I ask why he makes such a complete differentiation in the case of what are described as closed companies? The rate of pay-out is set here as standard, at 60 per cent. of what remains after Corporation Tax. Would not the hon. and learned Gentleman agree that in the case of private close companies, which are manufacturing companies with large physical assets, this is an excessively high pay-out and must result in lower retention? Is this a good thing?
§ Mr. MacDermot
They are already manufacturing retentions for rather a different purpose. I am coming to that point in a moment. The companies to which we have been referring, apart from the close companies, by and large, do not salt away retained profits in passive investments, but use the money for more fruitful purposes. In any event, we have taken steps by our taxation of inter-company dividends to see that there will be little inducement for passive investment. In respect of closely controlled companies, to which the hon. Member referred, there may be a greater danger of retentions which are purely passive in nature. It is for that reason that we are taking adequate powers in the Bill to ensure that such investments are treated as distributions on which the company will be liable at personal tax rates.
§ Mr. MacDermot
The reason for the separate treatment of closely controlled companies is well known. They are used as a method of avoidance of Surtax. This is the reason why they have been subject to special legislation already, in relation to the existing taxation of companies. We are continuing to apply the same precaution for preventing tax avoidance in relation to this system.
Then it has been said that we are moving over to the Corporation Tax at the very time when Western Europe is moving against it, and when influential forces in the United States would like to move against it if they could. What has happened in the past in Western Germany and in Belgium, and what may be about to happen in France, should not be exaggerated. All these countries started from the fundamental position that company taxation is divorced from personal taxation. In so far as they modify their systems, it is within the framework of a tax system such as we are now adopting. And where modifications are made in overseas systems, the reasons are often peculiar to their particular economic or fiscal needs and have no necessary relevance here. In respect of the United States the facts speak for themselves. Such tax credit as a shareholder got in respect of tax paid by the company has recently been abolished in favour of a straightforward Corporation Tax system.
There has also been some criticism of the Chancellor's proposals because he has not adjusted what is called the value of the investment allowance. It is said that, when the combined Income and Profits Tax rates stand at 56¼ per cent., a company investing in new plant obtains relief from tax of just over 16 per cent. of its cost, but that when the Corporation Tax is introduced at a rate less than 56¼ per cent. the percentage of relief in terms of cost will fall. This is no new phenomenon. If the rate of tax falls, so also will the value, in this sense, of tax reliefs.
This is the way in which tax reliefs work. It is a new view of tax reliefs which seeks to obtain the same cash advantage for them whatever the rate of tax. I do not recall, for example, that my right hon. Friend the Chancellor was congratulated and thanked by industry when he was obliged to increase the standard rate last November, because he 55 had thereby increased the value of investment allowances. The truth is that industries who make this complaint are regarding investment allowances not as a tax relief but as a subsidy.
The substantial fall in the tax on company retentions, which will follow the introduction of the Corporation Tax, will leave more money in the hands of companies for capital investment. Moreover, it will reach them much quicker than under the scheme of investment allowances, where there is a substantial period between the investment and the reduction in tax in respect of the allowance.
Any increase in the value of investment allowances would require a higher rate of Corporation Tax to pay for it. This has not prevented at least one company chairman from demanding both a lower rate of Corporation Tax and higher rates of investment allowances. Perhaps, like myself, he was an Irishman.
As my right hon. Friend the Chancellor said in his Budget Statement, we must examine the effectiveness of the investment allowances. All the evidence arising out of a number of independent inquiries is that the great majority of businessmen, whether the business be large, medium or small, do not have regard to the tax position and, therefore, to the investment allowances, in deciding on capital projects. One can produce companies that do have regard to the tax position, and it may be that in the future industry will change its practice and have greater regard to the effects of tax incencentives. But as things stand, we must base ourselves on the practice of the great majority of industrialists when we are deciding on the future of a costly concession like the investment allowances.
In our view, the right hon. Member for Barnet (Mr. Maudling) increased these allowances without any real effort to discover whether they were acting as an incentive or whether they were merely reducing the tax bill of those who received them. Investment allowances cost £80 million ten years ago; now they cost £320 million, and the cost is still rising. The Corporation Tax will serve a useful purpose, if only because it will put a brake on the growth of this relief while a review is undertaken to see whether this is the most profitable way in which to secure 56 the increased efficiency of British industry, which is our common aim. I suggest that the House should await the outcome of that review.
§ Mr. Stratton Mills (Belfast, North)
Has the hon. and learned Gentleman considered the difficulty there may be in respect of the forward planning of business men when the whole basis of investment allowances in the future has been put in doubt by the Chancellor's speech?
§ Mr. MacDermot
The hon. Member is grossly overstating the matter to say that the whole basis has been put in doubt. There has been a reduction in its effect by these Measures. There have been complaints about that, and a suggestion that more assistance should be given. But what has been indicated is that in view of these representations we shall review the whole system of investment allowances—and that is being done—in order to see that the relief really operates where it is most needed and will most help the national economic effort.
§ Mr. Stratton Mills
That may be widely interpreted as meaning that the Government are thinking of doing away with the system of investment allowances and moving to other methods of incentive. Will he clear up the point and say this is not so?
§ Mr. MacDermot
I cannot anticipate our conclusions, arising from the review. However, it is not the intention in total to withdraw assistance from industry. What we want to do is to see that the assistance which is given is purposefully directed.
Most of the criticism of our Corporation Tax proposals has been about their effect on overseas investment. In the first place, let me emphasise what my right hon. Friend the Chancellor said in the Budget debates. The Government are fully alive to the importance of overseas investment in relation both to the encouragement of exports and to the help we all want to give to developing countries. But the fact remains that consistently, over a period of years, capital investment overseas has been proceeding at a rate which we cannot afford, and has thus served to aggravate our balance of payments position.
57 The Corporation Tax will act as a brake, but will not prevent desirable overseas investment. We should be shirking our responsibilities if we were to bury our heads in the sand and try to regard this as a purely temporary phenomenon, calling for some temporary palliative. It is not. There is here a chronic imbalance, which must be corrected. We believe that the Corporation Tax will provide the brake that is needed. Of course, medicine of this kind is unpalatable, and those who have to take it will naturally complain. But to depict the tax as putting an end to overseas investment is as irresponsible as it is ignorant.
Some people have complained at our reference to the bias in the tax system which favours our overseas investment. Let me explain again what we mean. The existing system treats the tax paid by a company as covering the shareholder's Income Tax liability on his dividends. One of the consequences is that the credit which is given, whether unilaterally or under a double taxation agreement, for overseas tax paid on the company's profits, may not only wipe out the company's own liability but may also free the shareholder from any Income Tax on his dividends. This treatment of the income arising from overseas investment is far more generous than any other important country in the world provides and is certainly more than we can afford in the present position of our balance of payments.
Moreover, we insist on confusing the company and the shareholder not only in relation to our own Income Tax but in relation to other country's taxes as well. Take the U.S.A., for example. The U.S.A. keeps its Corporation Tax separate from its personal tax: it does not allow one to be set off against the other, and a United States individual is chargeable to United States tax on his dividends from a United States company without any set-off or credit for the tax which the company may have paid on its profits. But under our existing tax laws we pay no attention to the way the United States regards its tax system; we refuse to recognise the distinction between the two kinds of tax. A United Kingdom individual who invests in the same United States company gets credit against his United Kingdom tax on the dividend not only for the United States withholding 58 tax, but also for the United States Corporation Tax. This is pushing our doctrine to absurd lengths.
Just how the new proposals will affect overseas investment is a very complex matter. It is not enough just to take the rates of Corporation Tax in an overseas country and consider the extent to which they exceed—if they do—the Corporation Tax in this country. Much depends on the allowances that are given. There are countries with high rates of Corporation Tax where, nevertheless, the tax burden on a British enterprise is below the tax that will be due from the same enterprise in this country.
Where the overseas tax is about the same or is less than the United Kingdom tax, a British company is in much the same position as a company here. Overall its tax burden—taking United Kingdom and overseas taxes together—will be the same under Corporation Tax as the tax burden of a company trading at home which distributes the same proportion of its profits. Nevertheless, to meet any hardship which may be caused by the immediate impact of the charge, Clause 79 provides for payment to companies which paid overseas tax in a base year at a rate higher than Corporation Tax. For the first two years payments will equal the amount by which their overseas tax in the base year exceeded Corporation Tax to the extent that this attributable to excess is attributable to the profits paid out as dividends.
There has been much discussion of the effect of the Corporation Tax on the oil companies. Spokesmen of the major oil companies have been critical. This is not surprising, since the changes we are making will certainly mean that tax will be paid where it has not been paid before. But the effect of the changes must be kept in proper perspective, in relation to the scale of these companies' operations. As I will explain, the changes should not hinder them from continuing to play their full part in the world oil trade. We are, of course, aware of the immensely important contribution which the British oil companies make to our economy and our balance of payments, and their importance is recognised in the special treatment accorded to their overseas investment programme. But it does not follow that these companies should be 59 exempt from the tax modifications we propose for companies operating overseas. It is, of course, difficult to discuss in public the affairs of particular companies, but both B.P. and Shell have raised publicly their own position and I think I am justified in commenting on it. I should emphasise that the figures and facts I propose to quote are all taken from public sources generally available.
The first striking fact about these two companies is that neither of them has paid any appreciable United Kingdom tax on their profits for several years. This is apparent from their dividend warrants which show the "net United Kingdom rate", that is, the rate of United Kingdom Income Tax actually borne after allowance of credit for overseas tax. For four of the last five years Shell's net United Kingdom rate has been one penny. In the fifth year it was nil. B.P.'s rate for all five years has been nil.
We all know that these companies carry on the bulk of their business overseas, and since they can credit the tax they pay in countries overseas against the United Kingdom tax charged on those overseas profits, we can understand how it is that they have been paying no tax on the profits earned overseas, but, as everybody knows, they have substantial installations in this country. In 1964 over one-fifth of the oil refined throughout the world by B.P. and nearly one-tenth of the oil refined throughout the world by Shell was refined in this country. In addition they control very large distribution organisations. Their road tankers and petrol stations are a familiar sight. On any realistic view, the United Kingdom activities of each must be making a very important contribution to their total profits.
No question of double taxation relief could arise on these United Kingdom profits, and yet no United Kingdom tax is paid on them. Indeed B.P. has done even better than this. Its published accounts show that in some years it has actually received repayment of large sums of tax paid in the past.
The Chairman of B.P. criticised the Government's proposals by saying that B.P. was in the position of a patient who has had a severe coronary and has been told by his doctor that he might live for another four or five years, provided he 60 keeps to a very restricted diet. I am afraid that my clinical diagnosis would be different. Here is a very healthy subject, exuding profits and dividends, who has not been acting as a donor like other citizens but who has taken a blood transfusion from his hard-pressed fellow citizens amounting, according to the company's own accounts, to over £44 million between 1958 and 1962. I do not think that we need concern ourselves with the technical means by which this has occurred—inter-company payments, loss claims, investment allowances and so forth. Foreign tax does not enter into the matter.
I ask the House whether it is fair or sensible that this large company should not only pay no Income Tax or Profits Tax, and its shareholders pay no Income Tax on their dividends but should actually be drawing out of the Exchequer tax paid on past profits. This company, like the whole of the oil industry, makes great claims on the Government for the defence of its undertaking. It makes use of all our public services for its large undertakings in this country. There is something, I suggest, radically wrong with a tax system that allows it to escape all tax charge. This case of B.P. illustrates some of the main arguments for a Corporation Tax.
Another argument raised by the oil companies is they will be penalised by comparison with their competitors in other countries. I cannot accept this argument. Their complaint is that they will, for the first time, be required to account to the Revenue for the Income Tax deducted from the dividends they pay. This tax is of course the shareholders' tax, repayable if they are not liable to it, and it is only a matter of machinery that the company will deduct tax and pay it over to the Revenue. With the exception of Belgium, at present and possibly France in the near future, I know of no other country where a shareholder in a domestic company is given credit for any tax paid in another country on the company's profits. That certainly does not happen in the United States of America. A U.S. shareholder in a U.S. oil company will pay U.S. tax on his dividend without any deduction for the foreign tax paid by the company. Similarly, a Dutch shareholder in the Dutch company of the Shell group will pay full Dutch tax on his dividend. All 61 that is happening is that the United Kingdom shareholder is now being put in the same position as overseas shareholders. The Deputy-Chairman of Shell has described our proposals as a "millstone for the British oil industry"; I can only comment that the Dutch side of the group seems to have survived and prospered with a similar millstone.
I am not, of course, denying that under the new system these companies and their subsidiaries will fare less well than under the old. But the very considerable growth which they have shown over the past decade does not seem to be related to the fact that their shareholders have received their dividends almost tax free. They have financed nearly all their total investment from retained profits and depreciation, having raised very little capital from their shareholders and none since 1958.
Over the last 10 years Shell financed no less than 98 per cent. of its total investment, amounting to £3,354 million from retained profits and depreciation. In the last 8 years B.P. financed 83 per cent. of its £1,165 million investment from internal resources, 13.5 per cent. from borrowing and only 3.5 per cent. from new money raised from shareholders. Moreover, its dividends have grown very substantially, both absolutely and as a proportion of income. Those paid by B.P. doubled between 1956 and 1964—they rose from £15.1 million to £31.3 million, excluding capital distributions in the last three years. Shell Transport's dividends nearly trebled over the same period from £15 million to £41.4 million.
It is not for me to forecast the future actions of the oil companies. They have made and are making substantial investment in the expectation of further growth. This, together with the transitional relief which will be due for the next five years should provide a cushion which will soften the effects of the changeover. But even if these companies decided to maintain their gross dividends unchanged so that the whole burden fell on the shareholders, the shareholders of Shell would still receive the same net dividend as they had in 1960 and of B.P. the same as in 1958. The burden of the Income Tax would do no more than offset the dividend increases of the last few years. Thus, while figures of loss which have been bandied about sound very serious, the effects of the tax 62 payments on the shareholders and the companies should not be alarming in relation to the scale of operations of the companies and their prospects.
I cannot help thinking that the fears that have been expressed about the future of the oil companies have been much exaggerated.
I return to the general question of overseas investment. Some of our critics have said, in effect, "We agree that something has to be done about this excessive overseas investment, but it is unnecessary and penal to make your measures bite on existing overseas investment. Your brake should apply only to new investment". In effect, what these people are proposing is that overseas investment should be exempted from the change-over to the Corporation Tax system—with its separation of company and personal taxation—by allowing overspill. They suggest that we should instead use exchange control or the Capital Issues Committee procedure to restrict new overseas investment.
Exchange control would, of course, be quite inadequate, as it does not apply within the sterling area, and I do not think that anyone is seriously suggesting that it should. Whether the Capital Issues Committee procedure would be suitable for this purpose depends upon whether a temporary remedy is all that is needed, or whether a long-term influence is required, to correct a chronic tendency towards excessive overseas investment. We believe that it is the latter, and I think most of our critics believe that it is the former. This is the real issue which divides us. If a permanent influence is required, I do not think any hon. Members in any part of the House would like to see that done as a permanent method by the Capital Issues Committee procedure.
If there has to be a permanent correction, most hon. Members would agree that the taxation system is the better way to do it, leaving the greatest amount of freedom of decision to the companies which are considering whether to make the particular investments. I do not think that anyone is suggesting that it would be possible to apply one set of double taxation reliefs to pre-Budget day investment, and another set of reliefs to post-Budget day investment. It would, of course, be wholly impracticable. And if what has to be done is to be done by 63 taxation, it must apply to existing as well as to future investment.
The real question is whether our overseas investment requires to be bolstered up by a special protection, which no other country which operates the Corporation Tax system grants to its overseas investor. We believe that it does not, and that the transitional provisions we have made will afford time and opportunity for our companies to adjust themselves to the change.
I know that there are special problems for some developing countries, and my right hon. Friend has undertaken to watch this position with great care and has said that he would be ready to consider whether any new action was needed in relation to aid to these countries.
But these are not reasons for failing to apply the principles of the new Corporation Tax system to our overseas investment, particularly when, as we believe, its overall effect will be to serve the real economic interests of this country in relation to our overseas position just as it does internally.
§ 4.44 p.m.
§ Mr. Edward Heath (Bexley)
There are three main groups of sections in this Bill, and there are three main themes running though them. The House will agree that they are all linked together as part of the attempt of the Chancellor of the Exchequer to deal with the balance of payments problem. The first group is those levying heavier taxation on consumer goods—on tobacco, spirits, and so on—and on motor licences. With those go the Capital Gains Tax, which the Financial Secretary has again emphasised exists in order, he says, to ensure fairness, and the measures about business entertainment. Both are put forward in an attempt to secure the acceptance of an incomes policy. The general purpose of this group is to reduce the demand on the economy.
The second main section is the Corporation Tax in relation to home affairs in the economy. The purposes really are to secure a greater investment by companies at home and to penalise the investors in those companies.
The third main section is the Corporation Tax in relation to companies overseas. Its purpose is to reduce over- 64 seas investment to help the balance of payments and is, I think, an attempt to force people to invest more at home. Thus, there is in the minds of hon. and right hon. Members opposite this connecting link between the Corporation Tax at home and the Corporation Tax overseas in creating greater investment. The argument is that if we can stop people investing overseas surely they will be forced to invest at home.
I want to deal with each of these broad issues in turn. I hope that the Financial Secretary will forgive me for not going into the detailed matters with which he dealt. Our first task, as the hon. and learned Gentleman indicated, is to comprehend the Finance Bill in its present form. It might be easier to comprehend were we not so apprehensive about what we might apprehend if we had comprehended it. It is the longest and most complicated Finance Bill for over 50 years.
I must offer a protest against so much legislation by reference in a Bill which makes fundamental changes of this kind. It places an intolerable burden on hon. Members. I see that even the chartered accountants, according to The Times, have declared that this is the last straw. We have had many gallant attempts to put the Bill in a form which a layman, or a Member of the House of Commons, can understand. We had the first Budget Statement of the Chancellor of the Exchequer, his amplification to the House, the second Budget Statement, the Finance Bill, two White Papers, and now a long and detailed account by the Financial Secretary, which could well have been published as a third White Paper or explanatory memorandum of the other two White Papers.
Everybody will agree by this time that any idea that this has led to a simplification of the tax system is way out through the window. We can all take our pick of the examples, but the one which I take is Clause 55(3):A claim for relief under this section may require that capital allowances in respect of the trade, being allowances which fall to be made to the company by way of discharge or repayment of tax and to be so made for an accounting period falling wholly or partly within the 12 months ending when the company ceases to carry on the trade, shall (so far as they cannot be otherwise taken into account so as to reduce or relieve any charge to corporation tax) be added to the loss 65 incurred by the company in that accounting period or, if the company has not incurred a loss in the period, shall be treated as a loss so incurred:Provided that the allowances for any period shall not be treated as including amounts carried forward from an earlier period.This is an example of the Chancellor of the Exchequer's open declaration about simplifying the whole of our tax law and tax system.
The Financial Secretary went to considerable lengths to emphasise what a great attraction all this was. But surely he must realise that most of those who were originally attracted by the idea of a modernisation and simplification of our tax system—which I agree was supported in the election manifestoes—now see the ramifications and implications of doing it in the way in which the Chancellor and his colleagues suggest. I do not think that most of them are any longer in love with the suggestions which he has put forward. It is clear that this is a bad Bill as a tax reform Bill, and nothing that the Financial Secretary said has done anything to change our view on that.
I turn to the three main sections. The first is that dealing with what the Chancellor of the Exchequer described in his Budget Speech as the short-term management of the economy and the Budget judgment. He is asking us in the Bill to levy additional taxes and to take consuming power out of the economy. For this debate we should have an up-to-date report on the situation. The Financial Secretary has not given it to us. The Chancellor of the Exchequer did not open, so he has not taken advantage of the opportunity to do it. I hope that when he winds up tonight, although it will be too late to help the House in considering these matters, he will nevertheless give us the information for which I shall press him.
In the Budget debate we got him to the point of discussing the £ sterling and coming forward with strong arguments in favour of it. We even got the Prime Minister to stand up in New York in his address to the Economists Club and boast of the resources which are now, and always have been, behind the £. What the economists were asking themselves—they did not have the chance to put it to the Prime Minister—was why did he not say all this the moment that he came to power. Then, they say that he might 66 have saved himself the crisis of confidence into which the Government plunged themselves in November. We know why he did not do it. He was much too busy playing his own party tricks to worry about the national interest or the strength of the £. He wanted an alibi for not being able to carry out the promises which he made at the election and which we now debate from Supply day to Supply day. All this has cost us the three billion dollar stand-by and the indebtedness which we now face.
What is the Chancellor of the Exchequor's present judgment about the economic situation for which he is asking support in this Bill? How does he explain his past judgments on this matter? The judgment started with the White Paper in November, which we have so often quoted to him, in which he said that no further action was required for the economy. That was the first statement. It was followed by the first Budget a month later, by the 7 per cent. Bank Rate and by the credit squeeze. This was followed by the second Budget, in which he said that he was aiming through these taxes and two other means—the TSR2 cancellation and the Post Office charges—at taking £250 million out of the economy. In fact, he took £231 million.
The conclusion to which he came was very interesting and specific. I should like to quote it to the House. He said:Taking into account the nature and incidence of these increases"—this is his conclusion—my estimate is that, working with the other measures I have mentioned, they will bring about the desired reduction in home demand and so make room for a progressive improvement in the balance of payments.He went on:The Committee is only to well aware that we have a Bank Rate of 7 per cent., and that, following the letter from the Governor of the Bank of England to the London Clearing and Scottish Banks last December a tight and effective control over bank lending is at present in operation—[OFFICIAL REPORT. 6th April, 1965; Vol. 710, c. 287.]These were his conclusions at this stage of his Budget speech.
What is the situation today? Only three weeks after he made that speech and reached those conclusions we have the imposition of the special deposits.
67 After exactly three weeks another £95 million is taken out of the economy. We have another letter from the Governor to the banks. The Chancellor has already said that we have a "tight and effective control" over bank lending, yet we have another letter to the clearing banks about it, and, within three weeks of his Budget speech, he demands these extra measures. What is the explanation? The Chancellor of the Exchequer owes the House of Commons an explanation of this. Is it a fundamental misjudgment of the situation? He has never given us an explanation of how he came to the conclusion that he ought to take £250 million. He gave us no analysis of this in his Budget speech, so we cannot judge whether he was right or not.
In winding up the mortgages debate, the Chief Secretary to the Treasury said that it was due to an increase in the clearing bank advances. I cannot believe that the Chancellor of the Exchequer did not know the trend of the clearing bank advances when he produced his Budget. This is a very simple—perhaps an oversimple—explanation by the Chief Secretary—
§ The Chancellor of the Exchequer (Mr. James Callaghan)
The right hon. Gentleman should ask Reggie. He will tell him.
§ Mr. Heath
Was the mistake a mistake in calculating the increase in wages? The Chancellor of the Exchequer has not told us what he took into account in his Budget statement so we cannot judge for ourselves. What we have had in the first three months are wage settlements amounting to between £80 million and £90 million a year—almost exactly the same as the special deposits which have now been taken out.
This raises the general question of the extent to which the Chancellor is relying on a 3 to 3½ per cent. money incomes policy for the rest of the year. I should like to quote to him what the First Secretary said on the second day of the Budget debate:What is new and dramatic is that in the short space of six months we have reached agreement with both sides of industry on the intent, on the machinery, and on the criteria to be applied. There is now a prices and incomes policy in existence."—[OFFICIAL REPORT, 7th April, 1965; Vol. 710, c. 533.]68 Does the Chancellor of the Exchequer base all his claims on that statement by the First Secretary, or does he take the view of Mr. George Woodcock, who said at the T.U.C. Conference:This is not a plan. It is not even a policy. Let us not make any false claims. These words are much too grandiloquent to describe what we are putting before you. A policy may come out in time. This is only the first cautious and sensible step in that direction … I can tell you this, and Mr. Brown will not be pleased at this, there is not the remotest possible chance that incomes and wages will be kept down to 3½ per cent. in this year.What has the Chancellor of the Exchequer taken into account in his claims for which he is asking support in the Bill?
This can either be the latest of a series of misjudgments or there can be another explanation. Did something happen between the Budget and the demand for the special deposits? What has happened is that the conduct of the economy by the Chancellor of the Exchequer and the Government have been under constant examination by foreign international bodies—by the Finance Committee of the Common Market, by O.E.C.D., by the Group of Ten and by the Financial Ministers in E.E.C. themselves. What have been their comments on this situation? They have been reported in the press of 5th May. The Times said:As Mr. Giscard d'Estaing"—the chairman—put it, the meeting hoped very much that the Chancellor of the Exchequer's target, notably for bringing the British payments into balance by early 1966, would be successfully achieved.
§ Mr. Callaghan
I only want to make the point that there is no—[HON. MEMBERS: "Do not get excited."]—I am not getting excited. I have been accused of bad faith by some of the hon. Friends of the right hon. Member for Bexley. What I want to get clear is that I take no 69 responsibility for what appears in The Times. That was not a quotation. If the right hon. Gentleman will make that clear I shall be happy.
§ Mr. Heath
I read it as a statement of what The Times said that Mr. Giscard d'Estaing said.
The next quotation from his speech is in the Daily Telegraph of the same date:There is a great convergence of our points of view. Every one of us hopes that the objectives stated by Britain will be achieved. The British Cabinet plans include detailed description of their objectives, figures, and a calendar for the achievement of them. The Ministers also took note that if these objectives are not attained other measures will be put in hand by the British Government.That is a firm quote. On the same date, the Chancellor of the Exchequer said in answer to a Written Question:The Government aim to restore our balance of payments to equilibrium by the end of next year."—[OFFICIAL REPORT, 4th May, 1965; Vol. 711, c. 140.]When he winds up the debate, perhaps the Chancellor will tell us what exactly these detailed plans and descriptions of objectives and figures and a calendar for achievement are. The information has been given to foreign Governments. It has not been given to the House of Commons or to the people of this country.
Perhaps he will also take the opportunity—as he obviously wants to do—of explaining whether the report of Mr. Giscard d'Estaing that it is to be done by the beginning of 1966 or his Written Reply that it is to be done by the end of 1966 is the more accurate. It is of great importance to know what the policy of the Government is. I hope that he will give us full details of these proposals and also let us know whether they include a 3 to 3½ per cent. wages basis for the rest of this year and whether these proposals also include the effects of the nationalisation of steel or whether that is only put in as a listening post, rather inadequately manned. It leads to the—
§ Mr. Callaghan
I am a little surprised that the right hon. Gentleman should be so anxious to press the inquest on his Government's achievements. It is well known that we are now in the process of negotiating the second part of the loan, which will total £850 million, and which 70 will help us to finance the deficit which the right hon. Gentleman and his friends left behind. As to disclosing the details of these matters, the Budget Statement contained all the necessary information. I was asked about the detailed negotiations between Governments. The right hon. and learned Member for Wirral (Mr. Selwyn Lloyd) who performed a similar exercise in 1961—and his right hon. Friend the Member for Enfield, West (Mr. Iain Macleod) was also in communication with the working party—will tell the right hon. Gentleman that it is not the practice to disclose details of negotiations of this sort between Governments, and I hope that he will not press me to change that practice.
§ Mr. Heath
The right hon. Gentleman well knows that the loan which he is at present negotiating from I.M.F. to replace the drawing on standby was to meet the crisis of November which his own Prime Minister admitted was the fault of his own Government. That is the plain truth. As to the details, I do not recall any statement published about my right hon. and learned Friend's negotiations of the kind which I have read, made by the Chairman of the Finance Ministers of the Six and saying that detailed targets, plans and undertakings have been given. The true explanation of the special deposits three months after the Budget statement is that the Chancellor has been made to do this in order to get the standby. It is summed up by the Statist this week—and that is not usually regarded as a magazine supporting this side of the House—when, referring to the Government, it said:For the time being we have in considerable degree lost our financial sovereignty.That is the fault of right hon. Gentlemen opposite. What it amounts to is that what the Chancellor is asking for in this Bill is out of date, and he has taken no opportunity to tell the House what the position is today.
I want to turn to other matters.
§ Mr. Heath
This is very much concerned with the Finance Bill. The fact that the Financial Secretary to the Treasury spent his time dealing with small items concerning businessmen's accounts is no reason why we cannot 71 look at the great issues facing this country.
Finally on this point, I want to ask the right hon. Gentleman to reconcile this: having been put in the position of being compelled to take these additional steps, how does he reconcile them with his own expressed anxiety of what will happen to investment in this country, with a possible down-turn in investment at the end of this year or at the beginning of next year? That, on the lesson of past experience, is the danger at which we must be looking.
I turn next to the section of the Finance Bill dealing with the Capital Gains Tax, and I will make a brief reference to business expenses as the Financial Secretary brought the matter up. Looking at the Bill, it is clear that the Chancellor has taken no note of any suggestions or comments made in the whole of the Budget debate. What is more, as far as I can see he has taken hardly any account of any of the representations which were made to him between November and April. If we are to make reasonable progress with this enormous Bill, then I hope that there will be a change of attitude and heart at least when we are discussing it in this House.
The Capital Gains Tax will certainly not encourage savings or risk-taking or building up one's own firm or investment in growth industries. In fact, it will discourage all these things. It is being done in the name of fairness. This is the argument put forward by the Chancellor and the Financial Secretary. It has been done to get an incomes policy. I do not think that the settlements since it was announced in November suggest that it has, in fact, made a penny difference to the wage settlements in this country so far. Let us be realistic about that.
I have five points to make on this part of the Bill. The Financial Secretary said that it was a very moderate tax. It is a very comprehensive tax, and I believe that it is at a high level. Taking these two things together, they make it the most severe capital gains tax of any country in the Western world. If the right hon. Gentleman can find one which is more severe, I hope that he will tell the House the details of it. We have studied this tax very carefully.
72 Secondly, it makes absolutely no allowance for inflation. This is fundamental. Those who see their savings, in whatever form, increasing at exactly the rate at which the currency is being depreciated will still have to meet the gains tax and thus lose part of their capital, whether they sell or whether it happens on death. Is this the Chancellor's idea of fairness? If one's savings increase only at the rate of depreciation of the currency, one is still bound to lose a large slice. Surely that does not appeal to the people of this country as being fair.
Thirdly, it is the growth industries and the growth activities which will suffer most. The more they grow and expand the larger the slice they will lose. Is this what the right hon. Gentleman and his hon. Friends want to encourage? What it means is that, combined with the Corporation Tax, it will make it almost impossible for the small private company to grow to a stage at which it can become a public company. That is the consequence of the two taxes together because of the arrangements for close companies. If hon. Members look at it, they will find that that is exactly the case. These companies will have a higher burden of tax than any suffered by any other section of the community. Is that fairness? Is that what the right hon. Gentleman means by introducing a tax to bring about fairness? One can only come to the conclusion that it has been deliberately arranged, by this combination of taxes, to damage the small privately-owned companies. In the process the Chancellor is damaging the real growth companies of this country.
Fourthly, the ten-year treatment of discretionary trusts which is laid down in the Bill can also, in cases where they exist for a family company, be damaging and lead to the break-up of family companies on death.
§ Mr. Heath
It is a very good thing to have that stated in public. Now we have it on the record that what the Labour Party want to do is to damage and break up family companies even where they are efficient and growing.
73 Fifthly, will the Chancellor deal at some length with a question which has been discussed in detail by my right hon. Friend the Member for Flint, West (Mr. Birch)? No doubt he will be able to contribute to our discussions on the point in Committee. The plain fact is that in the particular case of gilt-edged stock and local authorities' stock the general public regards the Capital Gains Tax as fraudulent. No matter what the hon. Gentleman says about land in the Bahamas, the ordinary owner, and very often the small owner, of gilt-edged stock regards this as fraudulent, and I believe rightly so. But leaving that aside, it is bound to affect Government borrowing, as we have emphasised before. The Chancellor says that it will not affect the fluidity of the market, but I can find nobody who shares his view—not one person—particularly because of the very large holdings by the life offices of long-dated Government stock. This will certainly affect the fluidity of the market, and I believe that it will damage the Chancellor in his activities. We shall therefore resist this very strongly and put forward constructive ideas as to how to deal with it.
To sum up on this part of the argument, I believe that in its form and in the context of the present burden of taxation, this is a bad and indeed a vicious Capital Gains Tax. It is introduced for the wrong reasons. It does not achieve the fairness which the Chancellor gave as the reason for it and it damages the economy. We have to add to it this very petty and spiteful measure about businessmen's expenses which, as everybody knows, is just a nasty little bit of political manoeuvring by the Chancellor of the Exchequer. The Chancellor admits the principle—the Financial Secretary has just repeated it—that when one is doing business which apparently the Government want done—export business—one can have these allowances. But there is an immediate contradiction. If one has resident buyers in this country, which means that the overseas firm is a very large firm which can afford to have people permanently stationed here and that it is therefore likely to give larger export orders, they cannot be entertained. We see, therefore, that even when the Chancellor is trying to help exports there is an extraordinary contradiction.
74 We must consider the damage to the small man at home—the small business man, the specialist—and those—and there are a considerable number of them—who use entertainment, meals, for doing business. Even Ministers, to my knowledge, do that, and at any rate the Prime Minister has not volunteered to surrender his position in regard to such special allowances.
The Financial Secretary could not tell us how much abuse there is. "In my opinion there is abuse", he said, but he gave no details. I have never known the Revenue to be in the position of not being able to deal with such an abuse if it wanted to. Certain marginal cases have been brought before the courts and sometimes the Revenue has won. Why would it not be possible for the Revenue to bring big cases before the courts? We would certainly support the Chancellor in dealing with either a big or small abuse, but why deal with it in the way he has chosen? It is rather like throwing out the baby with the bath water. Why abolish the whole of this to deal with an abuse?
The Corporation Tax and its effects at home is my second theme. I have dealt with the question of the simplification of tax and the object of increasing investment. I have pointed out that the way it is being done is a bad reform of the system. It is interesting to look briefly at the history of this matter. It was Lord Dalton who, in April, 1947, introduced a differential profits tax. As recently as his Swansea speech of January last year the present Prime Minister said:… I am strongly in favour of the return to the pre-1958 system of discriminating sharply between distributed and non-distributed profits".That was a great economic statement of Socialist policy. It is still held as such by the Prime Minister. Only last June the Chief Secretary to the Treasury suddenly came forward with the statement, at a conference arranged by the Investors Chronicle and in a discussion on investment after the election, as reported in The Times:The most likely … solution … was a corporation tax—the separation of the combined rate of tax into two, one for individuals and one for corporationsSo they stumble into it. They stumbled over the Minority Report of the Royal Commission and, in tripping over it, the 75 dust came up and suddenly it became adopted as Labour policy. Suddenly, without realising where we were and that 10 years had gone by—and that a great deal of European and American thought had changed—they introduced their policy in November in a mad rush. That is why we are suffering from it today.
There are several points with which I will deal. On the financial and other aspects, there are cases where tax is paid back without it being received. This has been a constant thing. Having been told that, may we now be told how many cases of this kind there are and how much is involved? All the authorities I have consulted say that such cases as exist are very few in number and could easily be dealt with by amendment of the law, certainly without the whole of this part of the Finance Bill. Thus what we have been told so far is no justification of this part of the Bill and I hope that such arguments will not be adduced again.
Then we are altering the way to tax distributed profits. It is a backward step. Bit by bit, with the help of the Chief Secretary, the Financial Secretary is getting himself off the hook he was on because in an Adjournment debate he said that we were moving "with one rush" towards the German and European system. That was immediately contradicted in the Neumark Report, in which it was shown that they are moving towards our system.
The Bill is riddled with contradictions, of which I will point out a few. The Bill is supposed to encourage public companies to retain and invest, but it forces small companies to pay out 60 per cent. It is supposed to encourage overseas companies to retain but not to invest. So we have these contradictory processes being carried out at one attempt by the Corporation Tax.
The tax will damage innovators, particularly, in the small companies, and I hope that the Economic Secretary, who has always been so strong in his support of innovators, has looked at this one very carefully. It should, at the same time, be remembered that the nationalised industries will get substantial preferential treatment in this process because they do not have shareholders but only loan 76 capital. This is demonstrated by the fact that while local authority water companies are exempt under the Bill from tax, private water companies must pay tax. How can this be fair or justifiable? Or is it that the Chancellor wants to produce a situation in which he can have another argument for nationalising water companies? It looks very much like it.
§ Mr. Heath
As to its effect on investment allowances, the Financial Secretary discussed these at some length and produced typical Treasury arguments. He has never uttered the argument that this was being done as part of the Corporation Tax; just that it was happening and that it must be accepted. I believe that it is damaging and I do not accept his argument that firms do not take any notice of investment allowances. If something should have been done, and I do not accept that it should, the job could have been done by way of firms' accountants. We should recognise the importance of investment allowances and similar financial arrangements.
What concerns me is its effect in the development districts. One who is probably more experienced in matters of regional development than anybody else is Mr. George Chetwynd, who has commented forcibly on the damage that this will do to the development districts, particularly those in the North-East. I believe this to be wholly true. The figures which have been produced are, I think, about right—that firms get up to 79.2 per cent. on plant and machinery and 71.3 per cent. on the 40 per cent. rate, whereas in future they will get 56.8 per cent. and 59.4 per cent. respectively. This is a considerable difference.
What we discovered in regional development is that unless there is a sufficient scale of inducement to industry, not just a differential, we will not get firms to go to the trouble of expanding and going into the development districts to achieve their expansion. There is an inherent contradiction in the whole operation of getting firms to invest and cutting back allowances in this way.
What is the real purpose? It is, in fact a measure against shareholders and I do not think that the Chancellor will, in 77 fairness, deny that. Indeed, on 3rd October, 1950, the right hon. Gentleman who is now the Chancellor said:Let shareholders be content with fixed dividends and let us abolish ordinary shares altogetherI agree a boyish prank, but while the right hon. Gentleman has grown to adult status it is obvious that he has not yet grown to adult wisdom. There may still be things like that lurking at the back of his mind.
What are the possible results of all this? The first possibility is that there will be a diminution in investment in equities because people will not save or put their money into equities because an adequate return is not very likely. The second possibility is that companies will feel compelled to keep up dividend levels. What will suffer, therefore, will be what they can use for their own resources or there will be an attempt to increase profits by increasing prices. Indeed, the latter is the most likely outcome. Neither can be described as desirable in terms of the way the Chancellor has organised the tax.
The Overseas question is the third theme. The Financial Secretary dealt with this in some detail. I suppose that this is the biggest and probably the most important impact of the Bill. The Government want to take action to slow up overseas investment. I fully understand their desire to do this, but they already have very good machinery for doing it outside the sterling area. There is, for example, exchange control. It operates effectively, and if hon. Gentlemen opposite criticise Shell for having a very large amount of investment, as shown in the 1964 figures when they are published, because of Montecatine they should realise that Shell had to get authority to do that and that it was given because it was thought to be in the national interest. Therefore, there are actions which the Government could have taken for dealing with this problem.
We could certainly support the Chancellor in action to stop false holiday allowances and the switch market, although many people may not like the action. What I find difficult to understand is that in the whole of the Financial Secretary's discussion this afternoon and in the discussion of the Chancellor of the Exchequer and others there has always been emphasis on fairness but 78 never a mention as to what this is worth to us, whether or not it is fair.
This is what matters: what is it worth to us from the point of view of the national interest, and balance of payments and returns from overseas? I do not know whether the Chancellor of the Exchequer is setting out with the Financial Secretary to go back—I regard it as going back—to the taxation principle that there should never be discrimination of any kind. I was personally immensely glad when the Treasury was finally defeated and we got away from that principle, particularly for the regional development areas, because there was most definite discrimination in tax matters.
Instead of looking back to non-discrimination in every form we should be looking forward to other methods of discrimination in taxation to produce the results we want. Therefore, the hon. and learned Gentleman has been arguing without any point as to what the overseas investment is worth. I think that the action he is taking is very damaging to overseas companies, and it cannot just be wafted aside as he tried to do. And it is humbug for the Prime Minister to stand up in New York and boast of our immense international investments and say what a standby they are for the £ when, at the same time, his right hon. Friend the Chancellor of the Exchequer is saying in the House of Commons that he is doing everything he can to slow up new investment and to bring down existing investment.
There is this argument about the bias in our present system of investment overseas and in this country. I cannot find any tax authority which will advise me that there is bias in this system as between overseas and domestic investment. Has the Inland Revenue really advised the Chancellor of the Exchequer that there is bias in this system, when every company has to pay the higher rate of overseas or home taxation? The Financial Secretary rather indicated that he did not like people paying taxation overseas at all. But the fact is that it is a well-accepted international principle, which the Chancellor of the Exchequer will not be able to change, that if one makes one's profits in another country one pays one's tax there. That will continue.
79 In my view, the Chancellor of the Exchequer has never demonstrated, nor has the Financial Secretary, the way in which—with the exception of the O.T.C.s—there is bias in this system. I hope that in our more detailed discussions in Committee we can be given much more information about this.
The hon. and learned Gentleman gave the return of figures for investment overseas and at home. He gave the figure abroad after tax and at home before tax—8 per cent. in one case and 15 per cent. in the other—but that is just not comparable. That is what I have been talking about—the idea that if one makes money abroad one should not pay tax abroad. This is to say that one should not have any overseas investment of any kind and should withdraw any one has. That is the logical conclusion of the Chancellor of the Exchequer's figures in his Budget speech. It is not comparable to give the figure before tax at home and after abroad. In any case, he said that it was 8 per cent. in one case and 9 per cent. in the other after tax. With such accuracy of figures as there is, I do not know how one can make a judgment.
I do not accept that bias has been proved, but even if it has, as in the case of the O.T.C.s, is not the real question: is this worth it for us as a nation in the returns we get back? That is the real point. It is not just a question of can we afford it for the future but also a question of whether what we have done in the past has been worth it at the price? That is the other half of the matter. It is very important to get this right, because we have had no figures in substantiation from the Chancellor of the Exchequer, and nothing whatever from the Financial Secretary.
As we all know, last week in the other place there was a very interesting—indeed, a fascinating—debate on this whole question. A great deal of information was given there, and I hope that we shall have more information given to us here during the Committee stage of this Bill. There has been no discussion of the returns from these investments in exports, in management fees, in other trading invisibles, in making raw materials available to us, as well as in the actual remittances through profits, 80 dividends, and so on. Surely, this is fundamental.
The great companies have published figures, and extracts have been given by the Financial Secretary today, but I believe that the O.T.C.s have also served a very useful purpose—that is why we legislated as we did—and that they still serve a very useful purpose. In view of the time, I shall not go into all the details now—because we, too, shall have opportunity when in Committee—but perhaps one can look at the other figures, as the Financial Secretary did not.
If we look, for example, at the Federation of British Industries' Overseas Investment Survey, published recently, we find that it gives indications over a wide field of the returns from some of these companies. We see that Shell in 1963, at a total currency cost of £30 million—the 1964 figures are not yet out—brought us foreign raw material worth £140 million, and also brought the longer-term benefit of £30 million of overseas investment. Is that such a bad arrangement in the national interest?
I.C.I. has published its figures for the 15 years from 1950 to 1964; £37 million direct outflow and £120 direct net inflow. That is worth while. B.P. shows a total net gain to us of £67 million a year. This is invaluable. The Hudson's Bay Company—an O.T.C.—has in this century paid out £9 million from this country in investment, and in the last eight years alone has had £9½ million back. The Chancellor of the Exchequer now says to that company, "You will pay another £1,075,000 in tax." That is the result of this Bill. Can the right hon. Gentleman say that that will not affect the activities of that one company? I believe that this is an absolutely unbalanced argument, without foundation or proof.
My third point is that Government lending overseas is still going on. Government expenditure overseas still goes on and has not been cut. How can the Government justify lending for what is almost inevitably a far less profitable investment, and cutting back on this one? I think that the House will agree that at the United Nations Conference in Geneva last spring we in the British delegation did our best to help the developing countries, and I would go on 81 doing so. But I firmly believe that those countries prefer private investment—without governmental strings attached to it, and with all the "know-how" and management experience going with it—to direct governmental investment through aid. So the undertaking, and it has been repeated by the Financial Secretary, which the Chancellor of the Exchequer gave in his Budget speech, that if any difficulties arise, he is willing to look at the position—by increasing, presumably, Government-to-Government lending—is not a substitute for the damage done to the investments of the private companies.
My fourth point is that these developing countries are showing great anxieties—Malaysia, in particular, but others as well. It is also noteworthy that the Americans have exempted the developing countries from the action they have taken, which is very effective, to deal with their balance of payments. I do not believe that this aspect of the Corporation Tax is justifiable, because I do not believe that anything the Government can do through pumping out additional aid will replace the work that has been done by the mining companies, by the plantations, by the oil companies, which will be damaged. I also fear, and I must warn the Chancellor of the Exchequer of this, that if he continues with his policy it will produce in other countries reactions that are damaging to us. I am sure that that will be the case, and there are signs of it already.
Fifthly, there is the general belief that these companies, if only they are stopped, can invest more in Britain. That is just not the case. The great companies we have been discussing today cannot just turn round and say, "Instead of investing in Malaysia, we will invest in Great Britain". It is just not a tenable argument. If they cannot get their resources, they will be in danger of being taken over by our competitors—by the Americans, the Germans and the Japanese—and, I believe, at lower prices than they would otherwise realise.
One must therefore ask: are all these consequences unforeseen because of the Corporation Tax being looked at mainly from the domestic point of view, or were they carefully foreseen, and is this a balanced judgment? The Economist had a very interesting article putting forward 82 another way of dealing with the Corporation Tax. The Economist was at first very favourable to the Chancellor of the Exchequer, but now no longer is. It said:Do we now contradict ourselves …?It then urged:It would be greatly in the national interest if Mr. Callaghan … were now to contradict himself too.I believe that there is a great deal of truth in that.
I come, finally, to my conclusion about the Finance Bill. We can sum it up by saying that it is going to do nothing to modernise our tax system. It is not going to stimulate our economic growth, because I have pointed out where it damages it. It is not going to help exports, but it is going to damage them because of the effect of the Corporation Tax on companies overseas. It is not going to simplify the tax system because of the separate code for Capital Gains Tax and because it is grafted on to our present taxation system. It is not bringing us into line with other countries.
What is the philosophy underlying the Finance Bill? The Chancellor of the Exchequer says that it is fairness. I believe that behind it is not a philosophy but a set of primitive Socialist tribal beliefs. All this is really part of an attack on the free enterprise system and the individual. Of course, this is only one aspect of the Government's policy. We are now beginning to see the whole thing. We are seeing the extension of the nationalised industries more and more into the field of private enterprise. We are seeing nationalisation through the Highland Development Board. We are seeing the curtailment of the private airlines in the interest of the nationalised industries and the attempt to get the nationalisation of steel, the White Paper on which said that the Corporation would have power to take over more steel companies and other types of companies for diversification.
This is an attack on those who invest and who receive their rewards. The country is now waking up to what this is all about. This is why we saw the result we did at Hall Green and the result of the Gallup poll. We on this side of the House will do our utmost to alert the country to what is going on. This is a 83 bad Bill and we will go into the Lobby tonight to vote against it.
§ 5.33 p.m.
§ Mr. Harold Lever (Manchester, Cheetham)
The Conservative Party has managed to persuade itself that when it left office last year the country was in a state of fundamental soundness both in the international and domestic economic sectors and that an ungrateful and uncomprehending British public stabbed the Tory Party in the back and threw a good many very unfortunate babies out with the bath water. This has led to a mythology as complicated as some nations invent to cover their military defeats. The Conservatives have a simple unction to lay to their soul in regard to the crises which befall on their leaving office. They say that the crisis of sterling was a crisis of confidence due to the line taken by the Prime Minister, and that throughout the conduct of the nation's affairs the Tories had led a blameless life.
In fact what the Prime Minister's statement said was that this one of the many crises of confidence which have beset sterling after the war began immediately after the Conservative Party left office and the fundamentally feeble state of our reserves had left us in a position where we could not deal easily with that crisis. The most elementary look back at Tory rule shows that even the most blue-blooded Conservatives provide us prophylactic against this and that even a booming balance of payments is no prophylactic against them. So I hope that we shall not hear any more on this juvenile level.
I was abroad during the Easter Recess and found that the standing of the leading members of the Cabinet was exceedingly high. In fact, on my return from my travels I found that the severest critics of the leading members of this Government were to be found in the City of London and in the Parliamentary Labour Party.
The Budget in its main objectives, the Finance Bill in its main objectives and the strategy of the Chancellor in its main objectives are, first, the defence of the £ sterling at its present parity. I am absolutely convinced that the Prime Minister and the Chancellor of the Exchequer have, by standing by these parities in 84 international negotiations and agreements, acted in the best interest of this country and that this will lead to further developments in the international arrangements which are necessary if the world is to continue at its present level of prosperity.
It seemed to me that nothing could have done more good and been better than the Prime Minister's statement in New York. I am very much in favour of the Chancellor being courageous in the difficult circumstances which he faces in the reform of our Income Tax system. I must say that the introduction of the Corporation Tax was not a light undertaking at the present time and that even the detailed measures of reform which accompanied it required a measure of courage in present circumstances.
I believe that the case for the removal of the entertainment allowance is not really based, as the right hon. Gentleman opposite seemed to suppose, on the kind of malicious spitefulness which he says occupies the Chancellor's mind. Broadly, the case could be put in this way. One entertains one's customer and is then entertained, in turn, by another customer. Expenditure is set against revenue liability. None of the receipts of entertaining are accountable to the revenue as a perquisite of trade.
It seems that in the circumstances the Chancellor could defend the abolition of entertainments allowance, since he does not call for the beneficiaries to account for it as a trade receipt. This is a matter which we might examine in more detail in Committee. I hope that my right hon. Friend the Chancellor will not mind if I trespass on our old friendship and if I say that I did not think his references to penthouses, yachts and the grouse moors were really apposite. If my right hon. Friend wants to abolish the entertainment allowance for grouse moor shooting, yachting and penthouse occupation this could be done quite simply without the blanket abolition proposed here.
§ Several Hon. Members rose—85
§ Mr. Lever
All I would say is that it is hard on those who run their yachts at their awn expense, and the Chancellor will know that that is so in the case of one hon. Member of this House. Those who have either visited grouse moors or occupied penthouses at their own expense may find it hard to have a totally unconnected allowance disallowed on this ground.
I hope to make the case in more detail in Committee. There is a very respectable case to be made for the blanket abolition which has been proposed. It would help us to get the case over to people who will be injured—to our regret if we managed to avoid talking of the more extreme end of the entertainment allowance business. The Surtax on deeds of covenant proposal is equally defensible, and I think no one objects to that. I am glad to congratulate the Chancellor who, with his manifold problems and difficulties, has realised that he cannot leave these matters any longer but has to tackle them right away.
I have been saying for years that this country has been investing overseas beyond its strength. I am glad that the Chancellor has adopted a general proposition which I have put forward for many years. I never thought that the special tax treatment of overseas trade corporations was justified. It has become less and less apt to our circumstances and I am glad that it is being abolished. I am glad also that the Chancellor intends to ensure a close scrutiny of future overseas investment. In the 10 years before 1964 this country invested nearly £4,000 million abroad. We cannot help feeling that if we had had a little more of that in our short-term reserves we would not have been mauled so badly, forced to distort our economy so badly, and found ourselves in constant crises which beset the pound.
This is not because investing abroad is a bad thing, but investing beyond our strength is bound to make us recoil in general domestic programmes, such as happened in 1957, 1961 and 1964. Then we have to take these economic measures, including 7 per cent. Bank Rate, which are a setback to the whole economy. Incidentally, I hope that the Chancellor will be as eager as I am to see that rate reduced. It does not seem to be fulfilling 86 much purpose at present and it is time that we had a look at the idea of bringing it down. I am glad to see that the dollar pool is to have close examination to see how far useful aid can be given in that respect.
I am glad, too, that a Government have come into being which recognise the need to measure the breadth of a taxpayer's back in order to assess the burden which he can undertake and that we shall have regard to a man's capital position, including capital gains and capital assets. This principle should have been introduced into the tax system long ago. Whether in detail I can finally approve it is another matter. Being a man of a somewhat benign disposition and able to see the difficulties of many people who have a different political and economic point of view from mine, I particularly welcomed the Chancellor's peroration, which stood in sharp contrast to the out-of-context exuberance of the party conference quotations of the right hon. Gentleman the Member for Bexley (Mr. Heath). It is plain that we shall need to have a united nation if we are to tackle the problems ahead. All this met with my intense approval and my full support.
I have not been able to agree with complaints that the Bill is badly drawn. It is a little masterpiece of its kind. [An HON. MEMBER: "A big one."] Accountants said that it was the last of several successive "last straws" which taxpayers had to interpret and to be advised upon, but those who are at all expert in understanding the drafting and style of Finance Bills must find this an outstanding one. One cannot help feeling that the Chancellor has had the advantage of the help of advisers who have not always been present before to assist him in giving what was always a brilliant drafting staff their marching orders. It is quite clear that there was a high standard of competence in giving the instructions for drafting.
What the right hon. Member for Bexley referred to was a mere nothing compared with the ecstasies of incomprehensibility to which the draftsmen have been lashed in previous years, often without much effect. I cannot agree at all that the drafting is bad. The drafting is excellent and the advice which the Chancellor has received has been of a very 87 high order. It is not for me to speculate about how advisers come and go, but have never shared the xenophobia and narrow folly of those who criticise outsiders entering the Civil Service. The Civil Service has been refreshed during and after wars by the introduction of advisers from outside. The brilliant and high quality Civil Service we enjoy today is in no small part due to the new blood admixtures which it has received from time to time. This has done no harm at all to this Finance Bill.
If this were all that had to be said I should be very happy in congratulating my right hon. Friend on taking a first step in what I believe will be a remarkable career as Chancellor of the Exchequer. He is the first Chancellor in recent years to show courage, character and personality to put over tax reforms which were very much overdue and which are in the interests of the whole economy, and, incidentally, in the interests of social justice. But alas, some of the attempts to execute these principles, when they are examined in close detail, leave some ground for anxiety. I have always been in favour of a corporation tax being introduced, but I favour a high corporation tax and a small or negligible withholding tax. It would produce the same revenue but would be fairer to those affected.
Before the election in the Statist I published two articles to this effect. Alas, they do not appear to have been accepted by the Treasury. One of the consequences of the scheme adopted by the Chancellor is that where there is total distribution of income there has to be a rate of tax approaching something like two-thirds of profits. This is the highest standard rate ever applied to a company's profits. It is said that this is only for companies which pay out the whole of their profits in dividends, but that is not necessarily the wrong thing to do. Sometimes it is the most reasonable thing to do; sometimes the Inland Revenue insists on it. The question is, can we justify so high a standard rate simply because a company pays out the whole of its profits in dividends? I think the answer is no.
Those profits automatically come within the grasp of the most severely progressive Surtax system in the world. 88 I do not suggest that Surtax should be modified, but it would be better if we taxed income paid out at a rate which was not so high before Surtax as to bear so hardly on those concerned.
This tax bears heavily, too, on existing overseas investment, and this has nothing whatever to do with the balance of trade. To find some means for selective payment of tax which would decrease investment beyond our means is one thing, but to impose a burden of tax on existing investment must be defended on its merits and not on the question of balance of payment.
Some people say that this cannot be excluded from consideration of the balance of payments because, as the Financial Secretary said, it would be impracticable to make this selective discrimination, even if we accepted the need for it. I must say that the Chancellor of the Exchequer is well able, and previous Chancellors of the Exchequer have been well able, to perform the most extraordinary verbal acrobatics in selecting and defining so as to prevent the taxpayers avoiding tax when they, rightly, did not want him to avoid tax.
I would like to see some of that same ingenuity applied, if we make out our case in respect of overseas companies, in saying that we shall discourage new investment but will not penalise old investment. Would my right hon. Friend the Chancellor of the Exchequer say as a matter of principle that he is not in favour of penalising old investment but is merely in favour of deterring new investment? If he were to say this, some of us would lend our efforts to assisting some of the brilliant draftsmen he has at his disposal to achieve this end.
We do not want to be put into the position where these companies will say to us, "Under your system we would have been better off in the last few years if, instead of painfully and at great hazard building up vast and useful overseas investment of benefit to the country, we had been engaged in setting up a chain of pin table saloons. We would have been rather better off, fiscally speaking, than we shall be now". I hope that we shall not ignore the case that has been made. I hope that the Chancellor of the Exchequer will look at this again. He is a moderate man. He is a man of great flexibility of temperament and character.
89 There is another matter which troubles me—[Interruption.] I do not think that my right hon. Friend needs any protection from me. He stands in sharp, exciting and encouraging contrast to his predecessors of the Tory Party. I thought I had made it abundantly clear in my opening that every one of his policy objectives is intelligent and well conceived and has my fullest support. What I am now dealing with are detailed matters, points which the Chancellor of the Exchequer is quite able to consider in Committee and put right. They are not in any sense fundamental criticisms of his approach or of his handling of our affairs since he took charge. I have the greatest confidence in my right hon. Friend's handling of our affairs. I have the greatest confidence in his budgetary approach. As I have said, these much overdue motivations are very much what we need, but that does not prevent me from making detailed criticisms and making them in public. [Interruption.] These private criticisms sometimes lead to the most unhappy results. They sometimes impose a burden upon both parties. After all, my eccentric constituents elected me to the House of Commons and it is here that I should make such contributions as I have to make. I hope that I shall not be accused of attacking my right hon. Friend, because I am most anxious to support him.
Another matter I should like my right hon. Friend the Chancellor of the Exchequer to look at—I do not want to take up too much time now on Committee points—is the question of closed companies and the effect of his legislation upon them. The Corporation Tax, which can, as I have indicated, be very severe in its impact if there is total distribution, has been defended on the ground that it encourages retention. It seems a little anomalous that the Bill, whose impact is justified because it encourages companies to retain their profits, also contains a Clause which grants more draconian powers compulsorily to exclude profits than has ever been seen in a Finance Bill. This matter should be further considered.
The kind of things I do not like about the Clause dealing with this—I will tell the Chancellor of the Exchequer about them—are, first, that a standard of 60 per cent. dividend is set. It seems to 90 me a little too high to assume that 60 per cent. is a reasonable percentage for a trading company to pay. Again, this is more of a Committee point. The second thing is that I do not like the fact that the onus of proof in deciding what dividend shall be paid is transferred from the Revenue, where it has always been firmly put in tax legislation of this kind, to the taxpayer. This onus of proof should never be upon the taxpayer. If the Revenue says that more dividend should be paid than the directors think fit, let the Revenue prove it, not the taxpayer. If any benefit of doubt is to be given, it must be given to the board of directors and not to the Revenue.
It is a pity that when the Clause was introduced a new phrase was used different from that which traditionally has been used in the old legislation and which seemed to be a very apt phrase, that people were allowed to keep in their businesses as much money as was reasonably required for their extension. I do not like the new phrase which is used. It has caused many people perhaps unnecessary anxiety. Many business people seem to think that the Chancellor of the Exchequer is up to some mischief by changing the words. I am sure that he is not. As a matter of fact, when the Chancellor of the Exchequer introduced this part of the Bill he used practically the same language as the old Section 245. I suggest that, instead of calling upon the company to prove prejudice, some adaptation of the old Section 245 words be used.
Another thing that confuses the taxpayer is that he does not know, since he is subjected to this Clause and to the old Section as well, as far as one can make out, whether he is to get directions under this Clause as an alternative to directions under the old Section, or whether they can be both used against him. If this is in substitution of Section 245, it should be so stated and no doubt the taxpayer will be correspondingly relieved. However, I do not want to go on making too many Committee points.
I want to move to capital gains. The Chancellor of the Exchequer has shown great understanding in many of his actions in the very short space of time that he has been in office. These are novel and very complex problems. He 91 has exempted investment trusts and unit trusts, or at any rate he intends to exempt their members from paying tax twice on the same capital gain.
Can we have from my right hon. Friend some guidance upon this as a matter of principle? Unless somebody can argue cogently to the contrary, it seems to me unfair that some capital gains should be taxed twice—once in the hands of the company, and once in the hands of the shareholder. If the principle for which I contend is accepted, we can all proceed from there, without burdening ourselves with an excessively complicated, impracticable Finance Bill, to put suggestions to the Chancellor of the Exchequer as to how the unfairness of double taxation can be avoided.
I should like my right hon. Friend to tell us—I hope that he will do so tonight—that he is able to accept, in principle at any rate, that it is not a good thing or a fair thing to tax the same capital gain twice—once in the hands of the company and once in the hands of the shareholder. If he will say that, some of the unfortunate occasions where, under the Bill as drafted, that will occur may well be avoided. If the Chancellor thinks that it is proper to tax capital gains twice—once in the company's hands and yet again in the hands of the shareholder—let him say so openly. I would disagree with him, but he must tell us why he thinks it is justifiable to tax the same capital gain twice.
I want to make it quite plain to anybody on this side of the House who thinks that I am defending the company taxpayer or the capital gain achiever that all I am seeking to do is to achieve fairness between the members of a particular class of taxpayer. I do not dissent in any way from my right hon. Friend's desire to raise an appropriate amount of tax from this class of taxpayer. I do not want to reduce the amount of tax he is to get out of companies or out of capital gains. All I wish him to do, within his global targets, is to say that those who are subjected to tax are consistently subjected to it on the basis of equity and fair play, so far as this can practicably be achieved in a Finance Bill.
The next matter that causes me very great concern on the Capital Gains Tax 92 is the question of capital gains on personal chattels. A friend of mind, when I mentioned this to him, said that I should declare an interest. I am bound to say that I suppose that every one of us has an interest in every matter which I have raised on the Budget. So if any of these taxes were to be lowered to my own personal advantage, let it be now declared that I have an interest in them all being lowered. It is likely that I would pay every single one of them at some time or other if they were put in force. So I think that I had better declare my interest.
I should imagine that it is very much in the interests of everyone that, so far as possible, we should not bring within the Capital Gains Tax the personal chattels and belongings enjoyed by people in good faith in their homes. It surely is not impossible to exempt this class of goods from tax. The amount of tax which the Chancellor would get from his present proposal would be very little indeed. There are bound to be anxieties and inconvenience involved in this matter, and I ask my right hon. Friend to reconsider the tax on personal chattels. It is not justified. I know that the Inland Revenue has a kind of neurotic obsession with stopping potential loopholes for tax avoidance, but suppose that the Chancellor enacts this tax without this provision and suppose we see whether, in fact, there is any conceivable scale of tax avoidance that could result from people buying, personal chattels and making gains thereon.
I think the Chancellor is going up a blind alley, with no benefit to himself and with considerable inconvenience to other people. It will not be a Capital Gains Tax on personal chattels. It will be a penalty on realisation only, which will fall upon the most innocent and simple people, and will not produce any benefit comparable with the harm and inconvenience it will cause.
These are the few matters of detail that I wanted to mention. The Chancellor will be relieved to know that it is unlikely that the Committee stage will produce any more from me.
I sum the matter up thus. The Chancellor is the inspiration for these criticisms being made, in a way prematurely before the Committee stage. He is anxious to unite the nation behind the immense 93 tasks that he has set out to accomplish. It would be dishonest to pretend that the Finance Bill has succeeded in any noticeable way in achieving that objective. I put it to him that one of the reasons for this is not merely hon. Members opposite who have played little part in recognising the nation's dire need. They have played very much the party game. They have shown little sympathy for the Chancellor's difficulty and very little sense of communal effort to put matters right. They have shown very little willingness to help in getting a spirit of national unity in tackling these affairs.
I suggest that the Chancellor should not rely upon hon. Members opposite too much in that respect but should rely on his own efforts. If he shows flexibility, moderation and good sense in the kind of matters that I have outlined as matters of detail, I believe that he will get the nation behind him. The nation is aware of the disreputable record of the Conservative Party in relation to the state of the economy. The nation is not interested in the verbal quibbles with which they seek to defend themselves. It is aware of the immensity of the task that faces the Chancellor and will back him if it gets half a chance. I ask my right hon. Friend to show his good sense, moderation and flexibility and then he will find the country is behind him.
§ 6.3 p.m.
§ Mr. J. Grimond (Orkney and Shetland)
We have listened to a most interesting example of how to criticise one's own Government. I would suggest to the hon. Member for Manchester, Cheetham (Mr. Harold Lever) that he ought to conduct a seminar for other members of his party, including the hon. Member for Bosworth (Mr. Wyatt), on how to make the Chancellor listen. The Chancellor not only listened. He beamed like a cat presented with a bowl of milk. In general, he was being buttered up. He was told that there were only a few detailed criticisms here and there. But in fact the major proposals of the Finance Bill were taken to pieces by the hon. Gentleman for Cheetham and were found not to work. The Corporation Tax is all right in principle, of course, he said, but not with a 40 per cent. Corporation Tax and the present level of the withholding tax. We all agree with that. 94 The Capital Gains Tax should be removed from all personal chattels hardly a detail. The overseas companies are not to be penalised on their existing investments. All I can say is that I hope that we shall see these very important amendments in the Bill.
I agree with the hon. Gentleman in being greatly puzzled about the way in which the general principles of taxation introduced in the Bill, with many of which I agree, have been dealt in detail. One of the questions we have to ask is, what is the real thinking behind this Bill? My party, for instance, certainly favour a change to a Corporation Tax. We favour a Capital Gains Tax at a reasonable level, and we are not at all blind to the difficulties which the Labour Government inherited. But the way in which these tax reforms have been brought in, the rates proposed for the Corporation Tax and the witholding tax which goes with it, and the measures taken outside this Finance Bill, many of them in the name of the need to deal with short-term difficulties when, in fact, they will have far-reaching results—these open the question of the real thinking behind the Bill.
I turn to the Corporation Tax. The Chancellor said that it is not his intention to throw new burdens upon industry. But he is throwing new burdens upon industry. One medium-sized engineering firm of which I know, which has a good record of growth, will find its own profits reduced from £45,000 to £21,000.
Another of the main arguments behind the Chancellor's proposals is, as the hon. Member for Cheetham said, that companies will be encouraged to plough back profits. As has been said again and again, the mere retention of profits by a company is not necessarily good. The money retained may be put to purposes which yield a very low rate of return. Some big companies appear to be diversifying their activities because they have nothing else to do with the large funds which they acquire. Some companies should curtail their activities and distribute their reserves rather than retain money on which they do not earn as high a rate as is needed in the national interest. In fact, the retention of profits may strengthen the brakes on change in the economy if it is carried too far.
95 Equally true is the fact that if retentions are well invested they can be a valuable element in growth. They are particularly valuable in building up smaller companies which have some difficulty in raising money on the market. But these are the very companies which will be heavily hit by Clause 72 of the Bill. This brings one up again against the contradictions in the Bill. The Chancellor's intentions seem to be contrary to the Clause. It is fair to argue that some small companies' profits have been retained, in spite of Surtax directions, for the purposes of Surtax evasion. But to cure this by taking steps which may discourage investment in general is to sacrifice the short-term and long-term: to cut off one's nose to spite one's face—an operation which occurs pretty often throughout the Bill.
However, let me take the question of investment allowances. The Chancellor argues that if taxation is reduced, investment allowances are reduced. But what we have to consider is the effect upon one of the major aims of the Chancellor, and that is investment. With a 37½ per cent. Corporation Tax on a £1 million purchase of a ship, an investment allowance, if retained at the present level, will be worth £85,000 less than it would have been worth under the existing system. On the purchase of similar value of plant it would be reduced by £56,000 and on industrial buildings £28,000. These are substantial reductions. If it is argued that industry is taking no account of investment allowances I think this is exaggerated. Industry will begin to realise how serious the matter is when they come to compute the effects of the new steps in the Bill.
On the question of these closed companies which I have already referred to, I understand that this Clause will affect most of the companies in Britain today—most in number, I do not say in size. Many are small but some are big and very important. It is not simply a reenactment of the old law allowing for Surtax direction. For one thing, the onus is changed and many companies may be involved in protracted litigation or at least negotiation if this Clause is not amended. It is in its present form automatic. It is inflexible, and it will put hundreds of companies in doubt about 96 their future. Furthermore, there is no exemption if more than 25 per cent. of the shares are in the hands of the public. On the present drafting, 100 per cent. of investment income and 60 per cent. of trading income have to be distributed unless the company can make out a case for some exemption from this provision. It puts great power in the hands of those who will administer this Clause, and it may be a serious brake on development in the economy.
Another line of argument used by the Government is that we are simply moving towards tax systems adopted by our successful industrial competitors. This was argued, for instance, by the noble Lord, Lord Longford, who leads for the Government in another place. But it is not true. The tax systems of the world vary very greatly. Many of them contain a corporation tax, but, if they do, most have a much lower rate of withholding tax. There would be a great deal to be said for the Chancellor's tax changes if that were the case. France has a corporation tax of 50 per cent., but there is a credit against this for dividends. Corporation tax in Germany is 51 per cent. on undistributed profits and 15 per cent. on distributed profits.
If that argument fails, the Chancellor of the Exchequer turns to the argument that he does not believe that dividends above a very low rate are essential to the efficient running of the economy. This may be the real argument behind a great deal of the thinking in the Bill. I believe that it is a disastrous argument. Liberals at any rate must oppose the great concentration of wealth and power in the hands of bigger corporations and the very rich—the very rich will always get past all efforts to control their capital; they are the people who can move their capital about the world—and in the hands of the Government. But, further, whether one is a Liberal or not, whatever one's views, we now depend on the efficient working of the free enterprise system, and there is no way out of this. Unless companies distribute a reasonable amount of their profits and dividends, the system will not work, the incentive disappears and it will become impossible to raise money on the market.
It has been said this afternoon that only very small amounts of money are raised in the market, but they are marginally 97 important. They are needed to finance the sort of new enterprise which we should be encouraging. Further with the high rate of personal taxation which we have, we are in danger of driving our more enterprising people abroad. I accept the argument that high taxation does not prevent people already in a job from working harder, but I believe that it weighs with people when they are considering where they will take a job. There are many skilled people and technicians who wonder whether their future will be better in this country or abroad, and some attention must be paid to the reward they can earn and their views in an economy based on private enterprise.
This brings me to overseas companies. Again we come up against the main difficulty in judging the Bill. It is perfectly reasonable to argue that in the present situation it is undesirable that too much new capital should be invested abroad, but, as has been said, this does not mean that we should penalise capital already invested abroad. This matter has been cleared up to some extent this afternoon, because the Government spokesman, the Financial Secretary to the Treasury, made it perfectly clear that he does not regard this as a temporary matter. The Government wish permanently to reduce the amount of capital invested overseas.
Yet even here the Minister was ambivalent because he said at one stage that the effect of the tax changes had been exaggerated and would not make so much difference. The oil companies can easily retain their 1958 and 1960 rate of dividend.
The idea that we can stop the economy at its 1960 level and say that we will hold it there is a disastrous attitude in the British economy. Every major oil company in the world is expanding. Do not let us delude ourselves that B.P. and Shell can hold their position in the highly competitive international oil market by resting on whatever happened five or six years ago.
Further, the Government have very severely altered the balance of advantage. They have not only equalised investment at home and overseas. It is not a question of removing so-called advantages of investing overseas. What the Government suggest will put com- 98 panies which operate overseas at a severe disadvantage with their competitors.
One major oil company shows that on the 1964 figures if it had set aside the same amount for retention and reduced its dividend, and if the proposed rates of taxation had been in force, it would have had to find £13 million more in taxation.
The chairman of B.P. has been criticised for the remarks which he made about tanker building, but I think that they have been misunderstood. He did not, as I understand, say that he would order tankers somewhere else than in this country. He said, "I will not order tankers at all. I will charter tankers from companies which operate in countries which give greater tax incentives than those to which British companies will be entitled." It is not a question of putting the British shareholder in a comparable position with the American shareholder. We must consider what will be the position of British companies in Africa and Asia against their competitors and the pressures to which they are subjected, rightly in many cases, by their parent countries to plough back money.
Does the Chancellor really think that the countries in which these companies operate will not insist that they pay the full rate of tax? Of course they will. And on top of that they want further investment. Does he think that if they pay British tax in addition this is a possible and a viable situation? The United States give a very considerable depletion allowance. Other countries give certain advantages to their companies operating overseas.
Under the present arrangements a company operating in a country where local company tax on profits is 50 per cent. pays an extra 6¼ per cent. to bring the level up to the British combined rate. But, under the new arrangements of the Chancellor of the Exchequer, a company will pay on each £100 of profit which it earns abroad £50 in foreign tax, and if the remaining 50 per cent. were distributable in this country it would pay 41¼ per cent. on the remaining £50. This is an impossible position. The net result will be either that the United Kingdom's companies operating abroad are sold far below their true value to other nations or that they can distribute only a very 99 low rate of dividend. Further, British exports will suffer—in the currency remitted in our access to raw materials and in the exports which directly flow from this country because we have these investments overseas.
Let no one suppose that all this can be palmed off on to shareholders or that it is only a matter of concern to them. As has been mentioned, the Prime Minister, in New York, pointed to the enormous national advantage of having these great overseas investments. They are part of the substratum of the reserves on which we rely. Many companies are able to invest very cheaply overseas because of their past record and future prospects. The Chancellor wants them to raise as much money as they can in foreign currency. I sympathise with this. But if companies are to do this they must be able to raise at least a marginal proportion of their capital on the equity market in this country. Once that disappears they will find it very much harder to raise money on good terms.
If dividends are so drastically reduced that it becomes impossible to raise new equity capital, the Chancellor of the Exchequer will find that they have very great difficulty in borrowing abroad. The right hon. Gentleman, even on the shortest term calculation, is in grave danger of killing the goose which lays the golden egg. He will be aware of the I.C.I. statement that the effects of its investments overseas during the past 15 years have been that it has established outlets for the export of equipment and materials from this country and these, together with dividends, fees and so on, have been worth more than double the amount invested. If we were to lose that sort of benefit, it would have an extremely serious effect on our balance of payments.
Lastly, on taxation, I want to say a word or two about the Capital Gains Tax. I am not opposed to a capital gains tax. However, I believe that 30 per cent. is high. Inflation in this country has gone on at an average of 3 per cent. a year. In America the figure is only 2 per cent. a year, but the Americans have a lower tax. Again I suggest to the Chancellor that this is a factor which the people whom one wants to encourage in this 100 country will take into account. The man who tries to save and to build up capital, and rightly so, will find that he is the person most affected by this tax. I also suggest that anyone associated with the National Savings Movement should now carefully consider his position.
Respected leaders of the community cannot afford to mislead people. For some time, it has been questionable whether many forms of saving were a good investment. The value of the pound has fallen by 50 per cent. over the last twenty years. People who invested originally in Government stocks in, say, the late 1940s will find that if they hold them to redemption, they will get only £48 in real terms for the £100 which they are nominally repaid. Even adding interest to it, they will lose. Some of them believed that they were making a patriotic gesture as well as being told that this was a good form of saving for their old age.
It is a queer commentary on the way we run our affairs that we should appeal for patriotic reasons for National Savings, possibly persuading ignorant people that they are making this reasonable provision for their old age, and then tax their increase in value if they are sensible enough to buy Government stock below par and wait until it is redeemed. They are to be hit both ways, by inflation and the Capital Gains Tax and yet, at the same time, we allow most gamblers to go scot free.
There are other anomalies in this tax which must be looked at. People who live in tied houses and who, therefore, cannot accumulate a house for their old age, will find that if they put their savings into Government stock which increases in value no more than enough to offset the decrease in the value of the pound they will be charged. These, however, are points for Committee.
We must look at the Bill against the Government's economic measures and judge it against their professed intentions. The Government are calling in the special deposits. Bank Rate is at 7 per cent. If this is a Bill which is based upon the belief that what Britain needs is a higher rate of productive investment, I find it difficult to reconcile what the Chancellor is doing with what he is saying, because 101 it is not giving incentive to capital investment. Investment allowances, the effect on small companies, the calling in of special deposits and a high Bank Rate, although that is much less important, are all things which go against productive investment.
There is no sign that the Government appreciate that the doubts about the country's economy are largely centred upon the very high level of Government expenditure and the fact that much of this expenditure is not productive. The real criticism of the Bill is that it will penalise a great deal of the productive side of the economy but do nothing to curb the unproductive side. One of the most necessary things for the Government to do in the coming year is to see that we get value for money in the public sector.
Furthermore, there is about the Bill a new and unpleasant taste. The onus in taxation matters should be upon the Government to prove that they need the money. In the Bill, the onus frequently seems to be shifted and people are told that they ought to be taxed and that they must prove that they are entitled to escape tax. As I have said, I have doubt about the real intentions behind the Bill. Good as many of the principles which it introduces may be, it could be the instrument of a defeatist and inward-looking policy.
I am not one of those who have indulged in personal abuse of the Chancellor's advisers—on the contrary, I think that they are able and dedicated men; I believe, however, that some of the advice which the Chancellor must be getting comes from a long way back in history and that some of his present policies seem to be rather reminiscent of the type of closed economy which was common in Europe before the war and was particularly associated with the name of Dr. Schacht.
There are policies in this Bill which, if extended, would tend to insulate Britain from the rest of the world and to make it that type of tightly planned little island which years ago was dear to a certain type of continental Socialist. The Government sometimes seem to be afraid of individual enterprise and to have little faith in the capacity of individuals to order their own affairs. 102 They have a liking for big corporations and for uniformity for uniformity's sake. The Bill could lead to the concentration of power, wealth and decision, and that is something against which my party at least should always be on guard.
Again, we see in the Bill a strong streak of pessimism. There are people who advised us against entering the Common Market on the ground that British industry could not compete. Perhaps the Government do not share that view, but if that view were to prevail it would be wholly disastrous for the country and out of keeping with the attitude of a radical party.
I notice that the Minister of Housing and Local Government has lately published some of his old essays. One argument in them is that we must have a Socialist economy because the Socialist economy of Eastern Europe will inevitably beat the free enterprise economies of the West. The argument is that by stepping up investment, the Socialist economies of Eastern Europe will expand faster than we shall.
That is shown to be quite wrong. The Communist countries are turning to Western ideas and even to Western capital. They are coming out of their shell at the very moment when we may be in danger of going back into our shell. The reason why they are doing this is the sluggishness of their Socialist economies. The gross national product of Czechoslovakia actually declined in 1963 and only a 2 per cent. increase is claimed by the Czechs for 1964.
The Soviet bloc countries are faced as much as we are by a balance of payments problem. They are finding that the advanced types of machinery and equipment of all sorts which they need, from liquid oxygen converters to fertilisers, can be bought only in the West. Do not, therefore, let us be pessimistic abount running a free enterprise economy which can take its place in the forefront of the modern world. Do not let us be told either that we are simply moving in the direction of what the modern world is doing, because although the type of taxation on which we are now embarking may be common, the rates of taxation and the form of taxation proposed in the Bill are not common.
103 The Chancellor should announce that he will make concessions to overseas companies and that he will give credit for dividends or the withholding tax against the Corporation Tax. He might well look at the proposals already outlined by the Economist. He should also look at the effect upon closed companies of the direction to distribute 60 per cent. of their earnings.
§ Mr. Grimond
It happens to be the right policy. As most of the Government's sensible policies were got out of Liberal Party policy in the past, it might be better to see how those who thought of them would work them. If the right hon. Gentleman reads what his hon. and learned Friend the Financial Secretary has said, he will find that he, too, is a convert to Liberal policy.
§ Mr. Callaghan
The right hon. Gentleman misheard me. I said that I did not think that his speech was in the true vein of Liberal policy; but I am not the real interpreter of that policy.
§ Mr. Grimond
We want the Chancellor not to agree with us but to take action. We want not fine statements about expansion of investment but alteration of the Bill so that such statements may be made effective. Without such amendments, the Bill as it stands could be harmful to modernisation. It could be harmful to this country's standing in the world and it will be quite contrary to the speeches made by Members of the Labour Government themselves calling for incentives to change, to efficiency and enterprise in our affairs.
§ 6.29 p.m.
§ Mr. Christopher Rowland (Meriden)
I wish to address myself entirely to one subject which has been already touched on by most of the speakers this afternoon, and that is the effect of Corporation Tax on overseas investment. I believe that the Government's case is that overseas investment is less profitable than investment at home and has been unduly favoured by tax legislation in past years. I think that, if I may say so to my right hon. Friend the Chancellor, in the statements which we have 104 had so far on this subject the Government have been somewhat long on assertion and short on proof. The Times today has already queried the facts and not the opinions on which policy is being based, and I should like this evening to apply a slightly closer scrutiny to this subject than was possible immediately after the Budget. I hope, in doing this, that the Government's case will also be clarified in the reply to the debate tonight. If my criticism is misguided, as the Financial Secretary has already implied that such criticism is, I trust that it will be realised that it is also well intentioned.
There is, I believe, no question that overseas investment under the proposals will become less attractive than home investment. There are three good reasons why this should happen. I will list them in descending order of importance, in my judgment only. I think that first of all it will be desirable for there to be much sterner criteria of profitability applying to overseas investment.
Secondly, I believe it can be argued—I believe that the Chief Secretary himself bases much of his own position on this argument—that it is bad for this country that the tax which is paid on profits made overseas is, in a sense, lost to this country and accrues only to the Governments of the countries in which the companies operate. This is one of the facts of the situation which cannot be altered, but it is an argument which we have to admit has some force: the operation of double taxation relief so far has tended to mean in a sense that the British taxpayer has been subsidising the foreign Government. If, as I believe to be the case, India taxes gross profits at 65 per cent., Ghana, I believe, at 70 per cent., and this compares with a tax in this country of 56¼ per cent. this means that the foreign Governments are allowed to tax more heavily than perhaps they should.
There is another point, if I may be mildly critical of foreign Governments, and that is that it could be argued that overseas investment, in a changing world of very revolutionary characteristics in Asia and Africa, is at risk of expropriation, and it would be foolish to deny that this must have an effect which also we should bear in mind.
105 The third argument for the Government's policy is that we must to some extent cut down on new investment; but, of course, the main charge against what the Government are doing is that, even if all the arguments I have advanced are overwhelmingly powerful, in fact the effect of the proposals will be not only to cut down new investments but gradually to cut down all existing investments. I think we should try to get some clarity of a simple, factual character into this subject.
It has been said by the Financial Secretary and the Chief Secretary in the Budget debate, and by the Chancellor as reported in The Times of 3rd May, speaking in Manchester, that all that is happening is that the new proposals will remove an existing bias in favour of overseas investment. In fact what is happening is that a position of rough parity between overseas and home investment is going to be moved towards bias against overseas investment, and this is quite different from what the Government are suggesting is the case.
When this was put to the Chancellor by an hon. Member opposite in the Budget debate he indicated dissent—according to the OFFICIAL REPORT. When it was put to him by the Leader of the Liberal Party a few moments ago I noticed that the Chancellor indicated neither dissent or assent. I trust that when I finish he may possibly even indicate assent that that is what the proposals are—not to remove a bias in favour of overseas investment but to institute a bias against overseas investment.
I said that we should have some minimum, factual comparisons to make, and I have been anxious to get a very simple level of comparison. I have found out what the figures are, assuming a Corporation Tax of 40 per cent., Income Tax at 8s. 3d., overseas tax of 55 per cent., which is not a unreasonable average of overseas tax at present, and with a desire by a company to distribute one-fifth of its gross profits in dividends, £20 out of £100. These are arbitrary figures, I must admit, but taking these as assumptions, what do we find the figures produce?
We find that a British company operating in Britain under the pre-Corporation Tax system pays 56¼ per cent. in tax and would retain 23¾ per cent. Under the post-Corporation Tax system it will pay 54 per cent. in tax and retain 26 per cent. I would say that this is something with 106 which all hon. Members will agree as being desirable. The tax will in fact be slightly reduced and retention by the company will have been increased. This is the avowed purpose of the tax. I think that, certainly on this side of the House, we applaud the Chancellor for instituting a policy with these results.
A British company operating overseas—not an overseas trading corporation—at present pays 55½ per cent. in tax and retains 24½ per cent., very similar to the situation existing for British companies operating entirely in Britain, and the difference in tax is only ¾ per cent., admittedly in favour slightly of the company operating overseas. But under the post-Corporation Tax figures the British company overseas, still with this desire to pay one-fifth of its gross profits in dividend, will have to pay 69 per cent. in tax and retain only 11 per cent. So I think the figures show quite clearly that what is going to happen is that the position of rough parity between home and overseas investment will be removed to the very considerable disincentive and disadvantage of the company operating overseas.
If the Chancellor wishes to say that this is the intention, fair enough; but I do not think he should say that all that he is doing is bringing overseas companies into line with British companies. What he is doing is quite clearly making it more difficult for British companies to operate overseas. This is a policy which can be argued, but let it be argued on the basis of the kind of fair figures which, I think, I have given.
§ Mr. Callaghan
Is it not the fact that the 55¾ per cent. of tax was paid by the company operating overseas, and am I not right in deducing that it would pay 55 per cent. to the foreign Government and only ¾ per cent. to the United Kingdom Government? That is the reason for the difference.
§ Mr. Rowland
Yes, precisely, I said earlier on that what I think is one of the main parts of the thinking, of the Chief Secretary in particular—that this is precisely this argument, which can be advanced in favour of the present proposals. But in terms of the present position there is no advantage at present between operating overseas and at home, except of ¾ per cent., whereas in future 107 there will be a very considerable disadvantage. So I think that the Chancellor must admit, talking in terms of the companies concerned, that he is not removing an existing incentive, he is instituting a new disincentive.
§ Mr. Rowland
What do these figures show? I think they show that the system to a company presently investing overseas may well become less attractive. It is an important and fundamental fact which should be known, because what is happening at the moment is that many of my hon. Friends, who are naturally influenced by what the Chancellor says, take it as axiomatic that there is an existing preference in favour of companies operating overseas.
I should like to say why I am concerned about two aspects of the long-term outcome of the present proposals. One is in relation to under-developed countries and the other deals with exports. Hon. Members have already referred to this. As regards under-developed countries the Chancellor said in the Budget debate that there would probably be no effect on under-developed countries. After a period of three to four weeks, during which time we all considered this problem, it was very interesting to note that my hon. Friend the Parliamentary Secretary to the Ministry of Overseas Development, in Standing Committee A considering the Overseas Development and Service Bill, went out of his way to admit that there would be a considerable disadvantage against overseas investment in underdeveloped countries.
I trust we can take this as one of the facts of the situation. It is one of which I hope the Chancellor will take note. We have already had foreign Governments complaining against this. In the area of the world which I mostly know, the West Indies, the four Prime Ministers of the major territories of that area, including two independent States, at their recent Caribbean summit conference spoke in their final communiqué, of the harmful effects on British investment in the West Indies by the present proposals.
More important is the possible impact on exports. I say possible because this 108 is a completely unproven field. I asked the President of the Board of Trade, in a Question a few weeks ago, if there was any research or study on the extent to which British exports can be attributed to the ownership of British assets overseas. Speaking from my memory, the answer was that no such study existed and that such facts as were known were too difficult to communicate in a Parliamentary Answer.
I think we should all know a great deal more about this subject. In the Budget debate itself my hon. Friends the Members for Birkenhead (Mr. Dell) and Dewsbury (Mr. Ginsburg) both raised this, and I hope the Chancellor may feel able to say that some study is being made on this subject, not only for a week or two but in the years that lie ahead. We must consider where we are going on this particular front. At the moment I must confess that when one asks questions on this subject one gets the feeling that the answer is sentence first and verdict afterwards.
Why have the Government allowed the incidence of the Corporation Tax to have such a considerable effect on overseas investment? I think that it is to some extent an accidental by-product. The Financial Secretary has already indicated this afternoon that we cannot infringe the principles of the Corporation Tax. He almost implied "Well, it is going to happen; because there is the principle of the Corporation Tax it is bound to happen." This is what I would call accidental. I know there are other deliberate advantages but I think there is an element of accidental application of the principle.
I have the feeling that what is happening both inside and outside the House is the desire to cut down on investments overseas, particularly in the underdeveloped countries, and that this is a kick-back against the moralising on this subject of the past 10 or 12 years. One is always preaching the virtues of assisting underdeveloped countries. The implication is that virtue hurts and one does this at one's own cost. I am as guilty of this as anyone. All of us who have spoken in those terms have laid ourselves open to the most massive counter-attack when the nation goes into a deep crisis and cannot afford to be moral or generous and must weather its own storm.
109 This is the psychological backdrop to the Government's thinking on this subject. In many ways it is very embarrassing for many of us, the companies concerned, and for progressives of all parties. A lot of this investment has been very good business for this country. It may be that sceptical, cynical, hard-headed non-idealistic non-moral gentleman opposite have always known this. We are now having to change gears on this and the Federation of British Industries is now trying to prove that this investment is good business for this country. We know that this is one of those things no one has ever really dared attempt for the last 10 or 15 years. But if it is good business for this country then I think that this is a reason for the Chancellor to look at this subject once again.
To turn to the export point, I think another reason we have these proposals is the feeling that what cannot be quantified or is not already quantified is not particularly important. We do not know what the effect on exports will be and I think that until we do we should be very careful about committing ourselves. I sometimes think—and this is true of all of us in politics—that we have this heroic view of ourselves, that omelettes cannot he made without breaking eggs and the very fact that this is going to be hurtful to our overseas investment shows how tough we are being.
I am in favour of being tough, but not if it means hurting this country in the long run and, to some extent, hurting overseas countries in the shorter run. I do not believe that this effect is really necessary. So far as I can see, there is no need to lump portfolio investments with direct investments, investment with an export potential and without export potential, investment in underdeveloped countries and rich countries. O.T.C.s and non-O.T.C.s, oil and the rest. They are all going to be affected by this proposal. The Financial Secretary gave us a medical metaphor in his diagnosis on oil. He must surely realise that the essence of making a good diagnosis on one patient is that it does not necessarily apply to all patients.
There are various ways of resolving this problem. There can be permanent overspill arrangements, or a higher Corporation Tax for overseas companies alone. 110 The Economist article has already been referred to. It saw it as being one of the merits of a higher Corporation Tax, but it could possibly be a restriction only to overseas companies. Perhaps the Chancellor will consider allowing companies which operate, partly in this country and partly overseas, to have all their results and all their accounting treated as income in this country. This happens in Germany and I have figures which will show that whereas at present there is roughly comparable treatment between German companies operating partly in Germany and partly overseas, and British companies operating half in Britain and half overseas, there will, under the new proposals, be a very considerable bias against the British Company in this category. Perhaps my right hon. Friend could possibly look into this.
I think that best of all would be some permanent overspill for some categories of company—perhaps non-oil, perhaps those who can prove that they have an export potential—and, finally, controls for major new investment in the sterling area as a whole. I think that the Financial Secretary should tell us a little more clearly why the existing controls which apply to the non-sterling area cannot apply to the sterling area. I know that it will be more difficult, but I think that we should look into this matter more carefully.
I think, too, that we should distinguish between portfolio investment and the rest. During his speech on 12th April I thought that the Chancellor half indicated that he might be willing to consider some distinction between portfolio investment and the rest. If something like this is not done, there will be not merely the permanent correction of an existing high outflow of capital, for which I think hon. Members on this side of the House see the need, but the permanent erosion of existing assets overseas.
It is not only a question of a cut-back in new additional investment or in what I call replenishment investment—investment which keeps the existing outfit going—but, because investment by these companies in businesses of this kind will be so much less attractive, there will be a gradual selling off of existing investments at less than asset value. One of the ironies of the situation is that we 111 could get a better price for existing investments if we did not have this kind of tax proposal. If the Chancellor wants Britain to sell off part of our £11,000 million worth of assets because there is a desperate need to do so, let us do that; but do not let us end up by selling them at less than the £11,000 million value.
I am prepared to agree that a brief or temporary period of disinvestment—I am not prepared to say how brief—might be justified, as it was during the war, but under these proposals, whose full incidence will gradually get tougher and tougher until in five years' time their effect is total, the disinvestment will go on. I do not believe in cannibalism as a long-term policy of nourishment.
The Chancellor said that he would listen. He has queried The Times reporting once today, but he is quoted as saying, "I shall listen." It may be that this has become an un-Parliamentary expression, but I believe that he would show his own strength of character, and that of the Government, if he were to admit the possibility that Corporation Tax will, in the incidence to which I have been referring, have a long-term undesired, and in the case of exports unforeseen, result.
§ Mr. Callaghan
My hon. Friend has talked about the need for facts. Will he give the House the slightest tittle of facts on which he says that this is going to harm exports, and that we need large overseas investments of capital to get exports? I am waiting to hear the argument in support of that view.
§ Mr. Rowland
What I have been saying is that we need to know more facts on this. I am asserting that in the view of many people there is a correlation between ownership or involvement in overseas investment, and the continuation of British exports. This is being stated, and the facts are now being coralled. Not enough facts are known, but the Chancellor has given the impression that he knows that this is factually unimportant. I believe that factually it may be highly important. If the facts show that ownership produces exports, I should like the Chancellor to agree to consider again the incidence of this tax.
If I might disgress for a moment, I believe the Chancellor thinks that if British 112 exporters are efficient enough they will be able to export anywhere in the world, on their own merits, regardless of who owns the importing enterprise. I do not believe that that is the way the world works. It may be wrong, but I think he will find that in many cases—I.C.I. has been quoted, and I could refer to many other companies—when companies own overseas enterprises they give their business to Britain, and possibly to one of their own subsidiary companies. Let us not deny that there is self-interest in this. They give their export orders to this country, because this country is Britain, or because they have other subsidiary companies here. They do not shop around looking for what the Dutch, the Germans, or the Americans can do.
§ Mr. Grimond
I intervene only to help the hon. Gentleman. In the Financial Times of Friday, 2nd April there was a statement by Mr. Paul Chambers of I.C.I. that that firm had carried out the type of inquiry for which the hon. Gentleman is asking, and the firm had concluded that the direct benefit to exports from its overseas investment was double the amount of its investments.
§ Mr. Rowland
I am aware of that, and I thank the right hon. Gentleman for reminding me of it. I think he will find that the experience of I.C.I. is paralleled by that of many other companies, but, as I said earlier, this is the kind of statistic which we as a nation have been slightly reluctant to publish because it has consequences for other countries overseas. If these facts can be got together, and, if not published, at least conveyed to the Chancellor of the Exchequer, I think that he should take note of them.
I think that if the Chancellor was prepared to look at the facts on the export factor, he would lose no political face by doing so. Let us be frank with each other. As politics go, this is a comparatively esoteric subject. We are not asking him to withdraw the Capital Gains Tax, or the disallowance of business expenses, in which there is a high political content, and rightly so. The matter we are discussing now is a technical problem. If the Chancellor could look of this again, no one on either side of the House, would feel that the Government had suffered any political defeat.
§ Mr. Rowland
I hope that when I have been here as long as the Chancellor has I shall be as open-minded as I believe I am at the moment.
I think that we are a great trading nation, perhaps by absolute terms not as great as we were, but in relation to our own internal economics overseas trade is of great importance to us. In a plethora of anniversaries being celebrated this year, it may be worth recording that it was on this day 25 years ago that Winston Churchill became Prime Minister, and that he subsequently said that he was not going to be the King's First Minister to preside over the liquidation of the British Empire.
As a deliberate act of policy both parties liquidated the British Empire after the Second World War. I take no issue with that, but it would be a sad footnote if this transformation into a Commonwealth were to be followed, as a by-product of policy—not a deliberate act of policy—by the liquidation of Britain's commercial empire on which our long-term interest to a large extent still depends.
§ 7.0 p.m.
§ Mr. R. H. Turton (Thirsk and Malton)
This is the longest Finance Bill that I have seen since I became a Member, and in my view it is certainly the worst. I would describe it as a Hungarian rhapsody. If one looks at Nuttall's Dictionary one finds that a rhapsody is "a rambling composition composed in an excited or confused state of mind". My intention tonight is to restrict myself entirely, as did the hon. Member for Meriden (Mr. Rowland), to the Corporation Tax, and to its effect on overseas investment. This matter is absolutely vital not only to British companies but to our Commonwealth relations. Until we clear this matter up, not by having a party battle about it but trying to put it right, severe damage will be done to our economy and to our Commonwealth relations.
The Chancellor, in his Budget Speech, and the Financial Secretary today, both agreed that there was some connection between exports and investment. They said, "We do not quite know what it is. 114 We shall put this tax on until it is clearly defined for us." Knowing his previous history, it appears to me that the Chancellor is adopting a very curious attitude towards the Commonwealth. He seems to regard it as a matter of misfortune that in the last year for which we have records-1963—we invested £250 million overseas, of which £150 million was invested in the overseas sterling area. I regard that as a great buttress to our economy, and evidence of the fact that Britain was then helping progress in the world, and especially in the Commonwealth.
This part of the Finance Bill shows that we are running away from our responsibilities as the leader of the overseas sterling area, by reducing our investments in that area. I warn the Chancellor that this will certainly have very serious repercussions on our relations with leading Commonwealth countries. I believe that it will also stimulate retaliation, which will be very damaging to our export trade.
If we consider the £250 million worth of investments that I have mentioned, we find that the three leading destinations for those investments were, first, Australia, to the extent of £65 million; secondly, the European Economic Community—£36 million, and thirdly, South Africa—£34 million. It is more than a coincidence that in that same year's trading the three countries, or groups of countries, where we had a favourable balance of trade, were, first, Australia, where we had a favourable balance of £31 million; secondly, the European Economic Community, where the balance in respect of the countries at large was £124 million, and, thirdly, South Africa, where we had a favourable balance of £88 million.
That is evidence of investment's effect on exports. It is a two-way influence. The mere fact that we are investing in a certain country tends to excite that country to buy goods from us. Equally, the mere fact that we are exporting to a certain country leads to investment following upon those exports.
I am surprised at the Chancellor's attitude to this investment, bearing in mind what the Prime Minister said when he was in the United States and also the Table in the Bank of England's Quarterly 115 Bulletin for March, 1964, which shows how the whole of our economy and reserves were greatly helped by the £1,300 million investments, of which these form a part. The right hon. Member for Orkney and Shetland (Mr. Grimond) referred to the poor return on overseas investment, and I heard the Chancellor interrupt him—if it was not an interruption, it was a remark made from a sitting posture—saying, "A damned bad investment." That is entirely the wrong attitude for a British Chancellor of the Exchequer to adopt in addressing himself to investment in the Commonwealth.
These are good investments, because they help to strengthen our balance of payments position and help us to discharge our duties in the world. The Chancellor's judgment is, "What will be the rate of return?" If he sees one which has a higher rate of return than another—because an overseas investment or a Commonwealth investment is having to pay the overseas tax—he regards it as an undesirable investment.
Let us take as an illustration two companies—one investing £10,000 in gambling machines on Brighton Pier and the other investing £10,000 either in the mining industry in Australia or in launching a cement industry in Nigeria. It may be that there will be a higher return on the gambling machines, but there will be far less moral value in that investment, and it will do far less good for the stability of Britain. This is the great fallacy that I hope will be corrected when the Finance Bill goes to Committee. At the moment it will reduce the incentive to invest in the Commonwealth and will therefore weaken our influence in the world, and damage our future balance of payments position.
I hope that the Government will radically alter Clauses 46, 60 and 79. They will be a permanent handicap. I can conceive the Government's saying, "Here is a temporary balance of payments problem. We shall have to introduce a short-term measure in order to hold this investment position." But that is not what they are doing. Clause 79 will make it less and less attractive to invest in the Commonwealth. It has caused a great shock all round the Commonwealth. In the Financial Times of 24th April, its Melbourne correspondent 116 pointed out that the First Secretary's letter to the 300 companies had caused consternation in Australia, because it clearly contained the adjuration to comb out their investments and to do away with any which did not bring in a good return. This is insular and reactionary and it will have grave effects on this country.
It is surprising that the Chancellor of a Socialist Government is today telling us not to invest overseas or in the Commonwealth. I remind him that the Socialist Party manifesto said, on page 19,We shall ensure that development and capital investment programmes are geared to Commonwealth needs.If the Finance Bill goes through in its present form that will be a completely broken pledge.
The provisions in Clause 60 will prevent British companies overseas from ploughing back profits or retaining them in reserves. Clearly this will damage the whole of Britain's external position. It is in very strong contrast with the speech made by my right hon. Friend the Member for Bexley (Mr. Heath) at the U.N.T.A.D. Geneva Conference last June. The effect of that speech on Commonwealth leaders, as I have seen in my capacity as Chairman of the Commonwealth Industries Association was that they thought it an enlightened speech, indicating that the attitude of Britain was very different from the attitude of many countries in Europe; that Britain was helping them to develop. Now we have the position that under this Clause there will be an end of the whole policy, which the Conservative Party has been trying to encourage, of helping developing countries—[interruption.] I did not catch that interruption. I like interruptions, but if they are to be made, it is much better that they should be made from a standing rather than from a sitting posture. That enables everyone to hear what is said.
The policy announced by my right hon. Friend the Member for Bexley was for helping developing countries, and I thought it was a policy which had been agreed by the whole nation. We must all realise that the great problem in the world today is the division between the rich countries and the poor countries, or between North and South. I regard this Budget as doing a great deal of damage to the policy—which I had believed was 117 an all-party policy—of helping to deal with the problem created by the division between rich and poor countries.
In the last three weeks since the Budget I have received letters and representations from leaders of Commonwealth countries and the underdeveloped countries, in which the writers ask what has happened to Britain that this Government should be doing all they can to prevent overseas investment and to damage investment in developing countries. From the speech of the Financial Secretary I gather that he envisages that it may well be we can do more by aid, that by Government loans and aid we can repair some of the damage which would be caused by implementing the provisions in this Bill. I beg him to realise that it is trade and investment which can be of lasting value to the developing countries.
§ Mr. Edmund Dell (Birkenhead)
I am sure that the right hon. Gentleman is trying to be fair, but I think he should address himself to the fact that private investment in the less-developed countries has been falling seriously over the years, and was recently shown in a Board of Trade Report to have fallen from £91 million in 1961 to £52 million in 1962. If we count only new money, the fall was from £72 million to £19 million. This process has been going on for some years.
§ Mr. Turton
Exactly, that is the point I am making. If there is this difficulty, of course it is more encouraging to invest in the European Economic Community or in America. That is why the British Government and people should be encouraged to invest in the developing countries. That was the whole point of introducing the provisions for overseas trade corporations. It was in order to steer investment into these under-developed countries where the profit has to be ploughed back into the country. The hon. Gentleman's intervention seems to me to be helpful to my argument.
I warn the Government that we cannot replace trade and investment by loans and aid. It is damaging to the receiving countries, which would far rather, from the point of view of dignity, have trade and investment than loans and aid. Apart from that, we shall find that, however 118 much aid is given, if we cannot raise or maintain the price of their primary commodities and if at the same time we cannot keep their standard of living rising, all that we give in aid to these countries will very shortly be cancalled out.
I should like to remind the House of an article written in the Financial Times by Mr. Harold Wincott. He warned that we are in danger, because of the provisions in the Bill, of getting close to a world economic crisis such as we had in 1931. It happens that at a time when the British Government are putting forward these provisions America also is taking some dangerously reactionary measures in the same direction. Mr. Wincott points out that it is just that type of action which, with its effect on the primary producing countries, resulted in the world economic crisis of 1931.
In a short time we are inviting the Commonwealth Prime Ministers to this country. Are the three Clauses which I have mentioned the message we propose to give to them? I hope that hon. Members, irrespective of party, will realise that a major mistake is being made and will repair it by amending the provisions in this Finance Bill.
§ 7.17 p.m.
§ Mr. William Hamling (Woolwich, West)
Having listened to the right hon. Member for Thirsk and Malton (Mr. Turton), I could not help reflecting that a couple of years ago when the Common Market was being debated in this House one heard from Conservative speakers a different sort of speech from the one we have just heard. I was not then a Member of the House, but I have read the OFFICIAL REPORT of the debates. It may well be that the right hon. Gentleman himself was making that sort of speech.
§ Mr. Hamling
That is my point. The right hon. Gentleman spoke for himself. He did not speak for this party. Is the right hon. Member for Bexley (Mr. Heath) saying he supported that?
§ Mr. Hamling
May I remind the right hon. Gentleman of other speeches in this House—made repeatedly by Conservative Members who advocated entry into the Common Market—to the effect that we must no longer think in terms of trade with the Commonwealth but rather in terms of trade with Europe. That is the point of view of many Conservatives, and it can be documented.
The rest of the speech of the right hon. Member for Thirsk and Malton seemed to me rather more a speech for the Committee stage on the Question, That the Clause stand part of the Bill, than a contribution to a general debate on the Finance Bill in which we are concerned to discuss not only the provisions but the principles of taxation which lie behind the Bill.
I should like to refer to one or two of the points made by the right hon. Member for Bexley. I was not clear whether he was trying to argue on general economic policy that there was no balance of trade crisis in the autumn of last year, but that it was something that happened after this Government were elected. If so, it contrasted with the speech of his right hon. Friend the Member for Barnet (Mr. Maudling), who was of opinion that there was a crisis and what was done by the Government in November was exactly what he would have done had he been a member of the Government.
§ Mr. Hamling
That is exactly what the right hon. Gentleman said, and I hope that when he reads HANSARD tomorrow he will see it. He was saying that the crisis of last autumn was a crisis of confidence in this Government. That is not what the right hon. Member for Barnet said last November.
§ Mr. Heath
With great respect, I think that the hon. Member for Woolwich, West (Mr. Hamling) must distinguish between the trade problems which were emphasised all through the last Government—I emphasised them myself on innumerable occasions at the Board of Trade, as did my right hon. Friend the Member for Barnet at the Exchequer— 120 and the crisis of confidence in November which was a financial crisis. It has been very carefully analysed and documented and the Prime Minister himself said that it was a lack of confidence in the Government.
§ Mr. Hamling
Let us look at the record before the right hon. Gentleman congratulates himself too much. The facts are that on previous occasions when we have had balance of trade problems, they have been followed by a crisis of confidence in the £. If the right hon. Gentleman takes his mind back to 1961 he will remember that there was a Conservative Government in power and that we had precisely the same sort of run on the £ as we had last autumn, despite the fact that the balance of payments problem was nothing dike as serious as it was last autumn.
Another point which he made was to refer to increases in wages. I was not sure, from that part of his speech whether he thought it wrong that postmen should have had the increase in wages which they have had. I know that it is the duty of Oppositions to oppose and criticise without necessarily saying what they think should be done. I am sure that the House and the nation would have been interested to find out from the right hon. Gentleman whether he thought that this was a wage award which should have been stopped by Her Majesty's Government. May I remind him again of 1961, and the award to Government industrial workers, which was suspended by Her Majesty's Government despite the fact that there had been an arbitration award. I am sure that the nation is entitled to know whether the pay pause of 1961 reflects the incomes policy of the Conservative Party of 1965. We have not heard that this afternoon.
The right hon. Member for Orkney and Shetlands (Mr. Grimond), the Leader of the Liberal Party, referred to Government expenditure. I am sorry that he is no longer in the House and that no other Member of the Liberal Party is here. It would have been quite interesting to find out from the Liberals what Government expenditure they think should have been cut. They certainly voted for the increase in Income 121 Tax last autumn. That was an increase in Government expenditure. Admittedly, it was related to the payment of pensions. They also voted again Government decisions to look very closely at Government commitments in the aircraft industry, which was part of the Budget Statement made by the Chancellor of the Exchequer. It is very easy for people to make general statements that Government expenditure should be cut. Hon. and right hon. Gentlemen opposite were always doing that between 1945 and 1950. They did not do much about it when they were in power. This is simply part of the stock in trade of Conservative and Liberal Oppositions.
My right hon. Friend presented this Finance Bill against a background of long discussions about the need to reform our taxation. I would congratulate him, particularly, on introducing into the Bill the Capital Gains Tax and the Corporation Tax. Again, if I may refer to the comments of the right hon. Member for Bexley on this, I hope that I have not got his words wrong, but he said that talk of modernising our tax system is illusory, that it is becoming a myth. I should have thought, judging from the conduct of his own party when in power, that they set out to modernise the tax system and to reform it, but did very little about it. I refer, of course, to the Royal Commission, 1952 to 1955. Very little was done by the previous Government in implementing the recommendations of that Royal Commission and very little was done about looking at alternative means of taxation.
It seems that they have adopted the attitude in Opposition, as they adopted it in Government, that the present system seems to work, so why bother to change it. We have had examples of inaction on this. We have had, for example, the refusal to do anything about the very serious disfigurement of our fiscal system in the last fifteen years in the shape of the tremendous increase in fortunes made out of capital gains. Professor Titmuss, in that section of his book where he refers to this, quotes the Daily Express City Editor as saying that nine men had made capital gains of £40 million since the war. That was, of course, in property. There have been many cases in the last five years of immense fortunes being made out of speculation in pro- 122 perty, out of capital gains. It is no use any Government appealing to wage earners or salary earners for restraint when those people see vast fortunes being made which not only do not have a very moral connotation in themselves but which are not taxed.
No action was taken, either, in respect of the recommendation of the Royal Commission to limit the use of covenants for tax avoidance. I know that my right hon. Friend has not put this into this Finance Bill, but I am sure that it is very much in his mind. In looking at taxation policy, one is entitled to draw into question the policies of previous Administrations. The last Government were in power for a long period and, although they may not have implemented taxation reforms they gave certain twists to the tax system. The abolition of subsidies, way back in 1952, was an example of that. This made the taxation system slightly more regressive. The diminution in the value of Income Tax allowance due to the fall in the value of money had exactly the same result. The Royal Commission on the Taxation of Profits and Income, especially the minority Report, drew attention to this.
As I have said earlier, we had the effect of capital gains. One of the troubles with the statistics of the national income and expenditure is that there is no evidence whatever there of the effect on personal consumption of capital gains. Another very important twist to fiscal policy was given in the years 1951 to 1964. That is that the previous Government repeatedly introduced taxation proposals outside the Finance Bill and outside the Budget.
I refer to changes in the social insurance contributions and charges. These were changes in the tax system. Everyone knows that contributions were increased and that this was a grossly unfair method of taxation because contributions are a poll tax not related to one's ability to pay. In 1951 the Exchequer paid 27 per cent. of the cost of social security and in 1960 it paid 20 per cent. It was estimated in 1961 that by 1964–65 it would be 16.4 per cent. I looked this morning at the Blue Book on National Income and Expenditure and found that in 1962 the Exchequer contribution was only 15.8 per cent. That was a change in taxation policy of a most regressive 123 character initiated by the last Government. I am not surprised that they do not want to discuss taxation policy very much today.
National Health Insurance contributions rose from £26 million in 1957 to £165 million in 1963. This was a form of taxation to finance the Health Service imposed on National Health Service contributions. When the Leader of the Opposition talked about Socialist Budgets being taxing Budgets, he might have mentioned the fact that in 1963, although the Conservatives reduced Income Tax, they also increased the contributions so that the £1,000-a-year man, who got an Income Tax relief of £4 9s., paid an increase of £2 16s. in his social insurance contributions. These are examples of a regressive twist to taxation which was introduced by the Conservative Party when they were in power. I need not refer to the charges for the National Health Service which were in themselves a form of tax.
The present Government intend to reform the tax system and they have made a brave start. I wish them well. It is most remarkable that in this business of taxation, as indeed in so many other fields, the tasks which were not accepted by the Conservative Party when in power for 13 years have had, after these long years, to be undertaken by my right hon. Friend.
§ 7.33 p.m.
§ Mr. Hugh Fraser (Stafford and Stone)
The whole House would like to congratulate the hon. Member for Woolwich, West (Mr. Hamling) on having come to the support of the Government, for he is the first hon. Member to have made a speech in their favour this afternoon. Having listened to the speeches of the hon. Members for Manchester, Cheetham (Mr. Harold Lever) and Meriden (Mr. Rowland), I understand why right hon. and hon. Members on the Government Front Bench should look but not listen. I believe that in the next 20 or 30 days and nights we shall have a debate of considerable interest and many of the points which have been raised will be gone into in immense detail. I therefore do not want to weary the House for too long today when so many other hon. Members would like to state what is wrong with the Budget.
124 The important point which has emerged is that this is the great weapon of the Chancellor of the Exchequer which has been wheeled out to attempt to dominate the economy. One Budget was wheeled out in November and a second Budget has been wheeled out in the last few weeks. The late Damon Runyon described the Gatling gun as an equaliser, and there is a good deal of equaliser about the Budget. It will make a mash of the taller poppies so as to provide sufficient opium for the people.
In spite of the two new barrels which have been skilfully fitted to this great cannon—Corporation Tax and Capital Gains Tax—I fear that by the end of our deliberations, after 30 days, we may well find that this great cannon, which the Government will have moved into position possibly over the dead bodies of several hon. Members opposite, serves no purpose whatever in aid to the economy. That is why I wish to address the House for a few minutes to discuss the irrelevance of the Budget to the main problems which face us.
The Chancellor, recalling his gallant naval days, must remember that hideous sensation when the wheel no longer controls the movement of the ship. This is happening today; events seem to be more in control of the finances of this country than are any of the steps taken by the Government. As my right hon. Friend the Member for Bexley (Mr. Heath) made clear, it was a humiliation that within a few weeks of the Chancellor producing his Budget the Bank of England was asked to take further steps about special deposits and further letters were sent out by the Bank to the clearing banks.
The truth is that the Government have throughout under-estimated the difficulties which face us. They still base their actions on the first so-called Brown Paper which suggested that the economy was in no way overheated. It is clear to anyone connected with industry, anyone travelling on a public bus or public tube, or anyone connected with a hospital service, that the position is precisely that the economy is overheated. The Government may be suffering from cold feet, but the economy is suffering from a considerable dose of overheating. I believe that in the Chancellor we have a man who came to office 125 determined to carry through a series of fiscal reforms, but I also believe that this is totally inappropriate at this moment. If I may mix history a little, it is just as though Savonarola, the good reformer, had become attached to the court of the Borgias when Rome was actually burning. This would have about as practical an effect as some of the things which the right hon. Gentleman is putting forward.
Had he foreseen some of the problems which would face him in the summer of this year, I believe that the Chancellor would have been wiser to turn to quite different forms of taxes which could have had some effect on the economic problems which face us—the problems of maintaining the £ sterling and seeing that our exports rise. I suggest that he could have considered a pay-roll tax. When one reads the predictions of N.E.D.C. on what the employment problems will be in the next three or four years, there must be something in this proposal. Possibly he could have considered the introduction of a turnover tax. At least it might have had some impact on our export industries. But the right hon. Gentleman and his colleagues were committed from the first to embark on the Capital Gains Tax and the Corporation Tax. My right hon. Friend and others have shown many of the dangers of such taxes to the constructive economy of the country.
Two particularly important points should be stressed. First, in the clearly overheated economy which exists, there is no step whatever in the Bill to encourage savings. Secondly, there is absolutely no step to carry out what the Prime Minister on countless occasions has promised to encourage import-saving industries.
As the House will recall, whatever attitude one takes about the aircraft industry or the agricultural industry, these two industries, which have been so gravely affected by the Government, were undoubtedly import saving industries. One can consider the precise implications. For the agricultural industry, the damage is spelt out in greater detail. Consider forestry. The problem of timber is becoming worldwide, yet no steps at all have been taken in the Bill to help our timber industry. Consider mineral exploitation 126 in this country. Absolutely no steps, despite the promises of hon. Gentlemen opposite, to see that the Cornish mining industry, for example, is helped. The same goes for mining in Scotland and Wales. We find absolutely no change whatever from what has been done before.
Consider the small and growing industries, along with those I have mentioned—industries which are by their nature expansionist and which could be import-saving. What do we find? Precisely the same dichotomy, with the enormous amount of time, labour and effort being spent by the Government in trying to drive them down by the use of Clause 70 in their desire to see that the small closed company is harder hit. When we consider what is or is not being done for these industries, along with the trap which was so carefully baited by the Prime Minister during the election—all that business of the great surge forward of the import-saving industries—we find that not a darn thing is done to assist them.
It was promised during the Budget speech of the Chancellor that the Postmaster-General, that egregious and lavish figure, would be introducing a new savings scheme. Where is it? There is absolutely no question but that great damage is being done to the savings movement by the type of action which the Government are undertaking. The right hon. Gentleman the Leader of the Liberal Party drew attention to the grave danger inherent in public men, particularly public figures such as those on the benches opposite, offering bogus prospectuses about national savings to the unfortunate people of this country.
What steps have been taken in the gilt-edged market? This year the Government must redeem about £1,700 million worth of stock. Judging by their programme, it seems grossly inflationary, as the right hon. Gentleman the Leader of the Liberal Party pointed out, that the Government must go to the market for that amount of money this year. That is why I ask what the Government are doing about the gilt-edged market, except carrying out a betrayal. All those unfortunate creatures who indulged in or were induced to buy Dalton's are forced to suffer from the Capital Gains tax. I 127 hope that some hon. Gentlemen opposite read the admirable letter written by Maurice Macmillan in The Times this morning. It should be recognised that four million people are involved in this matter.
Hon. Gentlemen opposite should also consider unit trusts and investment trusts. If the computations under Clause 34 are taken and if the whole matter is analysed it is absolutely clear to anyone who has anything to do with the unit trust movement that not only the incomes of the unit trusts are being diminished but the administration of them is becoming almost impossible.
Hon. Gentlemen opposite pride themselves on their sense of fairness. They pride themselves that this is a just Budget and that it will remove many anomalies. Of course anomalies exist and should be removed, but consider the degree of fairness today in our fight for our lives as a trading nation, the fairness towards one citizen in this country who is engaged in the same sort of work as the citizen doing a rival job in another country and the level of tax imposed on those who are carrying the burden of industry. It is clear that the people of this country are receiving unfair treatment at the hands of the Government compared with their rivals in Sweden, the United States, Germany, France and elsewhere in Western Europe.
These are the facts and the House and the country must realise them. We will fight the Bill every inch of the way. We will first it for 20 days and 20 nights. Hon. Gentlemen opposite will be dragged from hospital and, with the final achievement of possibly the Ayes having it, then, over the piles of the dead, many hon. Gentlemen opposite will come to realise that this has been wasted time for a Budget and a Bill which are totally irrelevant to the facts which face us today.
§ 7.47 p.m.
§ Mr. A. E. P. Duffy (Colne Valley)
I have been surprised at the tone adopted by most contributors to the debate so far in their attitude towards new instruments of taxation, particularly instruments such as the new Corporation Tax. I say that because of the tremendous scope and far-reaching implications 128 which such new instruments must have. Without wishing to sound pious, it would be wise for us to approach the possible consequences of such a new device as the Corporation Tax with a great deal more humility than has been shown. So far hon. Members on both sides of the House have made predictions about the working of the Corporation Tax based on nothing more substantial than assertions, as my right hon. Friend the Chancellor pointed out.
I hope that hon. Gentlemen opposite will not jeer when I say that I am not uncritical of the Finance Bill, especially that part of it, the Corporation Tax, on which I will concentrate this afternoon. I am mindful of what the right hon. Member for Stafford and Stone (Mr. Hugh Fraser) said—that little support for the Chancellor has been shown in the debate today. Although I will make some tentative criticisms of the Corporation Tax in respect of its possible effect on investment, I thought that the balance of argument—and I have thought of little else because, as I said, this will be the main point of my speech—by last weekend appeared to lie with the Chancellor, certainly from the investment point of view. However, let us look again, from a slightly different angle, at the Finance Bill.
Had not the time arrived when Britain was entitled to look at the possible use of a new instrument of taxation, not only because of foreign experience but because a corporation tax was absent, leaving this country perhaps the only one of its kind without such a tax, although I agree that this is not a particularly powerful argument? Because of possible flexibility, would not hon. Gentlemen opposite agree that here was a weapon which might prove very useful in stimulating investment with a view to modernisation? This is my main interest and I hope that it will be agreed that in the short time I have been an hon. Member I have never shirked the implications of modernisation.
I thought that, all in all, the Corporation Tax looks as though it might measure up to the country's requirements. It is likely to play a positive rôle in incomes policy, something that most of us agree is needed. It is likely to be an instrument in the modernisation of our economy, especially in regard to investment, and it 129 is to that that I wish to confine my remarks. It is also the cornerstone of the Finance Bill, so I shall look principally at Clauses 42, 44 and 46 in Part IV.
Most hon. Members will agree that there is an overwhelming need to stimulate home investment, because Britain is still handicapped by an inefficient productive asset structure. At the present time, Britain is investing one of the smallest percentages of all developed countries, notwithstanding a liberal tax rate for investment.
I must say that I am not as much moved as some hon. Members by the possible effect of the Corporation Tax on the existing investment allowances, because we all know that the Report of the Richardson Committee as well as the recent Report provided to the National Economic Development Corporation by the Management Consultants' Association—as well as certain private pieces of research with which I am familiar, and about which I know many hon. Members are also aware—point to investment allowances as having been far from an efficient incentive in recent years. I therefore think that, on the most moderate and objective showing, the Chancellor is entitled to look at the position again.
We must remember, after all, that £300 million of public money are involved, and there is no, or little, evidence—and no one in this House can go further than that—that those £300 million were acting as very much of an incentive to businessmen. We know that a recent report suggests that many business men look at investment before taxation, so that these investment allowances were really coming to them as nothing more than tax relief. Those are not my findings, but the findings of others—and findings, incidentally, that have not yet been knocked about.
So I say that, on the most moderate showing, my right hon. Friend was entitled to look at the matter again. That is all he has said—that he will look at it again. He invited comment on this subject, presumably from both sides, in his Budget speech—
§ Mr. Heath
But what is happening is that these allowances are being slashed. If the hon. Gentleman could argue that his right hon. Friend the Chancellor of the Exchequer had done this with forethought, after examining the situation, and 130 had said that these should be reduced by way of Corporation Tax, one could say that this was a policy that could be examined on its merits. But what has happened is that it is now seen that the Corporation Tax is having this effect, and his right hon. Friend is saying, "I am quite happy to have another review of it."
§ Mr. Duffy
I heard my right hon. Friend's Budget speech, and have read it closely since. My right hon. Friend said that he would make an announcement in the next Budget speech. I think that that is reasonable. As I say, a lot of public money is involved, and there is little evidence that it is having the right effect.
I want the Chancellor of the Exchequer next year, if he will, to go beyond existing arrangements if he can point them in a positive direction. I want him to look at research and development for example; here there are real grounds for credit enticement. I should not like the right hon. Gentleman to think that I am cynical of these arrangements. No, it is just that I think, if the right hon. Gentleman will forgive my using the phrase, that they must be pointed more purposively.
Many hon. Members recognise now that the bulk of firms get the bulk of their additional capital for necessary growth out of retained profits. Despite the prophecies of woe that we have heard from both sides in this debate, whether we look to the period before the ending of the two-tier Profits Tax in 1958 or subsequently, or whether we look at German practice—and this is an interesting case to take, because the Germans have not a capital market comparable to ours, and we know the measures they take to compensate for that—they lightly tax distributed profits—as my hon. Friend the Chief Secretary said on the last night of the Budget debate, the lesson is the same; the pattern of financing equity has remained virtually unaltered. In other words, generally speaking, companies grow out of their own resources.
I found it difficult to get round that conclusion of my hon. Friend the Chief Secretary. Nevertheless, I hope he will accept my concern for certain companies that may not be covered by this conclusion. Generally speaking, what he said is possibly true of most companies, but there are two categories of companies of which exceptions could be made. One 131 category was mentioned by the hon. Member for Belfast, North (Mr. Stratton Mills)—the company which is heavily involved in automation. There is Elliot Automation, for example—1 have that category in mind. I have in mind, the really fast-growing company that will need to go to the market, will need outside financing.
Another category of company that may have to be looked at again is just the opposite kind of company—the slow-moving company, of which we may have too many, the company that may be superficially covered by what my hon. Friend said. We all know of some such companies, companies that are content to finance their own expansion out of their own resources. We cannot be complacent about their continued existence. Those are two categories that may not be covered by the kind of experience on which the Chief Secretary based his own view that evening, when he said that, generally speaking, most companies grow out of their own resources, presumably do so satisfactorily, and will therefore not be hurt by the Corporation Tax.
But what about another possible effect of the Corporation Tax? I grant that what has so far been said from this side of the Chamber is true, and that, in theory, the Corporation Tax will encourage retentions. How far those retentions will amount to plough back is another matter, and I will not go into that now. But I am apprehensive that things will work out slightly differently in practice.
I think that it is true that the Corporation Tax gives a company director an incentive to retain rather than to distribute profits to shareholders, since those shareholders will now have to pay an additional tax on such income. But there is a widely held belief that the average company will have had to enjoy at least double cover for its dividend under the old system if it is to preserve both its distribution and its retentions under the new arrangements. That means that many companies, given similar gross profits, will have to decide whether to cut dividends or retentions. So we shall have a psychological element to consider.
We know, and some hon. Members opposite know better than we do, how many directors are so concerned for their 132 standing in the markets that they will be tempted to cut back retentions to preserve dividends. Hon. Members on both sides of the House know that management and men in highest authority in the business world are moved by such uneconomic considerations. What I have said about home investment has been tentative, and deliberately intended to be tentative. I do not think one can go further at this stage. That is why I am appalled at the slightly dogmatic way in which hon. Members have addressed themselves to this debate.
I turn to overseas investment. It is widely held that it will be seriously affected by Corporation Tax. That has been said almost more than anything else from both sides of the House. I have been looking to those hon. Members to produce by way of argument something more substantial than they have produced. I wonder how many of them have looked at the article in the autumn review, "Moorgate and Wall Street," by Professor John Dunning on "Does Foreign Investment Pay?" I am not suggesting that this is the last word that can be said on the subject, but it is something which cannot be easily overlooked. I think that Professor Dunning speaks on this matter with a little more authority than do some hon. Members He concludes that it cannot be said with any precision that foreign investment does pay.
Hon. Members may wish to know the basis for this final conclusion. He takes the view that the social rate of return on capital at home is higher than that on overseas investment and there are rather significant benefits, particularly in feedback of technical knowledge for strategic uses of raw materials and the increase in exports, all of which accrue to the domestic economy. Thirdly, there is evidence to suggest that United Kingdom investment overseas is not as profitable as it might be. Finally, it is not clear whether the net effect of overseas investment on the balance of payments is to improve or to worsen it. Up to that point Professor Dunning has ignored the terms of trade.
§ Mr. John Harvey (Walthamstow, East)
I am interested in what the hon. Member is saying. I take it that he realises that Professor Dunning specifically excludes invisible earnings, such as insurance and banking, and also excludes oil from the 133 purview of his report? The assets were given in terms of book values which may have, and probably did have in most cases, an appreciable under-value.
§ Mr. Duffy
I was about to say those things. I said that Professor Dunning ignored the terms of trade and I agree about the other things mentioned by the hon. Member for Walthamstow, East (Mr. John Harvey). Even when one makes those allowances one is entitled to be impressed by the Professor's open-mindedness on the matter by his own conclusions, which contrast with dogmatic utterances on this subject which we heard in this debate.
Putting aside the argument, I have not heard anyone say in this debate that the Government were not obliged to correct the bias in favour of overseas taxation in order to correct a position whereby the outflow of capital had come to be responsible for half our balance of payments deficit in a current year. I do not believe that the former Government could have avoided taking some such action. This does not mean that I am complacent about the implications. I recognise that short-term matters may involve long-term hurts. Although I think the Chancellor was obliged to move here, I hope he will watch this position because this is a view which again has been put forward by Professor Dunning who said:The justification of overseas investment will vary according to priorities of policy. If the primary aim is to protect the balance of payments in the short run the attitude to foreign investment may be quite different than its long-term growth is the first priority.The recent N.E.D.C. Report said almost the same:Severe restrictions on private investment abroad could hardly be maintained indefinitely and, in an case, would worsen the current account of the balance of payments in the longer run.The risk here is of taking short-term steps which will run counter to long-term aims. I hope that my right hon. Friend will watch carefully the effect of the Corporation Tax on both overseas as well as home investment.
The Budget and the Finance Bill are in many ways reminiscent of the great Lloyd George Budget of 1909. The right hon. Member for Stafford and Stone 134 spoke about fighting the Finance Bill for 20 days and 20 nights. That reminded me of the great debates of 1909. With the benefit of hindsight we all know that what Lloyd George was trying to do was to make possible the first financial instalment on the Welfare State. This Finance Bill is, equally, a watershed in taxation and the things which taxation makes possible, such as the Welfare State, and steps towards the modernisation of our economy, without which we could not have expansion of the Welfare State.
§ 8.8 p.m.
§ Sir Alexander Spearman (Scarborough and Whitby)
I do not think the Government can be very happy about today's debate. We have had four back-bench speeches, two criticising the Government and two supporting them. With all respect to the hon. Member for Colne Valley (Mr. Duffy), I do not think there can be very much doubt about which were the most effective. I hope it will not damage the hon. Member for Meriden (Mr. Rowland) too much when I say that he made a most remarkable speech. It appeared to me to be a robust and radical attack on a doctrinaire Socialist Bill.
Before coming to the critical things I wish to say, I want to pay a tribute to the Government—if they will accept it from this side of the House—for standing firm against devaluation. I suspect that they must have been under a great deal of pressure from some of their newer advisers. I believe that devaluation today is quite unnecessary. Our prices are not now so out of line with those of our competitors although, if the Government do not do the right thing soon, they may become so. Devaluation would be only a temporary respite. I think we can get that, and are getting it, by borrowing—with far less harm both to ourselves and to those from whom we borrow. The consequences of devaluation would be that later we would have to have much more drastic deflation than is necessary today. We would create a tremendous distrust of sterling which might last for a very long time. We might do considerable damage to international trade, especially to West European trade, which would have serious repercussions on us.
135 My criticism of the Government in this respect, and many others, is not concerned with what they want to do, but with the effect which their measures are likely to have. We have to face the hard fact that we have to spend a great deal less or earn a great deal more. For several years now on and off, but most particularly during the last few months, this country has been suffering from a serious but curable disease of excess demand. I believe that the balance of payment troubles are a symptom of that disease. It is never any good attacking a symptom. It is the disease itself which must be attacked.
Many Ministers—I most particularly include the Prime Minister in this—have given the impression by many of their speeches that, if only by some clever gimmick we could export more or import less, our problems would be solved. Of course we must export more; but, if we do that and nothing else, we shall not solve our problems. We shall get into a raging inflation. There will be more money chasing fewer goods. We have either to slow down the expenditure or to modernise.
Right hon. and hon. Members opposite in theory support modernisation. They did so in their election speeches. They are not doing it in practice, because it means change, and change hurts. For example, it means employing two people where three people are employed today. I believe that we as a nation must choose between present comfort and only a little rise in the standard of living, and drastic and often painful change and a rapid rise in the standard of living. We cannot have progress and a quiet life. If we try to get both, we shall get neither.
I profoundly hope that we shall come down on the side of modernisation, but I do not underrate the difficulties. We must adapt ourselves to a changing world. That means doing all sorts of things that will upset many people a great deal. I must today confine myself to those changes which are relevant to this Bill. Primarily we must have much better planning and I have always believed that the Budget is the prime Government instrument for planning. By planning I do not mean, with all respect to the First Secretary of State, making plans as to what we shall produce, how 136 we shall produce it, and how much we shall produce. All that would be all right if planners were infallible, but we know that they are not. To take an example, in 1951 the last Socialist Government set up a very high-powered Committee called the Ridley Committee to estimate what fuel consumption would be 10 years later. How wrong that Committee was. It estimated that gas consumption would be substantially up, and it was down. It estimated that coke and manufactured fuel consumption would be substantially up, and it was down. It estimated that oil consumption would be up by 82 per cent. It was up by 249 per cent.
Totalitarian Governments do not have to bother about this, because they do not have to bother about what the consumer will want. They do not have to foresee changes in demand, because they force people to take what is produced. The planning which I believe is absolutely essential is regulating the pace of the economy. If demand is too little, we get unemployment and waste. If it is too great, we get diversion of exports, we get imports sucked in, and, most particularly, we do not get enough competition, and therefore we get waste.
If by those much abused words "stop and go" we mean "slow down and speed up", I am sure that "stop and go" is essential. The only alternative is either to run the economy very slow indeed, which is unthinkable because it means massive unemployment, or to have a series of controls, which I do not believe a democratic Government could possibly acquire in time of peace. I can remember the late Ernie Bevin, who was held in such respect and affection by most of us who were in the House with him, wherever we sat, saying just about 20 years ago, "The Labour Government are very fortunate They have inherited war-time controls they could never get in peace time".
I do not claim that the former Government learned at all perfectly how to regulate the pace. What we have learned is that these measures take much longer to operate than had been realised and, because of the multiplier, they have a much greater effect when they do operate. Therefore, when the Government turn the knob in one direction they must at once be thinking about turning 137 it in the opposite direction for effect in a few months' time.
It is a widespread view on both sides of the House that the way to get maximum growth must be to run the economy full out; that there is a choice between growth at the price of some inflation and stability at the price of no growth. I believe that this is an absolute and most damaging myth. I believe that the opposite is true. I believe that inflation slows down real growth, because it leads to inefficiency, it leads to waste, and it leads to the wrong sort of industrial investment. A study of company reports shows that time and time again when companies have very long order books they are concerned with the sort of investment that will give them the maximum return per unit of capital. When their order books get shorter, they are concerned with costs, with how much they can get per unit of labour, which means maximising our resources.
The Economic Report for 1963 defined the maximum output that the existing labour force could produce as the productive potential. I believe that, whenever actual output approaches closely to the productive potential, we then get conditions of excess demand; we then get balance of payment troubles; we get imports sucked in, exports diverted, and costs rising. That happened in 1951, 1955, 1960 and now. These were the years of the worst balance of payments figures in the 1950s and the 1960s. These were the years of the smallest margin of unused capacity.
I have taken my estimate of that from Professor Paish's article in Lloyds Bank Review, Table II. It is very largely borne out in that admirable book by Dow, "The Management of the British Economy 1945–1960" and, indeed, by Shepherd and Godley in the issue last August of the National Institute. Unless there is a margin of unused capacity of between 5 per cent. and 6 per cent., there cannot be enough competition. If everyone can make their profits too easily, they will not exert themselves. Unless there is adequate competition in a free state, I am absolutely convinced that there is inefficiency and waste. The Government's job is to make profits hard to make and well worth making. The surest way to slow down real growth is to preserve inefficiency.
138 Therefore, I maintain that maximum growth in the economy depends on planning that is regulating accurately the pace of the economy so as to get the maximum of enterprise and effort and the right type of industrial investment.
Then I believe that the Government must be realistic in their tax changes. Their object obviously should be efficiency. I was glad that my right hon. Friend the Member for Birmingham, Handsworth (Sir E. Boyle) in the Budget debate quoted the speech of Lord Franks, in which he said that one of the greatest handicaps this country suffered was that it always made the test of a policy—is it fair? The parable of the vineyard is a very hard one to master, but I am sure that it is a true one and worth remembering. The test has been "Is it fair?", whereas it ought to be "Will it lead to efficiency?" I agree with my right hon. Friend when he said that there is absolutely no inconsistency between efficiency and idealism because the more efficient we are the greater are the resources and, therefore, the more we can spend on education, health, housing and so on. Tax changes by which some, in the cause of fairness, are made less rich and the rest poorer must be bad taxes. Is a man to be reproached because he wishes and strives to do better than his neighbour?
I have, perhaps at too great a length, given the reasons why I believe we ought to have a deflationary Budget. I now want briefly to examine the Budget. I remember being told that when the present ruler of France came to office for the second time and when he found a very serious financial crisis in his country he had three different policies put before him by his advisers. They said, "The first is really no good; it will be quite ineffective. The second you cannot do; it will be politically impossible. Therefore, we must recommend you to accept the third, a compromise." I understand that the General said, "If you can persuade me that the second policy is the right one, the second is what we will do", and they did it.
I do not want to belittle what the Chancellor has done. I quite accept that his Budget has done something. It has given sterling a respite. But it is a compromise. It is not a courageous Budget. My criticism of it would be, 139 first, that a great deal of it is irrelevant and some of it damaging; second, it has not done nearly enough for the right hon. Gentleman's purpose; and third, it depends on the incomes policy succeeding.
The First Secretary is a very controversial figure, and I do not want to belittle what he has done. I think he has worked very hard. He has made a first-rate appointment in Mr. Aubrey Jones. I think it is quite possible—I will not say more—that the Incomes Board may make some contribution towards getting rid of these damaging restrictive practices. I can imagine circumstances when a measure of exhortation will be useful; but I am sure that it is madly unwise to depend upon an incomes policy at a time when unemployment is under 1 per cent. in areas of the country where two-thirds of the working population live.
I think my real difference with the right hon. Gentleman would be this. I do not believe that wages go up because of trade union pressure. I believe they go up because of competition between employers. I have tried, with the aid of those who have been extraordinarily right in their forecasts in the past, to make some calculations. I will not burden the House with my figures, but I believe that this year the increase in spending by public authorities and by consumers, allowing something to make room for exports, will considerably exceed the increase in production. Therefore, this year we are going to have a consumption inflation. It is quite likely that because of the credit squeeze, so much more severe than any of the monetary policies which were so much under attack during the past 13 years, and because of prospects for profits, that next year we may see a sharp decline in industrial investment. This year we shall have a consumption inflation. Next year perhaps we shall have an investment deflation. Inflation of consumption and deflation of investment must be the exact opposite to what the Government want, as occurs in so many of the things that they are doing.
The Chancellor estimated that his measures would cut back demand by 140 £250 million. I believe that a good deal of that will come out of savings and profits which, at any rate, in the current year will have no effect whatever on consumption. The cut-back in actual consumption may be not much more than half the figure that he has suggested.
What the Government ought to be doing is, here and now, preparing vigorous plans for an expansion of investment next year and sharply cutting back present consumption or Government expenditure, or both. The truth is that the Conservative Government in the last few years have spent up to the hilt of what we could afford, but all the time that they were doing that they were under the most bitter and abusive attack from hon. Members opposite who continually asked the Government to spend more. The Prime Minister said that last year. The present Chancellor of the Exchequer spoke about the Budget being too cautious, and the right hon. Gentleman the President of the Board of Trade described the 1963 Budget as a timid Budget.
All the time that they were making those attacks they were also making the most lavish promises of what they would do. No doubt, those promises served their purpose; no doubt they got votes. But now the day of reckoning is approaching. If they can survive the next few months I think they will find that they will have to break their promises and their pledges on a scale that will shock the country, hardened though it may be by its experience of the last six months.
I oppose this Budget not primarily because it will hurt certain interests but because it fails to promote growth. I recommend the Chief Secretary to read an article by Mr. Rees-Mogg in the Sunday Times of 11th April. I do not always find myself in agreement with Mr. Rees-Mogg, but I thought that this was a most formidable article showing the striking contrast between the Prime Minister's promises and his performances. I will quote the last sentence of this article, because it sums up the Budget more concisely than I could do:It is a Budget which will make Britain less efficient, less modern, less prosperous and less well able to earn her living abroad.What we needed was a Budget which would provide a stick to give more competition, a carrot to give more incentive. That is the way to get a dynamic economy. 141 What we got was a drab Budget which will make no one richer but most people poorer. I shall have no hesitation in voting against the Bill.
§ 8.29 p.m.
§ Mr. Edmund Dell (Birkenhead)
I was relieved to hear the hon. Member for Scarborough and Whitby (Sir A. Spearman) say that he does not always agree with Mr. Rees-Mogg, whose opinions on the leader of the Conservative Party are well known.
The matter on which I wish to address the House seems to be becoming a very large part of the substance of the attack on the Government. It is the subject of overseas investment. We are seeing launched on the Government what appears to me quite an undiscriminating attack, particularly on the Corporation Tax as it affects overseas investment. This is a pity, because our attitude to overseas investment should be highly discriminating between different forms. My criticism of the Government is that their present measures possibly are not sufficiently discriminating, although the information which is available for formulating policy is sadly lacking.
It is a severe criticism of the previous Government that over a long period of time, when for many years vast sums were being invested abroad, no attempt whatever was made to study the implications of that enormous investment for our balance of payments or for our economic progress. They ignored one of the main features of this country's economic development—the fact that it was investing abroad to a larger extent than any of its trading competitors with the exception of the United States.
Let me deal first with the matter of developing countries. Many hon. Members have referred to this subject. I do not think that hon. Members opposite can put forward this aspect in defence of their attitude. The fact is that for many years the rate of investment by this country in developing countries has been falling, quite independent of the Corporation Tax. It has been happening year by year, very likely because it has been found that investment in developing countries is less profitable than investment in developed countries. Another reason may be the political risks involved in investment in developing countries. What- 142 ever the reason, this type of investment has been falling, and there is no denying that this is a most serious matter. To say that the Government are in any way responsible for this is complete nonsense.
I am afraid that the effect of the Corporation Tax may be to re-emphasise this situation. I should like to see, if possible, the Government exempting developing countries from the impact of Corporation Tax. The Americans have exempted developing countries from their own measures against foreign investment. Nevertheless, our Government have no responsibility for this situation. It is a situation which the world faces and which the developed world will have to concern itself with very seriously.
§ Mr. John Harvey
Does the hon. Gentleman seriously suggest that overseas investment has been falling year by year? If so, I should like him to quote his authority for that and to know whether his Front Bench agrees with it.
§ Mr. Dell
The hon. Gentleman must inform himself on this subject.
On, I think, 2nd April, there was a Board of Trade report in the Board of Trade Journal on the subject of overseas investment in developing countries. It said that in 1961 the amount of our overseas investment in less developed countries was £91 million and in 1963 £52 million. If we take out of those figures the amount of profits reinvested, we find that the fall in new money from 1961 to 1963 was from £72 million to £19 million. This is a well-known fact and it has been the subject of frequent comment by those who make it their business to discuss these matters. It is suspected, although I cannot quote figures for this, that a process of disinvestment by all the developed countries is going on in the less developed countries.
I wish to consider the problem of overseas investment in its most general aspect and the sorts of information which the Government can have in mind in deciding their policy. We have to consider the advantages which it is believed accrue as a result of overseas investment. What we want, as far as it is possible to get them, is facts, not passions. What are the forms of return which we receive as a result of overseas investment? First, there is the direct return in the form of dividends, royalties, technical fees, and 143 so forth. There are two points to make about that. The first is that the results of our own overseas investment in these terms are, unfortunately, rather poor. They are, unfortunately, much less satisfactory than the achievements of the United States in this direction in securing a return in their overseas investment. The reason very likely is that our own overseas investments have to far too great an extent been defensive in character.
What we have been concerned with is the possible loss of markets instead of considering, as the Americans have done, what are the best forms of investment which are most likely to be profitable in overseas markets. We have taken the attitude that manufactures will be made there, that there will be a tariff and that we will be shut out and that, therefore, we must go in first. The Americans have not taken that attitude. They have considered the market in which they wished to invest and have considered on its merits what form of investment would be most profitable. The relative failure of our overseas development in this most important respect is a criticism of British management.
The second advantage which should accrue from overseas investment is in the control of raw materials. How extensive these advantages are is, again, subject to doubt. I do not know, for example, that we get our raw materials any more cheaply than other countries as a result of controlling their production in certain countries. Certainly, it is at least likely that the return to this country from that type of overseas investment in raw materials, in mines, and so on, is likely to fall in profitability if only because it appears that the long-term trend is that the prices of raw materials are falling relative to the prices of manufactured goods. I know that there is a lot of argument about how far this trend can be taken as being established, but certainly it seems to have been the trend over the last decade. That argument might lead us to consider critically the value to this country of that sort of overseas investment.
The third advantage which is said to accrue—and the argument here is much stronger—is that overseas investments assist in the promotion of United Kingdom exports. Unfortunately, as I 144 will go on to say, in this field also the information is all too sparse. On all these points we suffer from a considerable lack of information upon which policy can be based, and in considering these matters we have the whole time to remember that there are many different forms of overseas investment. Therefore, when I say to my right hon. Friend the Chancellor that he should go carefully in cutting foreign investment, it is not because I believe that he is necessarily in all cases wrong, but that it is impossible at the moment to determine in which cases he would be right and in which he would be wrong.
One case in which my right hon. Friend is clearly right is in respect of overseas portfolio investment. We have an overseas portfolio valued at £4,000 million. This is an enormous sum. Even the private overseas portfolio of the United States of America, a country much more wealthy than ourselves and with a much larger population, is valued at only £6,300 million. I cannot see that the return to this country of this enormous portfolio investment overseas justifies it. Certainly, if the effect of Corporation Tax is to bring some of that money back into the United Kingdom, where it could be invested, that would be all to the good.
The main question to which I wish to devote myself is what has become the gravamen of the charge that this attack on overseas investment or a possible reduction in overseas investment will affect our exports. The argument with which I have great sympathy, and with which, in fact, I largely agree, is that it will affect our exports because it will reduce the number of overseas manufacturing projects in which we can engage. I say it will reduce our exports. I would refer to what the Chancellor said in a very brilliant speech winding up the Budget debate. He said:I have looked at the nature and level of overseas investment by other countries, for example, Germany and Japan as the two most notable examples, in relation to their exports, and I do not think there is any particular correlation between the amount directly invested overseas and the quantity of exports."—[OFFICIAL REPORT. 12th April, 1965; Vol. 710, c. 1082.]I do not know what figures my right hon. Friend was using. All I can say is that what he said is certainly in accordance with my own experience. It 145 is certainly, according to my experience, true that the Germans and the Japanese have had their successes in exports, independently of the amount of their overseas investment. It is true also of one particular year for which I have had the figures produced for me, 1962, the last year for which these figures are available, and which compare the flow of overseas investment with exports. These figures show that in that year the Americans' flow of oversea investments was about 15 per cent. of the value of their exports; the United Kingdom flow of overseas investments was about 5 per cent. of the total value of exports; the Japanese and German flows were about 2 per cent.; in other words, substantially less than our own.
I think it is probable that this establishes the truth of what the Chancellor said, but I am afraid that this merely re-emphasises the inadequacy of our export effort, despite our enormous overseas investment and many other notable advantages which we have. In spite of the enormous advantage we get from our overseas investment and from our manufacturing projects overseas, nevertheless our exports have not developed at the rate they should have done, and certainly not comparably with those of Germany and Japan. It is not probably a reason for taking out from under our export effort the support which it apparently has.
As I am saying, the real trouble on this subject is that far too little is known about it. If I try to summarise what is known I suppose it is as follows. First of all, there is the impression of anyone who has planned and carried through an overseas manufacturing project that it does bring a return to the United Kingdom in the form of additional exports. That has recently been confirmed in figures which have been referred to in the debate today and which have been produced by the Chairman of I.C.I., the Chairman of the British Motor Corporation and by the Managing Director of Leyland's. In these cases there is clearly evidence that as one return on our overseas investment there has been a marked increase in exports. We have such official statements as that which appeared in Economic Trends in August, 1964, in an article on "Short-Term Economic Forecasting in the United Kingdom". It said that 146Figures for past periods … show that the development of private investment in Western Europe has an important effect on United Kingdom exports of capital equipment.We know that the oil companies spent £115 million in the United Kingdom last year on equipment and raw materials, but all these are specific examples which do not take us to the final result we are looking for, and that is, what is the likely return in the form of exports on our overseas investment? My hon. Friend the Member for Meriden (Mr. Rowland), in what I considered an excellent speech, referred to a Question which he had put down to the President of the Board of Trade asking for this sort of information, and the fact that he was told that this information was not available. That is, perhaps, not surprising, because when I myself put down a similar Question to the President of the Board of Trade I also was told that the information was not available.
Recently we have had two further items of information on this subject. The first is the report by the Federation of British Industries in a recent edition of British Industry, of 30th April, and we have also got such information as we can indirectly glean from what was published in the Board of Trade Journal on the subject of international trade credit.
I would like to examine these F.B.I. figures. They are very interesting and very valuable. The F.B.I. is to be commended for collecting them. They might have been collected before. Unfortunately they are totally inconclusive. First of all they are a very limited sample, and it is interesting to know that out of 45 companies approached ten failed to provide the information in a form which could be used. The figures show no direct relation between overseas investment and exports. It is curious—I hope not typical because it would go against the arguments I am trying to deploy—that the company with the second highest exports is the company which has been disinvesting most rapidly overseas. The export figures shown are not net of any imports into the United Kingdom from British overseas manufacturing projects as a result, perhaps, of lack of capacity in the United Kingdom which might not have existed if the money had been invested in the United 147 Kingdom rather than overseas. The export figures again are not net of any exports to third countries made from British manufacturing projects overseas which might otherwise have been made from the United Kingdom.
Anyone who has been engaged in this business of overseas investment knows perfectly well that many overseas Governments very properly say to a company that wants to invest in their country, "All right, if you build this plant here you must export from this plant." These exports may very well cut our own exports. They may replace our own exports, and no consideration is given to this in the F.B.I. figures. The Indian Government are an important example of this and the Indian Government are entirely justified in doing it, but it does affect the implication of the F.B.I. figures.
Lastly, and this is not a criticism of the F.B.I. figures, I think it is a pity that the F.B.I., in asking companies for this sort of information, did not also ask them what proportion of the imports of their overseas manufacturing companies come from the United Kingdom. My hon. Friend the Member for Meriden said that British manufacturing companies overseas do not shop around, they buy from the United Kingdom. That is no doubt in accordance with his experience, but it happens to differ somewhat substantially from mine. In fact, I find that they do shop around and the implications of overseas investments for the United Kingdom economy and for the United Kingdom balance of payments might be a great deal more favourable than they are if there was this concentration on United Kingdom sources of supply by British manufacturers overseas.
Perhaps the most interesting point about the F.B.I. figures is that companies investing overseas seem never before to have investigated what the total return to the United Kingdom from their investment was. Some of them have confessed to being surprised by the results. Those who have been surprised have fortunately been favourably surprised. It would be a pity if they had turned out to be unfavourably surprised. If my right hon. Friend the Chancellor has done anything he has certainly provoked thought on the subject of overseas investments.
148 To come to the figures recently published in the Board of Trade Journal on the subject of international trade credit. I have tried to use as much ingenuity as I have to seeing whether I can derive from these figures any lesson for the amount of our exports which go to British overseas manufacturing projects. I am sure the House will agree that that will require a considerable amount of ingenuity. It has always been known that there was no direct relationship between annual increases in exports and increases in private investment abroad. In fact, new private investment abroad is always much greater than the annual increase in exports. One would no doubt wish that it was the other way round, but it is not, so at any rate it looks probable that only a part, and it may be quite a small part, of this annual increase in overseas investment returns to this country in the form of exports.
What do the Board of Trade figures show? I remind the House that what I am trying to find out, and what I hope the Government will try to find out, with the far greater resources available to them, is what proportion of British exports goes to British overseas manufacturing projects, and, secondly, what part of that is in the character of raw materials, capital goods, and so on, for further processing.
The Board of Trade figures show that one-third of United Kingdom exports are sold on credit, and that about one-third of the total credits outstanding at the end of 1963–£895 million—was between United Kingdom companies and their overseas branches and subsidiaries. In my judgment, and I think that this is confirmed by the figures, credit is more likely to be granted by a British firm to its overseas associate or subsidiary than it is to a non-related company. Therefore I think we can guess that United Kingdom exports to overseas subsidiaries and associates, as a percentage of total exports, cannot be less than 10 per cent., could be 30 per cent.—I think that that is rather unlikely—and is probably about 20 per cent.
Now I want to find out what proportion of that 20 per cent. is material going to overseas manufacturing projects. Here the only aid that I have are the American figures. The House will remember—I referred to this in my speech on the Budget—that the Americans have found 149 that about 40 per cent. of their exports going to American subsidiaries overseas were of this character—raw materials, capital goods, and so on. I doubt whether the United Kingdom figure is anything like 40 per cent., if only because the value of our overseas investment is so much less than that of the United States. But even if we take that figure, 40 per cent. of 20 per cent. is 8 per cent., which is about £350 million. I cannot see how our exports of raw materials, capital goods, and so on, to overseas subsidiaries of British manufacturing firms can be greater than £350 million per annum.
One has to confess that, compared with the total value of our overseas investments, that is quite a small figure. Even if one adds to it goods supplied by other United Kingdom firms, and if one adds to it exports that result from the presence of a British manufacturing interest overseas, the total is not, unfortunately large, not perhaps as large as it should be. But equally—and this is the point that I want to make—although these figures are not large, they are not negligible.
In conclusion, I have three specific and one general point to make.
§ Mr. Terence L. Higgins (Worthing)
Perhaps the hon. Gentleman would deal with this matter before he concludes his speech. Is it not possible that people export from this country because they have the prospect of building up a market overseas and then investing there? If we take away the possibility of such investment in future, or diminish the incentive to do so, people may be less inclined to export.
§ Mr. Dell
I do not believe that people export from this country with the object of building up manufacturing projects. In certain cases when they already have the specific intention of manufacturing they export in order to build up the market. I do not believe that many companies have this long-term vision of building up exports to a market and then, perhaps having reached a certain level of exports, building up a manufacturing project in that market. I suspect that if they do this may be one of the reasons why the return on British investment of this sort is so low. I would have thought it better for a firm to look at the market first and to say, "Ours will be a profitable project in this 150 market", and proceed on that basis. Having got the intention, the firm would then do what many firms do, namely, build up the market on the basis of exports, having first established the intention.
I have three specific points and one general point to put to the Chancellor. The first specific point is that far less credit is being granted to the United Kingdom than the United Kingdom grants its customers. This raises the question whether United Kingdom importers are sufficiently tough in demanding credit. Secondly, there would be some savings to the United Kingdom balance of payments if United Kingdom parent companies granted less credit to their overseas subsidiaries. That point could well be discussed with British firms investing overseas. Thirdly, despite what my hon. Friend the Member for Meriden said, there would be great benefit to the United Kingdom balance of payments if overseas subsidiaries of British firms bought a higher proportion of their imports from the United Kingdom. As the F.B.I. has not done this I suggest that the Chancellor should ask parent firms in the United Kingdom what percentage of the imports of their overseas companies comes from the United Kingdom.
The general point I want to make is that the control of overseas investment is a matter for discriminating and not blanket techniques. The effect on exports must be taken into account, and good projects should be encouraged. I do not dissent from the criteria laid down in the Chancellor's Budget speech. There should be control of direct investment outside the sterling area, but I see no reason why this control should not be extended within the sterling area. There is a strong case for this.
The figures show that although overseas investment may be only a relatively small aid to exports it is an aid, and we are not in a position to dispense with any aid to our exports at the moment. I therefore ask my right hon. Friend to reconsider whether, for taxation purposes, there is some way of discriminating in favour of British overseas manufacturing projects. If the Government's attention could be directed to this question—at any rate to cover the period 151 when a necessary investigation into the whole problem of the implications for British economy of overseas investment is being undertaken—it would be an advantage. We must make sure that we do not lose anything by actions which may later turn out to have been ill-advised.
§ 8.57 p.m.
§ Sir John Barlow (Middleton and Prestwich)
I am glad to follow the hon. Member for Birkenhead (Mr. Dell), because he was speaking on very interesting lines about overseas investments and their effect on exports, and how the two things are correlated. I agree with a great deal, although not all, of what the hon. Member said. He thought that foreign countries which had fewer overseas investments than we have had ample access to raw materials. He mentioned Germany and Japan. I happen to know that both those countries have quite recently paid far more than the present market price—in fact, a very substantial premium—for long-term deliveries of certain raw materials in the future, so that they can secure the position. We have a great advantage, in that in many cases we control raw materials through our overseas investments.
The hon. Gentleman then urged the Government to go very carefully in cutting overseas investments. I entirely agree with him about that. In various ways the value to us of overseas investments through the last half-century has been immense, some of which I hope to mention.
The hon. Member was asked by the hon. Member for Worthing (Mr. Higgins) about a long-term policy of exports to certain countries with a view subsequently to manufacturing in those countries. The hon. Member said that he did not think there was anything substantial in that. In some cases it has worked, although originally it might not have been the intention. Those who come from Lancashire are only too well aware of the great diminution in exports of cotton textiles over the last 20 years. Because it was so much cheaper to produce in the overseas importing countries many Lancashire firms built cotton factories in those countries and produced large amounts of goods there. In any case, 152 Lancashire could not have kept that business for the textile mills, but it had the advantage of utilising valuable Lancashire cotton expertise and, in many cases, Lancashire provided the machinery for the overseas mills.
It seems to me that by his Budget the Chancellor is trying to achieve far too much far too quickly. As has been pointed out by several hon. Members, it is the longest and most intricate Budget for a great many years. The right hon. Gentleman is trying to impose a Corporation Tax and a Capital Gains Tax at the same time. Those are both tremendous measures, and I suggest that he is unwise to try to do too much too quickly. It was interesting to see that commentators in the learned journals which some of us read every week were full of congratulations for the Chancellor immediately after he had produced his Budget. It was also interesting to see how those congratulations turned to criticisms in the last few weeks. I think that as time goes on criticisms of the Budget will grow.
In his Budget speech the Chancellor suggested that he wished to modernise British taxation. He certainly has made a change of direction, but by adopting these methods I suggest that he is not going forward but backwards. He has adopted methods which were adopted years ago by other countries. France, particularly, has recently changed to our previous way of thinking and the French were astonished that the Chancellor should introduce his Budget in the way he did.
I know that other hon. Members wish to speak and so I shall be brief, but perhaps I had better declare an interest in case I have not done so already. Throughout my life I have been interested in rubber in Malaya and I wish to say something about the overseas trading companies and their prospects. The rubber industry in Malaya was started substantially before the First World War. About 200 companies were registered in London to produce rubber in Malaya and they had a paid-up capital of about £70 million in 1920. Curiously enough, four-fifths of the shares were held by small investors who had probably not more than £200 invested. That contribution in helping to develop Malaya has created one of the finest colonial ventures which this country or the world has ever seen. The Government built roads and amenities and left 153 it to private enterprise to develop, first of all, rubber and, subsequently, tin, with the result that in recent years Malaya has had the highest standard of living of any country in South-East Asia. The rubber states, which developed between the two wars, had a welfare state, at that time quite unknown in this country. Each of the larger estates had schools, hospitals, crèches, maternity benefits and so forth. They, in their small way, were far ahead of this country.
The estimated annual profits coming back to this country—there has been no new capital put into Malaya at all in the rubber industry in the last 30 years—are about £15 million. The estimated value of exports from this country to Malaya is thought to be between £10 million and £15 million. It is a difficult figure to assess, but that has been the estimated figure. It is because those companies are British controlled and have British engineers, British technicians and British advice that a great many exports go from England to Malaya which would otherwise go to the Continent or to America. So that influence has been very valuable indeed.
Before the O.T.C. legislation of 1957, the tax position penalised British shareholders in this country. For that reason we were all very grateful for the 1957 tax help. By the abolition of this O.T.C. concession, the values of these shares have already fallen to about two-thirds of what they were the day before the Budget. That will mean that, because British shareholders are so much worse off than local shareholders or foreign shareholders who might buy the estates and register the companies in Malaya, we are likely, in the near future, to get take-over bids at ridiculously low prices.
I appreciate that the Government may think that we are investing too much overseas, with which I do not agree. I think that we have a responsibility and we have helped to develop many of these emergent countries to our mutual benefit. The fact that, by legislation, we shall have to sell these estates at two-thirds of the price at which they stood just before the Budget seems to me to be quite ridiculous. We must also remember that, immediately after the war, the rubber industry made a great contribution in securing all-important American dollars. In 154 the six years between 1946 and 1951, rubber alone produced 1,500 million American dollars, more than all the British exports to the United States in those years. That was useful at that time and it may have its uses again.
Perhaps I may give a more personal illustration of how these things work. I am associated with a group of companies which, in 1920, had a capital of just over £2 million. Out of that capital, the estates have been planted and replanted and modernised, and the output per acre is probably three times the output of the original seedling rubber planted 50 years ago. I am glad to say that in the last 16 years the average dividend has been just over 25 per cent. The company has not only modernised itself but has contributed substantially to British dividends. Since the Budget the value of the shares has fallen to two-thirds of the previous value, and I shall be surprised if there are not take-over bids coming forward very shortly.
In addition, insurance shipping and banking have all been British. As the rubber industry was largely in British hands in the early days, the world market in rubber in Mincing Lane was established and it has contributed a great deal to the Mincing Lane wealth of London, which over the years has been considerable. Is it suggested that that is a bad thing and that the Government wish to destroy it? It would be a very serious thing if they did so. It is not a matter of sending out new capital but a matter of not penalising an existing profitable investment.
We know the present problems of Malaysia, and we are spending vast amounts of money to help her in her problems with Indonesia. If the Government abolish O.T.C. it will undoubtedly have political repercussions in Malaysia. It may well be that they have already made representations, because I know that they feel keenly on the subject. This is merely one instance of an industry long-established and profitable to this country over the years. There are other industries concerned, such as tin and other mining industries in other parts of the world, with which I am not familiar in detail. I urge the Government to be most careful before they penalise these overseas companies in this way.
155 It has been suggested that the Government are to continue with their overseas loans. That is not the same thing. The results of these loans are not nearly as beneficial or as useful to this country as the natural development which has taken place over the years. Only the other day the Prime Minister bragged to the New York economists, quite rightly, of our immense overseas investments. He said that we were rich and need not devalue because we had this enormous backing—which was quite true. If that is the case, why does he want to destroy it so soon afterwards?
We have tremendous good will and enormous riches abroad which influence a vast amount of exports, although no one can say exactly how many. For goodness' sake, do not fritter this away for political motives.
§ 9.14 p.m.
§ Mr. Robert Sheldon (Ashton-under-Lyne)
I am sure that the hon. Member for Middleton and Prestwich (Sir J. Barlow) will forgive me if I do not follow him too closely in what he said. A great deal of it was of a specialist nature.
I wish to make two points, and they both deal with omissions from the Finance Bill. Because one draws attention to omissions, that is not to say that one disagrees with the Bill. There are 90 Clauses and 19 Schedules in the Bill, and the fact that I draw attention to two omissions does not mean, I hope, that my support for the general purposes of the Bill is questioned.
The first of the two omissions to which I draw attention concerns the responsibility and the great burden on the Chancellor of the Exchequer in obtaining steady economic growth. It is his main burden to keep the economy fully engaged and, at the same time, to ensure that the pressure on resources does not cause excessive inflation. This is one of his great difficulties. It is a feat which is made more difficult because of the paucity of controls he has available. The controls which he can use are basically four in number—the Budget, the regulator, the Bank Rate and special deposits. The difficulty with all four is that they are not sufficiently discriminating in order to keep expansion running at a steady level. The desirable characteristics for controlling 156 the economy are that such controls should have immediate effect and, at the same time, be capable of fine adjustment.
In past years information on the economy has frequently come too late and, because information about what was happening in the country has come too late, the reaction has consequently been too violent. What we have had, therefore, is a break and an accelerator operating once a year. And because of the infrequent use of such powerful controls, the economy has been subject to jars and jolts and the consequent inefficient use of our resources. What we want it not stop-go but a frequent, gentle use of the accelerator. What we really need is a broad, continuous control of the day-to-day movements within the economy.
The difficulty about using the Finance Bill to control the economy is that the changes do not work through to the economy quickly enough. Many of the measures taken in the Bill will, of necessity, involve very complex processes and it is extremely difficult to estimate the final effect. Indeed, so much taxation has its effect months and years after the Finance Bill has gone through. Its use for controlling the economy is, therefore, somewhat limited.
There is a further defect in the Finance Bill for such close control, which is that, in times of economic change, action by the Chancellor may be suspended until the Budget and the situation may get so far out of hand that a certain amount of over-correction will be necessary. We know from too much past experience how hard it is to slow down a boom and how difficult it also is to start a recovery. Consequently, in times of inflation too much deflation will be found to be necessary and, six or nine months afterwards, we will find ourselves having to cure the deflation itself.
Real control must be introduced to suit the situation and not to suit the calendar. Such controls must be capable of immediate effect. The regulator was one such attempt to control the day-to-day workings of the economy. It had the great advantage that it was capable of immediate effect and I consider that it was admirable that some such solution should have been attempted. However, the difficulty was 157 the unfairness in selecting the industries concerned—selected not because they were the right industries to control but because they were easily controlled. Consequently, the investment and sales of those industries were distorted and we had a limited stop-go; limited only because the Revenue-collecting system made it easier to collect from certain industries than from others.
The main weapons we have today over our day-to-day controls—the Bank Rate and special deposits—have the disadvantages of all monetary controls; they also are indiscriminate. Although appeals can be made at various times to spare certain industries, this works only to a limited extent and for a limited time. What we really need to accept is that a Finance Bill cannot determine the entire pattern of the next 12 months in controlling the economy. What it can do is to set out the broad picture, and within that broad picture regulation by means of some form of continuous control is necessary so that economic growth can continue without excessive inflation.
The kind of continuous control I wish to see is one that will permit fine and variable adjustments as frequently as the situation demands. These adjustments to the economy need to be immediately effective, must be capable of small changes, and must permit of frequent use. Some means of broad continuous control might well be provided by having a National Insurance contribution variable both in amount and in regions of the country. Another method might be a payroll tax, and a third method, and one of which I am particularly fond, is the substitution of investment allowances by investment grants. Whatever methods are chosen, such broad continuous control can provide corrections to the economy before a situation gets out of hand—in fact, almost as soon as the change itself is observed.
In order to observe such changes, such continuous control will require some improvements in the statistical service, because with this type of control the statistics themselves can be out of date almost before they are available, and knowledge of the present situation can be obtained only by means of certain sample statistics. I do not wish to pursue this particular matter of sample statistics, 158 although I think that they will be necessary. I have tried to show how necessary for continuous control they are; and to show that this form of continuous control can maintain a high rate of steady economic growth.
The other omission from the Finance Bill is the insufficiency of incentives for investment. I accept quite fully that managements have frequently not taken correct decisions for investments. At the same time, I should like to add in parenthesis that anyone clever enough to programme their investments on the basis of the N.E.D.C. Report would have been confounded by the vast changes that are being introduced. Nevertheless, whichever way we look at it, £320 million of investment allowances are spent, and the benefit is obviously uncertain. The Report on investment in machine tools has been only one recent event which has made many people examine afresh the advantages existing in the present form of incentives for investment.
In studying the reasons for giving investment incentives at all, we should consider four main criteria. The first is that the investment must naturally be of the right kind. Incentives to investment must be beneficial to the whole community. For example, it is more desirable to invest in technologically advanced machinery and equipment than in conventional replacements. Because of this, there should be greater incentives to investment in such advanced machinery and equipment, with benefit to the industry and the machine manufacturers, and also to the nation, which will be acquiring new ideas, new skills and new products. It is for this reason that investment incentives in machinery and equipment are really the most important kind of incentives.
If we wish to get full value for the investment incentives it will be necessary to specify much more closely the categories for which investment incentives are given.
§ Mr. Julian Ridsdale (Harwich)
Will the hon. Gentleman say what incentive to the individual to invest is given in this Finance Bill?
§ Mr. Sheldon
The hon. Member has got the point quite wrong. He is confusing investing on the Stock Exchange and investing in actual machinery and plant 159 which produce goods. This is a confusion which is prevalent among hon. Members opposite, the confusion between genuine investment which benefits the whole community and financial exchanges which sometimes do and sometimes do not benefit the community.
The second reason for giving incentives to investments depends very largely on the financial return obtained by such investments. Without such incentives the return on the investment would be commensurate with the risk and the capital involved. Investment allowances distort the investment decision. To allow investment on this basis would distort the investment decision and allow investment which would not be made on the basis of risk and capital employed. Although such investment might be thought a waste of national resources, there are occasions when it is thought advisable to give such an incentive.
Over a period as a country we have probably been investing rather less than we should have been doing, especially in certain industries. It is possible that a higher degree of investment generally would have been preferable. Because of this there is a case for investment assistance to be given to all kinds of investments, but this naturally would form a minor part of the total assistance given to investment.
The third reason for investment incentives involves the capacity that capital goods manufacturers have available for utilisation. An important part of investment incentives is to make use fully of the capacity of the plant and equipment. According to the categories and the unused capacity of the plant manufacturer, purposeful assistance can be given to investment. There is obviously a fourth category which would cover the rather special cases where Government assistance is required and special projects are involved.
§ Mr. Geoffrey Wilson (Truro)
I am following what the hon. Member is saying. I gather that he does not want to assist individual investors, but how does he suppose that they get money for investment and choose to invest? Does he suggest that one should stick a pin in the Financial Times and decide the matter in that way?
§ Mr. Sheldon
I am trying to point out the difference between investments which hon. Members opposite are considering and those which I am considering. I have pointed out that there is a relationship, but it is an indirect relationship. When a person buys a share in X, Y Z Company Limited he is not investing in a machine but in a company with a quoted value. What that company does with that machine has nothing whatever to do with the person who buys that share, except in a very indirect way. This is too obvious even to be stated, because that company can do all sorts of things other than invest that money. The connection is indirect and I am concerned with direct connections.
There are large advantages in replacing the present system of investment allowances by investment grants. Such grants, if paid at certain intervals, need be no more costly but much more easily understood by those who make investment decisions than is the present system. A further advantage is that an investment grant would permit of more frequent changes in the level of such grants and consequently the encouragement to invest as demand varies and other factors vary also.
There is at present a delay between investing and receiving the investment allowance. The reaction to changes in the investment allowances is fairly slow, but the reaction to changes in investment grants can be much more direct and immediate. There is the further advantage of investment grants that changes in the levels of grants can lead directly to changes in the level of investments, and this can be closely allied with the capacity of machinery and plant manufacture.
§ Sir D. Glover
I am grateful to the hon. Gentleman for giving way, because I go a long way with the argument which he is deploying, until it comes to the practical application of his suggestion. Who is to decide, apart from the individual company, whether to invest in A, B, C, D or X, Y, Z? This is the fundamental problem.
§ Mr. Sheldon
If I were drawing up a blueprint for precise forms of investment, I should be a fool. There is no case whatever for precise investment. All that I am saying is that categorisation can be 161 more refined than it is at present. As has been said, investment grants for one-armed bandits should be rather different from investment grants for machine tools. My point is that there can be very much greater attempts at degrees of categorisation, which will show that certain kinds of investment are preferable to others, that these can be controlled in the very broad sense, and that such a form of control can be of immense value in controlling the country's economy, again in a broad sense, and consequently in maintaining a high uniform increase in economic growth.
Finally, whatever industry may have understood about investment allowances and how very wrong it might have been in not understanding the sophisticated calculations they made necessary, managers generally speaking understand today that allowances have been effectively reduced by the introduction of Corporation Tax. Unfortunately, the propaganda has worked only too late. Had the attempt been mace to make them understand how the Government were trying to assist industry in the many years before, perhaps some of the wrongs that have happened in industry might not have happened.
Because of this, I think that serious thought will have to be given to investment incentives before the end of the year. I believe that categorisation of certain investment grants could be the most profitable field for further investigation. Such purposeful encouragement to benefit the whole of the community will be desirable and eventually will be necessary.
§ 9.32 p.m.
§ Mr. Peter Hordern (Horsham)
The hon. Member for Ashton-under-Lyne (Mr. Sheldon) has dealt most eloquently with the faults of the monetary mechanism and the need to encourage investment. Whether that investment was through the Stock Exchange or through industry, I hope that he will forgive me if I do not follow his remarks too closely.
Clause 1 deals with the increase of duties on spirits, beer and tobacco. It is worth recalling what the Chancellor of the Exchequer said when speaking on the Budget introduced by my right hon. Friend the Member for Barnet (Mr. Maudling) on 15th April of last year. He said: 162The tax on beer and cigarettes is basically irrelevant to the balance of payments problem.… Yesterday's increases in the taxation on tobacco and alcohol shift the burden against the wage earner, against the man at the bottom end of the scale.… They depart, once again, from the basic principle behind which, we on this side of the Committee are firmly united, that taxation should be based on the ability to pay."—[OFFICIAL REPORT, 15th April, 1964; Vol. 693, cc. 431–35.]The Chancellor said on 6th April:As I am anxious to avoid taxing necessities, I have decided that tobacco and alcoholic drinks should make a further contribution."—[OFFICIAL REPORT, 6th April, 1965; Vol. 709, c. 294.]What a contribution—6d. on a packet of cigarettes, 4s. on a bottle of whisky, 1d. on a pint of beer. Yet all these are, or were, irrelevant, apparently, to the balance of payments problem brought about by the developments arising from confidence factors so aptly described by the Prime Minister in his speech on 23rd November last.
The responsibility for this part of the Bill rests fairly and squarely on the shoulders of the Government. It is pertinent to ask the Chancellor why he did not announce the extent of our reserves—that is to say, the value of our investments—amounting to £11,000 million last November. He said, in the Budget debate, that this news should make very good hearing on foreign bourses. It would have made much better hearing last November. Every step that the Government took last November and have taken since has been calculated to weaken confidence in sterling. The imposition of the surcharge, the subsequent E.F.T.A. meeting, the leaks to the Press—all these were signs of a Government either determined to play politics first or else ignorant of the way to deal with the problems of the country's economy.
The situation was exemplified by blaming everybody and everything except themselves. If it was not the fault of the gnomes of Zurich, it was the fault of the Governor of the Bank of England, and if it was not his fault it is now that of the Chairman of B.P. The impression has now got around that not only does the Chancellor not know his business but that his advisers are equally ignorant. So unrealistic are the arguments used to defend the measures in this Bill, so careless of the real interests of our economy, that it seems to the 163 outside observer as if the Treasury is an exotic hothouse full of kinky economists jabbering in different languages and with unintelligible signs. The Treasury seems to have become the Passionflower Hotel of the Civil Service in which a man with business experience is a total stranger. Never can so many expert representations have been made and never so many totally ignored. [HON. MEMBERS: "The hon. Member is reading."] I am making use of my copious notes.
Fortunately for the country, the Bank of England is still able to command the confidence of bankers overseas, and I think the Chancellor can thank his lucky stars that the Governor of the Bank of England has still sufficient independence and the character to express it. If he had not, it is doubtful whether we should have been able to negotiate the 3,000 million dollar credit for which he was responsible. Instead of criticising, the Chancellor should recognise the value of the Governor's advice and the debt the country owes him for preserving the stability of sterling. The Governor was drawing attention to the increasing cost of expenditure in the public sector. It is designed to increase this year, by a further 8.9 per cent. It is surely not surprising that European holders of sterling who are confining themselves to an increase in expenditure of 5 per cent. commensurate with the increase in their productivity should object to be expected to finance our social expenditure as well when they could have been doing more of their own.
In this context the kind of argument used by the Minister of Defence in the debate on the TSR2 is more damaging to confidence in sterling than anything else. He said that the saving of £600 million represents the cost of 200,000 houses. But to equate what was the spearhead of technology in aircraft industry with the construction of houses is the most utter economic nonsense. If there is to be any saving at all, which has yet to be proved, let us at least be clear that that money should properly be devoted to technological advance in industry, from which it was taken, and not to the construction of houses, however socially desirable that may be.
164 I turn to Part IV of the Bill dealing with Corporation Tax. There is the argument that the Chancellor has adopted that investment at home is much to be preferred because of the employment it gives and the revenue it attracts. We would have like this argument to have been produced in the debate on the TSR2. It is a strong argument, but there are very strong arguments, and indeed stronger arguments on the other side. One cannot suppose that companies invest abroad for any other reason than to earn as high a return on their capital as they can.
Here I should like to mention in particular the case of British Petroleum because it is an example which the House recognises as a very good one. In reply to a Question from the right hon. Member for Easington (Mr. Shinwell) last week, the Prime Minister said something to the effect that the Chairman of B.P. had a dual responsibility, to the country and to the shareholders. I do not believe that there has ever been any attempt by the Government to interfere with the commercial freedom of the board of B.P. until now, and as a result the Government's investment in B.P. has proved to be one of their most successful.
But the publication of this Bill has changed the whole situation. The arguments which have been adduced in favour of the Corporation Tax appear to be two. The first is that it is hoped that the level of investment will rise, and the second is that such is the magnitude of our balance of payments problem that it is essential to curb the outflow of funds for investment abroad, and that, in any case, we treated investment abroad more favourably than some other countries from the tax angle.
I wish to deal with the first point later. On the second point, it would have been defensible to curb investment abroad to help the balance of payments problem as a purely temporary measure. Even then, it would have been more fitting, in my view, to cut the foreign travel allowance. But the Corporation Tax is not a purely temporary measure. It is designed to be a modern tax suitable for the Britain of the 1960s and 1970s. It could hardly be less suitable, for in order to remain competitive with the advanced industrialised countries our major companies are already 165 finding out, as has been pointed out several times today, that the United Kingdom, as a market, is too small and that to achieve economies of scale it is necessary to expand production both at home and abroad.
The Chairman of I.C.I. has recently been making just this point. But in the case of B.P., its assets and raw materials lie abroad, and the effect of this proposal, if carried through, would be very serious indeed. To keep its present position, B.P. should at least be allowed to compete with its international rivals on level terms. The weighted average, I am informed, of taxes appears likely to be over 60 per cent. of taxable profit for B.P., whereas its American competitors pay well under 50 per cent. I hope that the Chancellor of the Exchequer will answer this point later.
This state of affairs will clearly affect B.P.'s capital expenditure programme, its ability to attract further capital and its ability to gain further oil concessions in the Middle East. By their proposal the Government are jeopardising a very considerable investment in which the nation has a 51 per cent. interest. B.P.'s assets overseas amount to about £450 million, and this figure does not include the real value of "oil in the ground". On revenue account, B.P. earns approximately £100 million per annum from overseas trading as a contribution to the United Kingdom's balance of payments. It is no wonder that the chairman of the company voiced his comments in such forthright terms. It is all very well for the Prime Minister to say that the chairman has an obligation to the Government. The Government have also an obligation to the nation, for which they are holding the stock as a trustee—and a very temporary trustee at that.
In considering the Corporation Tax, there are other points which I should like to touch on shortly. In many cases, British companies have deliberately invested abroad in order to burrow underneath the tariff walls. It is particularly unfortunate, when trade with the Common Market is becoming increasingly difficult, that this tax should be introduced at this moment.
But the fundamental objection to this attitude to foreign investment is that it is contrary to the best long-term interests 166 of this country. The Chancellor of the Exchequer complained that there was in OUT tax system a bias towards investing overseas. I hope that there is. But we have still a long way to go to reach anything like our pre-war position when 70 per cent. of our trade gap was paid for by net invisibles compared with 32 per cent. today. But, in total, as the Chancellor observed, £11,000 million represents a formidable amount, and it is all the more unfortunate that he is only just now mentioning this sum in order to impress on foreign holders of sterling the extent of assets he is proposing to run down by means of the Corporation Tax. This is an easy thing to do. It would be much more difficult to cut the travel allowance from £250 to £100 and yet the yield would be the same as the Corporation Tax is designed to bring in. That tax, however, would have been levied on expenditure and investment. That is what the Chancellor should have done.
§ Mr. Geoffrey Hirst (Shipley)
I follow my hon. Friend's argument, but he must bear in mind that during the last few years we have received enormous advantages from travel to this country. It must be reciprocal.
§ Mr. Hordern
I agree. At the game time, if this is a crisis the Government have chosen to meet it by other means, including the introduction of the surcharge, which has had a much more serious effect. As it is, the effect of the Corporation Tax will be to some extent to mortgage our future and to discourage foreign investment in this country and the growth of international investment generally.
I want to say a word about the effect of Corporation Tax on domestic investment. The Chancellor is aware of the work of Professors Dow and Paish in this field demonstrating the relationship between the level of employment on incomes and productive capacity. I do not wish to dwell upon the present high pressure on resources, but I submit that this most stringent of credit squeezes has had little effect so far upon total demand, despite the fact that more than £600 million will be taken out of the economy. That is more than twice what any Conservative Chancellor has ever taken out of it.
167 It is no use hoping that the credit squeeze will work without doing something positive about investment to improve the margin of productive potential. I am sure that the Chancellor believes that he has done just this by means of the Corporation Tax. He attempted to decry the value of investment allowances, as other hon. Members opposite have done, because, he said, there was evidence to show that these were not taken into calculation in judging new investment projects. I should have thought that all that it showed was extraordinary political foresight and good accountancy, because it was always known that the Socialist Party had plans to bring in a Corporation Tax and investment allowances would, therefore, have been devalued. Our investment allowances were, and still are, as good as any in the world and are given only for investment, whereas under the Corporation Tax there is no incentive to invest rather than to retain earnings.
What matters is the total amount spent on investment. The Chancellor, I thought, adopted a querulous tone in saying that investment allowances cost the Exchequer over £300 million a year. So they should. A company should be taxed at a higher rate on its retentions unless it invests and at a low rate on its distribution. The Chancellor has adopted precisely the opposite course and there is no doubt that industrial investments will suffer as a result.
It is not only direct investment in industry that will suffer, but investment through the capital market is bound to suffer through the Capital Gains Tax under Part III of the Bill, for which there is no economic justification. The Chancellor admitted as much when he said that the tax will provide a background of equity and fair play for his right hon. Friend the First Secretary's work. In other words, it may help him to get his incomes policy no matter how much damage is caused or how little revenue is produced.
But many of my hon. Friends believe, as I do, that the First Secretary's version of an incomes policy, based on nationally-negotiated wage rates as opposed to actual earnings without taking into account wage drift, which is unmeasurable, is both inappropriate and irrelevant. Therefore, to 168 obtain a policy for incomes which are not incomes at all, we have to suffer a Capital Gains Tax far higher than that which is paid in the United States, in addition to Income Tax and Surtax graduated to a higher level than in any other industrialised country, and all, apparently, in the name of social justice.
There are two points of principle concerning the capital gains tax which I want to draw to the Chancellor's attention. The first relates to gilt-edged securities. Until now, the Government have been able to finance their requirements at a low rate of interest on the promise of a tax-free capital profit at redemption. It is now proposed by means of the Bill that this profit should be paid in the form of a debased currency. I will give an example, on which I should like to have the Chancellor's specific comments. On 24th May, 1956, the Government of the day issued a further tranche of 3½ per cent. Treasury stock, 1979–81, at a price of £81. The yield on that stock was £4 16s. 3d. per cent. The nearest comparable yield to it was that of British Electric 4¼ 1974–79, which gave a running yield at that time of £4 18s. per cent. So here we had this Treasury stock deliberately placed at a lower running yield strictly on the understanding that the stock would be repayed at part without any form of tax intervention whatever. The Chancellor knows full well that if there had been any such suggestion that stock would never have got off the ground at all. I believe that there is involved here a most important point of principle, because if the Government are not prepared to accept the debts of their predecessors a very dangerous situation will thereby be incurred, and it will eventually bring our national debt into something like the position of the Hungarian external debt and other foreign debts of that sort.
The second point of criticism which I wish to make is on what is to be done about investment trusts. In his Budget speech the Chancellor made a lot of play about forming a Government unit trust. I would warn anyone who might be tempted to invest in investment trusts that it looks like an absolutely first-class racket. For dealing with investment trusts the Chancellor said:I propose, however, that the net capital gains on which tax has been paid by the trusts 169 should be deducted from the chargeable gain of the shareholder."—[OFFICIAL REPORT, 6th April, 1965; Vol. 710, c. 246.]But, of course, the investment trust has to pay tax of 35 per cent. or 40 per cent. against the private investor's 30 per cent. In other words, the Chancellor's way of helping the small investor for which these trusts were designed is to make him pay a higher tax than he would have to pay if he made his own investment.
Incidentally, if the new Post Office scheme outlined in the Budget by the Chancellor is any guide, anyone investing in a State unit trust would need his head examined. The Chancellor said the investor would get 5 per cent. and in the conditions of today, when local authorities are offering 8½ per cent. to 9 per cent., if anyone is tempted to take 5 per cent. in those circumstances he should have his head examined.
As the result of this Budget and this Finance Bill, can we be sure we are not in for another bout of inflation? In circumstances of very full employment, with a record level of wage drift, the pressure on earnings and prices must be higher than ever. Against this the Chief Secretary stands like Canute against the tide muttering fiery incantations to his incomes policy.
But it will be the Chancellor, not the First Secretary, who will be at fault if inflation continues its endless march. The Chancellor should have taken his measures earlier and together. I am not sure that these measures will leave enough room for exports, and my guess is that further measures will be needed later on.
This Bill has nothing to do with the economic state of the nation. It has to do with so-called social justice. The First Secretary of State went so far as to say in the steel debate thatif the argument is that one does not export in the nation's interest but only when one makes money, one is doing a very unpatriotic thing."—[OFFICIAL REPORT, 6th May, 1965; Vol. 711, c. 1688.]He could not conceivably have spoken more heartening words to our competitors abroad. They want us to make losses. They want us to run down our assets. That is what this Bill seems to be designed to do. It was conceived in prejudice, born in ignorance, and I hope will die a thousand deaths.
§ 9.58 p.m.
§ Mr. Joel Barnett (Heywood and Royton)
I hope the hon. Member for Horsham (Mr. Hordern) will forgive me if I do not follow him into the numerous topics he dealt with, particularly as they were not particularly constructive. I hope I may be forgiven if I stick to one point in the Bill, and that is the Corporation Tax, and its effect or otherwise on growth.
My hon. Friend the Chief Secretary in his speech on 12th April went into some rapturous praise of what he described as Cal's cap and corp. I cannot go all the way with him, perhaps because I have to deal with it on a day-to-day basis, but I certainly would not go anything like as far as some hon. Members opposite have gone, and as some professional commentators outside have gone, in some of the nonsense they have uttered on the Budget as a whole.
One has grown to expect the level of irresponsibility we have had from Front Bench spokesmen opposite, but one would expect something better from other hon. Gentlemen, and indeed from commentators outside, because their blanket criticism certainly does them no credit. To listen to them one would believe that we are moving from a simple tax system to a highly complex one. Anyone dealing with the present tax system would accept that it is an incredibly complicated one, particularly so far as the method of assessing companies both on the commencement and cessation provisions. The provisions have allowed for the almost miraculous changes in assesments which helped tax avoidance to a tremendous degree. I suppose one grows accustomed to almost anything, and we who have worked with this tax system for so long have grown accustomed to it, but some hon. and right hon. Gentlemen opposite seem to love it to such a degree that they cannot bear the thought of change.
It is perhaps understandable, but they should now see the holes that have been exposed in their arguments by the excellent speech of the Chief Secretary on 12th April and by the answers given by the Financial Secretary today. This is particularly so with reference to the arguments that have been put forward on the other side, that by encouraging distribution one thereby increases the amount of money available for investments in new 171 issues. This was answered very properly and has certainly not been answered today on the other side when it was pointed out that after 1958 the Profits Tax level changed considerably so as to encourage dividend distribution; in fact in the five years after 1958 dividends doubled, but the amount of new issues from outside capital grew from only 8 per cent. to 9 per cent.
Still the Opposition continue to argue that this must encourage distribution. The Opposition have not proved their case that distribution helps in this sense, but equally I believe that the Government's case is a somewhat negative one. It shows conclusively to my satisfaction that the distributionists' case has not been proved, but there is not enough evidence to prove that the retentionists are entirely perfect in every sense.
One can argue from the tax collecting view that it would be better to encourage distribution, but I hope that we look rather from a purely national point of view which will help to achieve the rate of growth we all want to see if we are to find the resources we need for the hospitals, houses, schools and the rest. It is this aspect of the Corporation Tax, whether it encourages growth or not, I would like to examine. Comments inside and outside of this House, particularly from outside, by those who should know better have shown that they have been so blinded by the pain of increased taxation as not to allow themselves to examine the case dispassionately. The arguments were really exposed in the opening sentence of a recent letter in the Financial Times:The real trouble with the proposed Corporation Tax is not its detailed provisions but the indicated rate.I think that this really does go some way to understanding the arguments of hon. and right hon. Gentlemen opposite.
Another example of the criticism that we have heard is contained in a speech by the former President of my Association. On 27th April, in a speech which was described in the Financial Times as a sweeping attack on the Budget, when referring to the intention to encourage retention, he said:This, too, seems hardly calculated to produce a dynamic economy.172 That is all that he said on this important subject.
§ It being Ten o'clock, the debate stood adjourned.