§ The action I took last year on the capital account has been of major benefit to our balance of payments. Although the new policy was introduced only in April, and in July modifications were made, total private overseas investment was reduced from nearly £400 million in 1964 to about £310 million in 1965, a reduction of about £90 million. At the same time inward investment was somewhat larger: so that on private investment account alone our "deficit"—I use that word with all the qualifications with which it should be hedged around—fell from nearly £250 million in 1964 to under £140 million in 1965—a reduction of £110 million. The 25 per cent. investment currency scheme played a big part: it benefited us by over £70 million in the first year of its operation.
§ But when we take official transactions into account we still had a deficit on long-term capital account of well over £200 million in 1965. I should, therefore, like to restate my policy quite shortly to the Committee. Whilst we must do all we can to improve our current account position by encouraging exports and holding down the demand for imports, I am not willing to place further drastic restrictions on our home economy just for the purpose of achieving a current surplus so large that it would finance an outflow of capital abroad of any size. I will not create unemployment at home in order to allow capital from this country to pour out overseas. No one should deduce from this that I rejoice at the thought of 1445 severely cutting down overseas investment. On the contrary, much of it brings a substantial long-term benefit to this country, and when we achieve our Triple Objective of a strong £, full employment and a growing industrial strength, then I shall aim to lighten the constraints.
§ But in our present state of deficit the measures of last year need to be reinforced, and I aim to secure a further reduction in our deficit on capital account.
§ There are two main features of overseas investment at present. The first is that investment in the sterling area is virtually free, is very substantial, and continues to rise. In 1965, it amounted to nearly £200 million and there is reason to believe that, unchecked, it would go even higher. The second feature is that we maintain very powerful controls on investment in the non-sterling area, all of which, apart from oil investment, which is a special case, is directed through the investment currency market when it is financed from this country.
§ I have decided, therefore, that some voluntary action is needed to slow down the flow of investment from the United Kingdom to the principal countries of what might be called "the developed sterling area", namely, Australia, New Zealand, South Africa, and the Irish Republic. I am speaking of the next year or two in this connection.
§ I have decided against the use of compulsory powers because I do not wish to impair the voluntary principle which underlies the concept of the sterling area. We have been in touch with the Governments of the countries concerned, and what I am about to say is with their knowledge. In our exchanges I explained that our overriding objective is the strengthening of the British balance of payments position; that from a longer-term point of view this is in their interests as well as ours; and that the sooner we are able to re-establish a healthy balance of payments by means of the various policies we have adopted, the sooner we shall be able to play our full part in assisting their economic growth—not to mention that of the less developed countries, who are not included in this voluntary action.
§ As we are not using compulsory powers, we must rely on co-operation by 1446 those companies in this country which are concerned with investment abroad. I wish to put the following Voluntary Programme before them and ask at the same time for their co-operation and support.
§ First, I ask all companies and firms which have plans for investment in the more developed countries of the sterling area to consider whether they can postpone them for the time being.
§ Next, I ask them to make every effort to finance projects from local sources of capital rather than from this country.
§ Third, I invite those companies which desire to proceed, despite the considerations I have just urged, to submit their schemes to the Bank of England, which is opening a separate office to deal with them. They will be examined in consultation with the firms concerned to see whether they promise a quick, substantial, and continuing benefit to the balance of payments. The benefit may take the form of starting up a new and continuing stream of exports, or an exceptionally large and quick return in profits earned and remitted from the investment, or a mixture of both. In any case, the benefit defined in this way should be large enough to equal the cost of the original investment in two to three years——
§ Mr. CallaghanI can assure hon. Gentlemen that this is possible, as those who have experience of these matters will know.
If the schemes do not fulfil these criteria, the companies concerned will be invited to withdraw or to postpone them.
The scrutiny by the Bank of England would apply to all types of investment in the countries concerned, portfolio as well as direct, though direct investment has been much the more important in the past. For portfolio investment, the aim would be to ensure that there was no significant increase in total holdings of such securities by any given company or institutional investor over a period of time. This is, of course, not meant to interfere with day-to-day management. And, in order to save unnecessary trouble both for investors and the authorities, I propose to exempt direct investment projects which cost less than £25,000 a year 1447 in any one of the countries covered, whatever their character and purpose.
This Voluntary Programme—I emphasise that that is the kind it is—will work only if it receives the fullest co-operation from everybody. I shall be writing in due course personally to the chairmen of over two hundred of the principal companies in this country which are involved in direct investment abroad, inviting them to co-operate in making the Voluntary Programme a success. The Governor of the Bank of England will be communicating with the representative bodies of the main kinds of institutional investors, calling for the full co-operation of their members. When the need is understood, I am sure we can look for a prompt response.
As regards reinvestment of profits earned abroad, I emphasise the importance of companies remitting funds home to the maximum extent. It would undo the effects of the Voluntary Programme if the reduction in capital flows from this country were offset by companies increasing their overseas investment out of retained profits. This will, of course, fall within the Bank of England's scrutiny.
The Capital Issues Committee will apply to applications for private borrowing by residents of the countries concerned the same criteria as those which the Bank of England will be using in their administration of the main scheme.
Each of the four countries to whom the Voluntary Programme will apply has special problems; for example, in the case of the Irish Republic proximity and history have created exceptionally close financial and economic relations, soon to be strengthened by the entry into force of a Free Trade Area Agreement. Likewise, Australia is the country principally affected by the Programme and I should like to acknowledge in passing the understanding with which it has been received by the Australian authorities, and by New Zealand. I shall continue to keep in touch with all four Governments about the effects of the Programme on them.
For the non-sterling area where, of course, Exchange Control applies, direct investment through the investment currency market will in future be confined to those plans and projects which satisfy the criterion of a quick, substantial, and continuing return to the balance of pay- 1448 ments, to which I have already referred. This will relieve pressure on the market and make it easier for those schemes which fully satisfy the criterion to obtain the necessary investment currency. Direct investments which do not meet the criterion will be allowed only if the funds are borrowed abroad on appropriate terms.
Against this background I have been looking once again at the scale of Government expenditure overseas. This imposes a heavy burden on our balance of payments, and over the last decade it has been allowed to swell out of proportion to our resources. Much of this expenditure is associated with our defence programme—including the costs of stationing forces overseas and of importing some military equipment. The second largest element is our overseas aid programme. As the Committee knows, the decisions contained in the Defence Review will result in substantial savings in Aden and elsewhere.
In addition there are a number of other Government activities—for example, overseas representation, our contribution to the budgets of certain international organisations, military aid, the overseas information services—all of which add significantly to our total foreign exchange costs. The Government have, therefore, put in hand a thorough review of this expenditure in all its forms, with the firm objective of reducing the total.
I now come to the special problem of the heavy expenditure we incur year by year in maintaining our troops in Germany. In the coming year this will be nearly £90 million. Following the negotiations conducted last year by my right hon. Friend the Chief Secretary to the Treasury, the cost will be offset to a considerable extent. The Federal German Government have undertaken to use their best endeavours to increase imports from this country above their normal level, and their efforts have had a degree of success. But there is still a very large gap; and it is more likely to increase than otherwise.
The Defence White Paper announced our policy in relation to the maintenance of our forces in Germany. I quote it again here:
As things now stand, we think it right to maintain our ground forces in Germany at 1449 about their existing level until satisfactory arms control arrangements have been agreed in Europe provided, however, that some means is found for meeting the foreign exchange cost of these forces.I emphasise the last few words of that quotation: "some means is found for meeting the foreign exchange cost of these forces."The time has now come to give effect to this policy and we shall propose to the Federal German Government that negotiations be started at an early date with a view to the United Kingdom securing relief from the whole of the foreign exchange cost of keeping our forces in Germany. We shall start these negotiations with the aim of bringing them to a successful conclusion by the autumn of this year.
By these policies that I have outlined we intend to make a total further saving of between £50 million and £100 million a year on the foreign balance: my aim is to get it near the upper end of the bracket. This will be a valuable help on the way to an overall surplus.
In passing, let me say that I have been struck by the extreme pessimism of certain commentators about the prospects of Britain repaying the two I.M.F. drawings. I do not take this gloomy view, and I am even now working on plans for the repayment of the first drawing which is not due to be repaid until November, 1967. In order that the position shall be clear, let me say that I do not intend to ask that this borrowing should be refinanced—or even rescheduled, as the I.M.F. calls it—when November, 1967, comes round. It will be repaid not later than the due date. Indeed, it may be that we shall start the process of repayment ahead of time.