INVESTMENT GRANTS

HC Deb 04 February 1969 vol 777 cc242-99

3.41 p.m.

Mr. A. P. Costain (Folkestone and Hythe)

I am fortunate in having been selected by Mr. Speaker to raise the question of anomalies in investment grants. I must declare an interest. I am a director of a firm which has manufacturing factories; a director of a firm of civil engineers; a director of a firm of builders; and a director of a firm of hotels. All of them are affected. According to Mr. Speaker's Ruling of 26th March, 1968, I am prohibited from raising any questions of taxation and legislation, but I am permitted to raise questions about administrative policy. This, of course, restrains me from asking the House to refer to bringing back the investment allowances, but it allows me to point out that, when investment grants were substituted for investment allowances, the House was told that they would encourage investment in selected industries and in specific assets.

The grants give great power to the Board of Trade, which has produced a booklet, "Investment Grants: A Guide for Industry". I see that the Minister of State is equipped with a copy. We are used to white papers and green papers. This document is orange, while the first document produced by the Board of Trade was yellow. The way things are going, I prophesy that the next one will be red.

The booklet can be obtained from any Board of Trade office. It is free—and all in industry can obtain it. But, like everything else in commerce that is free, one gets exactly what one pays for, and I congratulate the staff of the Board of Trade on producing the booklet in this colour. The Board of Trade must have a sense of humour, because this is neither stop nor go. However, under this Government, the Department's civil servants need a sense of humour.

I should also explain that, in private industry, before anyone embarks on any new project or any capital expansion, the first thing to do is to find out what the cost of the expansion will be. Unlike Government Departments, which can make an estimate and then double it and treble it during the Parliamentary year, commercial firms have to make an accurate estimate. If they did not, they would go bankrupt.

I can produce no better evidence than this booklet to show what is wrong with the system. I draw the Minister of State's attention to page 7, which says: It is hoped that the booklet will help firms to know, in advance of submitting claims, to what extent their investment expenditure is likely to be admissible for grant. It goes on, cleverly: This booklet will be revised from time to time in the light of experience does not have legal force. This is why I claim that it is a yellow document that gives no real information at all.

Secondly, we know from experience of what has been happening since the operation of the Act that an applicant has to wait up to nine months after spending the money to know whether he is eligible to get his grant. The Estimates Committee, on which I recently had the privilege to serve, heard evidence that over 195 cases dating back to 1966 were submitted to the Board of Trade as late as last November.

We can go further with this booklet. I refer the House to page 12. This is a most interesting page, because the Board of Trade has substituted a flyleaf for the original. I have done my best to see what secrets there are under it, but have not found out. Perhaps it is not a good time to do it for the moment, anyway. But it is evident that someone realised that the Board of Trade was giving too much away, had a sudden panic and ordered a flyleaf to be put in. The evidence of the hurry is that in paragraph 29 even the spelling is wrong. It says: The Board will consider whether it will be cosnistent … I presume that this is meant to be "consistent". The misspelling shows the panic with which the document was prepared. The flyleaf says: Grants will not normally be paid on manufacturing equipment whose use is subsidiary to or forms part of a non-qualifying process … The first example is … a lathe used in a repair shop or garage; When is a repair shop not a repair shop? When is a garage not a garage? I have a garage in my constituency, Martin Waters Limited, which manufactures and has a successful export trade. Is its work to be regarded as not qualifying for grant? The next exclusion is a saw for cutting wood at a timber merchant's yard; What is the difference between a timber merchant's yard and a joinery shop, and why has it been decided to exclude this one miserable saw? Quite often, timber merchants' and joiners' shops are adjacent.

This special page which has been stuck on goes further. It excludes printing equipment for use in office activities, I wonder what that means. If a company buys a printing machine and prints a circular about office hours, will grant on that be allowed? I wonder what happens if the same printing machine prints a notice board for the works. Is that office equipment or manufacturing equipment? I remind the House that this booklet is supposed to clarify matters.

The next item excluded is: kitchen equipment in a restaurant or hotel, But that is obvious. We know that, ever since the Government came to power, they have a sort of yen against the hotel and restaurant business.

The Government went out of their way to cripple this industry with all forms of taxation; but I would be trespassing on your generosity, Mr. Deputy Speaker, if I said anything further about that. The anomaly of this is that if a manufacturing process cooks food and the manufacturer supplies it to a restaurant, the grant becomes payable. We have had cases in Scotland of two adjoining restaurants, one with a bakery attached, the other without. The restaurant with the bakery receives the investment grant and the other does not. This is the sort of fair competition the Government want to help investment and improve production.

I assume, although I have not checked it, that if a firm of caterers such as Lyons was to cook its food at Cadby Hall it would get its grant, but if it cooked food at the Cumberland it would not.

Let us look at the industry about which I, perhaps, know most, the construction industry. This is dealt with in some detail in chapter 4, page 14 of this explanatory booklet. Paragraph 36 explains what will be allowed in civil engineering and building. It says—a quite remarkable statement: Ordinary repair or maintenance of buildings or structures is not a qualifying activity and"— believe it or not— machinery or plant used solely for this is not eligible. What a shaft of light is such a booklet! Who can possibly say what type of building equipment is used exclusively for maintenance, unless it is that used by the small builder who does nothing but maintenance? Every large firm carries out maintenance from time to time. What is the difference between alteration and maintenance? Is this building in which we are sitting being maintained or altered? How can anyone define it? Yet the Board of Trade, in this helpful document, says that it should be excluded.

It would need an army of civil servants in the building industry to work out such details. The only person who suffers is the small builder, who does nothing but maintenance. This, from the Government about to introduce a Bill for maintenance of houses in twilight areas. They make it difficult to get grants. Paragraph 38 deals with development areas and says that Construction equipment which is provided for continuing use in a development area is eligible for grant at a rate for those areas, but if it is used outside development areas at any time during the first three years from the date when expenditure was incurred in providing it, the fact must be reported to the Board of Trade, who may require repayment of … some of the grant. What do we mean by "development area"? Development areas are areas of local employment exchanges, which generally follow the pattern of local authorities. Many of the boundaries of such local authorities were settled in the times of the Domesday Book. We can blame our forefathers for quite a lot, but we cannot blame them, when they drew up the boundaries, for not seeing that the Government would use them for taxation purposes. Even if boundaries were in a straight line, as in Canada and Australia, there would be problems enough. Boundaries in this country wander round, and this can make the building of motorways, normally built in a straight line, rather difficult.

The Government are, quite rightly, building motorways, not enough, which cross these hypothetical boundaries. We are not talking about small equipment here. The sort of equipment used on motorways costs millions of pounds. This document, this flash of light, tells us that if the equipment is bought in a development area, and works entirely within that area, a 40 per cent. grant is paid. Should it cross the boundary, then the Board of Trade should be notified.

In building a motorway, a contractor moves millions of yards of material across these mythical boundaries. Soil is moved from a development area, into a non-development area, and then back again. Is an industrialist to have an army of flagmen blowing whistles and timing the intervals when equipment is used outside of a development area? Are the Government to establish a body of civil servants to calculate this?

The booklet goes on to say that this applies for only three years. No one knows why, and it will lead to some interesting situations. Some contractors might take a job outside a development area, which confuses the calculations. What happens then? The most extraordinary things can happen. If one is writing-off a very large crane, as opposed to a small piece of equipment the situation is near absurd.

The Minister of State, Board of Trade (Mr. Edmund Dell)

So that I may be clear what argument it is that the hon. Gentleman wishes me to reply to, will he make it clear whether he is arguing against having a differentially higher rate of grant in development areas?

Mr. Costain

I am not arguing against the differential grant in development areas, because the Government have agreed on a policy of additional grants. I am asking that a certain amount of common sense should be put into these regulations. I hope that the Minister will feel at liberty to intervene again, if there is anything he is not clear about.

In writing-off, a situation can arise when it is not worth taking a piece of equipment out of a development area, near the end of its life. What will the attitude of the Board of Trade be if the plant is not working, and remains in a development area? I would expect that, good guardians of public funds that they are, they might say, "No. You have to work outside the boundary area". But some of this big plant takes a month or two to repair. Is it right that it should be repaired in a repair shop in a development area which does not qualify for the grant?

The Government are pressing the civil engineering and building industry to export. I can say without fear of contradiction that we are doing our very best in that connection. But, having got the plant with the help of these grants, the moment we respond to the Government's appeal to export, the grant goes; it is taken away. Instead of having this wonderful asset to help exports, the Board of Trade says, "No. We might be subsidising exports". There are very few nations, except perhaps Germany, which are not subsidising exports.

Recently, the previous Parliamentary Secretary to the Ministry of Public Building and Works, Lord Winterbottom—a name which is easy to remember—made a speech on the necessity for builders to equip themselves for building in winter conditions. He made such an appeal to the builders that they responded and got on with buying equipment, including heating equipment. We in the building industry are sufficiently naïve to believe that whatever the Minister in charge says is put into effect.

However, when this equipment was purchased and it came to the question of allowing it for grant—and the gestation period between buying it and knowing whether one will get a grant in respect of it is nine months—the builders were told, "No. That is welfare". Apparently, heating a building to keep out the frost so that one can get on with laying bricks is welfare. The Government talk a great deal about welfare, but when it comes to paying for it, that is another story. The Blue Book makes it clear that welfare is excluded.

I refer to the evidence given before the Estimates Sub-Committee, on which I have the privilege of serving. I am delighted to see the Chairman of the Sub-Committee present. We carried out an inquiry into an excess of expenditure on investment grants which is dealt with in the Winter Supplementary Estimates. The increase above the Estimate is 11 per cent.—£45 million. This followed a 39.4 per cent. increase the year before. I do not blame the Board of Trade officials for their inability to give an accurate estimate. But I should like to congratulate the author of the paper which was put before the Estimates Sub-Committee; it was a masterpiece. It explained why the Estimate was not accurate.

Paragraph 5 on page 49 of the First Report of the Estimates Committee, Session 1968–69, reads: It seems clear to us that given the nature of the scheme there will inevitably, even with longer experience, be a number of uncertain factors at the time when the main estimates are prepared. These could all move in one direction, leading to an over-stated or an under-stated estimate, or they could cancel each other out in whole or in part". Was there ever a clearer statement to the effect, "We do not know what we are talking about, but we will put it in writing". The man who produced that should be made Leader of the House.

The argument which I am developing, be it very unsuccessfully, is that, as these Estimates increase, pressure will be brought to bear to disallow items which have previously been allowed. I have evidence relating to a firm with two factories, one in Scotland and one in England. It had items allowed for investment grant. On the next occasion, they were disallowed in England but allowed in Scotland. Then the Scottish and English got together, for a change, and they were disallowed in both cases. By that time the investment programme had gone on. We become suspicious about these matters. In view of these overestimates, is it possible that the Board of Trade is under instructions from the Treasury to cut down?

In Question 289, one of the officials of the Board of Trade was asked whether there is any pressure from the Treasury on the Board of Trade to have a time limit from the point of view of the demand-management of the economy?". The answer was: There has been no pressure from the Treasury on this particular point. The Treasury are, of course, concerned about the total cost of investment grants and this is one reason why the-e has been no further progress in the past year towards shortening the period of delay between expenditure and grant. If anything lets the cat out of the bag, that does. It is clear that, having made these promises in order to get popularity, the Government are, once again, trying to get out of their promises and commitments and are using the clammy hand of the Treasury as a reason for the delay.

I hope that the Minister of State does not believe that I am putting forward a political argument. I am looking at this matter as an industrialist. I should like to refer to a recent study of taxation which most hon. Members have received in the last few days. It is Study No. 3, by the Industrial Policy Group, which is composed of leaders in industry, into how we may get the economy going, help exports and stimulate the economy but cutting taxation.

These are a few of the scathing remarks made about investment grants. On page 42, it says: We now turn to the system of investment grants which, though not formally a part of the taxation of business income, is intimately connected with it. The present system is another of the innovations hastily produced in 1965–66. It has the following major defects: It discriminates between manufacturing and other industries. This is not only wrong in principle. It is impossible to apply in practice without numerous anomalies arising from the difficulty of defining manufacturing. It is wrong in principle because the distinction between manufacturing and other industries is not a distinction between industries in which it is desirable to stimulate investment and those in which it is not. That is a summary of what I have been saying about the difficulties.

It goes on: Its administration is, and must be, costly owing to the need for bureaucratic decisions on what may or may not qualify for benefit. It is uncertain. There are investment decisions which have to be made before it can be definitely known whether investment grants will accrue or not, owing to problems of definition. Uncertainty is in itself a deterrent to investment. The message I want to leave with the House—

Mr. Dell

As I understand, the hon. Gentleman has been arguing that it was a regrettable thing that further progress had not been made in reducing the period before which investment grants were paid. He now appears to be arguing with the Industrial Policy Group in favour of a return to industrial allowances. How does he reconcile these two positions, taking into account that investment allowances cannot be paid in less than 18 months as compared with the present 12 months for investment grants?

Mr. Costain

I am grateful for the interruption, since it shows how inadequately I have argued my case. I did at the start say that I was prohibited by the rules of the House from speaking about investment allowances, and your nod, Mr. Deputy Speaker, led me to believe that I must not trespass further on that matter.

The Minister has missed the most important thing. What is wrong is the definition. If a firm knows that it will get an investment grant, the bank can be told, "In spite of the Government's squeeze, in spite of the rude noises which the Chancellor of the Exchequer is making to you, we have this profit of so much and we know that we will get a refund." If the firm tried that on now, and went to a bank and said that the Government had promised the firm an investment grant, the bank would say, "Which Government?" "Which grant?" "Where is it in the book?" There is no book; and the bank manager will not give overdrafts on promises. This is the difference.

If investment grants are to work, the Board of Trade must in all decency produce a schedule of what it will allow and what it will not allow. There has been time enough since 1966 to prepare a schedule, so that industrialists can go ahead with expansion in the knowledge that a grant will be paid. Until the Board of Trade puts that right, the country will never get the benefit which it should get out of investment grants.

5.15 p.m.

Mr. A. H. Macdonald (Chislehurst)

The hon. Member for Folkestone and Hythe (Mr. Costain) is in a fortunate position since, as he remarked and as you confirmed, Mr. Deputy Speaker, it would be out of order to refer in any but the most oblique manner to the circumstances that prevailed before. He has, therefore, been able quite comfortably to indulge in all his invective against the investment grants system in a vacuum, without being able to make comparisons.

With all respect to the hon. Gentleman, following the intervention of my hon. Friend, I would remind him that he did carry on about the length of time that it takes to pay investment grants, and I fully take his point. He spoke about the length of time, and it would have been reasonable to make an oblique reference to the length of time that prevailed before.

The hon. Gentleman referred in some detail to the evidence which was presented to the Estimates Committee. I also had the privilege of serving on that Committee and, though the quotations which he made were absolutely accurate and apposite, they also were just a wee bit selective. He might have referred to some of the other questions which were put to the witnesses which indicated that the system of investment grant offered a measure of control. The matter is now before the House because we have this system. Under the previous system it could hardly have been brought before the House, but I will not elaborate on that point. The fact that we are discussing the matter now stems entirely from the introduction of the present system.

The hon. Gentleman, having been a member of the Committee, will recall that witnesses replied to questions by stating that the investment grants system enabled a more accurate method of control to be established than that which existed previously; it enabled hon. Members to put questions about the way public money is being spent in a way which could not have been done before, These comments are to be found in the Report and in the supporting evidence, but no reference was made to this in the speech by the hon. Gentleman.

Mr. Costain

Will the hon. Gentleman say to which question and to which evidence he is referring? This would help me to follow his arguments more carefully.

Mr. Macdonald

I was thinking of Question No. 303 on page 44 of the supporting evidence. The point I am anxious to make, treading as carefully as possible to avoid referring to the previous system, is that the advantages of the present system can be established only after it has been working for a reasonable period. Even if I wanted to make a comparison with the previous system, which I accept would be out of order, it would not be possible to do so because the previous system provided no statistics on which a comparison could be based.

There is some evidence, though of a slightly doubtful nature, to suggest that industrialists paid very little attention to the previous system. The hon. Gentleman is an industrialist and will no doubt have seen the booklet called "Investment Appraisal" which was published a few years ago and which showed something on these lines. The evidence I have does not suggest that the uncertainty of business and industrial firms on which he dilated at such length is significantly greater now. This is why it is all the more unfortunate that the hon. Gentleman proceeded, as he was obliged to do, in a vacuum, without reference to what had gone before.

He might have referred to some of the advantages of the present system. I remember most distinctly discussing with a group of businessmen and industrialists the system of investment grants with particular reference to the concept of rental. I suppose that we are all agreed that the concept of renting equipment should be encouraged. It enables a more effective use of plant, and it enables the use of expensive and specialised plant.

I do not want to elaborate on it in great detail, but it is common for the company engaged in renting out equipment, through some quirk in our system of accountancy, very often to show in its early years an apparent loss in its accounts. It is not a real loss. The profit is there in the future, but it is one which is to come, and it does not appear in the accounts for the early years. The only item featured there is the written-down capital value of the equipment and not, except in rare cases, the capitalised value of the rental contracts. For that reason, it is not unusual for the balance sheet of a company engaged in renting out equipment to show a loss.

Under the old system, no advantage was gained, but, under the system of investment grants, such a company can qualify for grant and receive it. As rental is an aspect of industry which we wart to encourage, it seems that the system of investment grants is admirably adapted to doing this, and that was the response which I obtained from a group of businessmen whom I addressed in the course of the 1966 General Election campaign. They said that they saw manifest advantages in the system. They were not alarmed at the prospect of uncertainty, because they saw no more uncertainty than existed before. Equally, they were not alarmed at the prospect of delay, because they saw no more delay than existed before.

Mr. Costain

The hon. Gentleman is putting over a powerful argument about the renting of equipment, and he has just referred to conversations that he had in 1966. However, does he realise that if a contractor rents equipment his grants are not allowed? Quite a lot of building firms inter-relate equipment, but, as soon as it is rented out, the grant goes.

Mr. Macdonald

That was not quite my argument, but, if the hon. Gentleman had confined himself to the point that he has now made, I would have felt inclined to support him. Although the system of investment grants assists the renting out of equipment, it could do more than it does, and I should like to see an expansion. If the hon. Gentleman had proceeded on that point, I would have been pleased to support him.

However, following up his remarks, I wonder if it is entirely true that in some circumstances a grant is payable. Manifestly, it is not possible to get two grants. The company hiring equipment cannot get a grant if the company hiring it out has one, and there are cases of the company hiring out equipment getting grant and the company using equipment gaining benefit from it because the hiring company has been able to quote attractive rental terms.

I would not like it to go entirely unremarked that there are distinct advantages in the present system of investment grants, but the arguments advanced in their favour in the Report of the Estimates Committee did not emerge fully from the hon. Gentleman's speech.

5.24 p.m.

Mr. Nicholas Ridley (Cirencester and Tewkesbury)

In answer to the hon. Member for Chislehurst (Mr. Macdonald), I want to make it clear that I am against both investment grants and investment allowances. For me, there is no question of a choice between the two. In my view, the whole system of subsidising investment is getting us into deeper and deeper water.

To begin with, I must declare the same interest as my hon. Friend the Member for Folkestone and Hythe (Mr. Costain). I, too, am a director of a civil engineering contracting company, and a competitor of his in some contracts. That means that it does not matter to competitors whether or no they receive investment grants, provided that they are all treated alike. But if I, as a development district based contractor, am to compete with my hon. Friend, as a non-development district based contractor, the competition becomes unfair. My hon. Friend receives 20 per cent. on his plant, whereas I get 40 per cent. I can assure the Minister that his inspectors do not follow my every wheelbarrow in its perambulations round the countryside, in and out of development districts.

There are other anomalies. One arose in my constituency where a firm making plastic mouldings was in the habit of treating the moulds as the property of the customer and, although the customer sometimes invested heavily in those moulds, they were refused investment grants on them. The problem has now been resolved satisfactorily, but there is no limit to the number of anomalies which other hon. Members can bring to the Government's attention.

I want to devote a moment or two to the development district concession of 40 per cent., as opposed to 20 per cent. It was one of the reasons for the very large increases which the Select Committee investigated. It will be known that the original guess was that about 20 per cent. of the money would go to the development districts and that this has had to be revised to 33½ per cent. If my arithmetic is correct, that amounts to £100 million in extra subsidy to the development districts.

It is highly questionable whether it is right to discriminate in favour of the development districts to the tune of £100 million a year of public money by making investments in capital-intensive industry.

As I understand it, the problem in the development districts is the shortage of employment for people. It is curious to spend so much money on providing capital intensive and, therefore, labour scarce employment. This has been recognised by the Government, who have brought in the regional employment premium, designed to redress the balance by subsidising labour. However, the two together are now costing us something in the region of £200 million a year—£100 million for capital and £100 million for labour. I suggest that it would have been easier to have abolished both, thereby saving £200 million a year.

The Department of Economic Affairs has always denied that these two large items, investment grant and regional employment premium, should be included in my calculation of the cost per job in the development districts. But the Prime Minister has said that the cost has gone up from £18 million a year to £250 million, which means that we are now spending £8,000 per job in the development districts by including them.

The time has come when this spiral of expenditure must be stopped, and this House is entitled to ask for value for money in the matter. The Chancellor said yesterday that private consumption must be curtailed and that public expenditure is on target and nothing but good. I do not know what this target is. It has gone up by 50 per cent. since Labour came to office, from £9,807 million to £14,500 million. But we have a glorious example of public expenditure which could be cut by £425 million a year in investment grants.

If I might quote to the House the figures which the Estimates Committee investigated, they are very revealing. Originally, in 1967–68, the scheme was to cost £166 million. A summer Supplementary in that year added a further £60 million. Not content with that, a Winter Supplementary was added of £89 million, making the first year's total £315 million. The Board of Trade for this year, 1968–69, upped the figure from £315 million to £380 million in its estimates and already this winter it has discovered that it is inadequate and it has come along for a further £45 million, making a total requirement of £425 million a year which is three times the original estimate when this House was induced to vote for the scheme and to vote for the expenditure. We have really trebled annual expenditure on this item

This is one of the most rotten pieces of estimating and forecasting. Whatever the reasons, it is absolutely disgraceful that civil servants should have made mistakes of this order, and always on the wrong side. They never over-estimate and give us a credit. I think that the time has come to suggest that this expenditure is out of control, and the anomalies mentioned by my hon. Friend show that it is in a most unsatisfactory position.

We have to be steady and not emotional about it and to ask what value we are getting for the money. What is the result of this £425 million that is being invested this year and which is still growing? It is interesting that the manufacturing investment in this country has not risen. It is running at approximately the same annual level as in 1964 before the scheme was brought in. So, despite this enormous expenditure, we are not getting any increase in manufacturing investment, and presumably that is what it is designed to do. We are in the position of investing as a nation less than any of our competitors and at a time when the need to invest more has become absolutely crucial. In 1966 we invested 18.5 per cent. of our gross national product. I will not read out the figures for all the other countries which I have here, but it is interesting that Japan invested 35.2 per cent.—about twice as much as us. This extraordinarily low investment rate is one of the prime causes of our distress. Despite the expenditure of this large sum of money in grants we do not seem to be making any improvement in the level of industrial investment. It is to that problem that I turn my attention for a moment.

It seems ridiculous to tax all the industrial companies in this country in order to give them investment grants at a rate of 20 per cent. on this ever growing scale. The effect of investment grants is presumably to make investment more attractive. But this has an effect upon investment, which can be treated like a commodity. If we are to make it more attractive to spend capital, to invest by means of these grants, we have to deal with the other side of the equation which is to make it more attractive to produce capital, that is, to save at the same time. The more we spend on subsidising investment the more we have to raise by penalising savings in taxation.

For example, if we subsidised the price of tomatoes, it would result in an increased demand for tomatoes because the public would be demanding more and more. But if we raised that subsidy by a tax on tomato growers there would be an ever dwindling amount of tomatoes grown and, therefore, an ever greater shortage. This is the position into which we have got ourselves. The more the Government go on subsidising tomato eaters the more they have to whack the producers of tomatoes with the result that the supply of capital for investment becomes smaller and smaller.

I believe that investments are made not because of the 20 per cent. grant, but because they are thought to be profitable, and the profitability has little to do with the rate of investment grant. To give an example, interest rates in the last four years have gone up from 5½ per cent. to approximately between 8 and 9 per cent. for new money in the market borrowed by first-class industrial companies. This represents a greater increase in industrial costs than is compensated for by the 20 per cent. grant which they receive in lieu. The 20 per cent. grant brings current interest rates down to 7 per cent. in equivalent terms, whereas in a development area it would only bring down the current rate of interest to around 5.3 per cent. The result is to put us back to where we were in 1964 in terms of interest rates in a development area and to keep us in the position of being at a 7 per cent. rate of interest in a non-development area. Therefore, we can see that this expenditure of a vast sum of money is unlikely to be very tempting to industrialists or to have much effect on stimulating investment, which depends much more on confidence, security, stability—

Mr. Deputy Speaker (Mr. Sydney Irving)

Order. The hon. Member is getting into a wider debate than is admissible on Supplementary Estimates. He can argue against the Estimates, but he cannot go into this wider sphere.

Mr. Ridley

I accept that. I will quickly bring my remarks to a conclusion. These Supplementary Estimates bring into doubt the whole value of this very large and expensive subsidy of £425 million a year which is rapidly being increased in every supplementary.

I have tried to show that there is no evidence that we are getting value for money and that the way to tackle the shortage of investment is much more at the supply end than at the spending end. I believe that the Government have a case to meet to justify coming to this House and asking for money. I believe that we should not grant it. I hope that their successors on the Treasury Bench, who will be of the same political colour as myself, will have the courage to come out and say that the investment grants system will be brought to an end. That seems to me to be the best way to deal with the problem.

5.38 p.m.

Mr. Kenneth Baker (Acton)

Although it may have escaped the attention of hon. Members, we are discussing an increase of £45 million in investment grants. I am grateful that this subject is being discussed this afternoon. It is the largest part of the winter Supplementary Estimates, and we are fortunate that the subject came up in the ballot. If we approve this additional Estimate of £45 million, the total amount that will be spent in the current year upon investment grants is £425 million. We have to be satisfied that this extra amount of £45 million is money well spent. The first question that we ask the Minister is: what is the evidence that this is money well spent?

I understand that the object of spending this money is to stimulate investment, particularly in manufacturing industry. Has this been achieved? Has this substantial increase of £45 million already brought, or will it bring, substantial benefits?

Turning to the Board of Trade Journal of 24th January this year, we find a table of the actual level of investment this year compared with earlier years. The year 1968 shows a drop in manufacturing investment from £1,203 million to £1,190 million. So there was a drop of £13 million last year in investment by manufacturing industry. These figures are taken at 1958 prices.

It appears that we are being asked to approve additional expenditure of £45 million which has brought about a drop in investment in manufacturing industry. It is interesting to note that during the same period last year—and again I get this information from the Board of Trade Journal—investment in distributive and service trades which, on the whole, do not qualify in all respects for investment grant, rose from £1,010 million to £1,030 million, while investment in that sector which the Government have selected to stimulate investment dropped. In these circumstances, can this money be well spent? I believe that the onus of proof rests with the Government to show that it can be. When the Minister replies perhaps he will tell us how many jobs were created by this sum of £45 million which we are being asked to approve. Perhaps he will tell us, too, how much extra production can be attributed to the expenditure of this sum, and also how much specific investment is directly attributable to it.

As was said earlier, some of the ground was worked over in the First Report of the Estimates Committee. On page 42 the hon. Member for Hampstead (Mr. Whitaker) asked: Has there been any research done into the efficacy of the investment grant use as at present administered? The official who replied said: This is the subject of constant inquiry within the department, but I must say as yet we have no conclusive information. We have been called here solemnly today to approve the expenditure of £45 million to stimulate investment which fell, and about which there is no conclusive evidence and information. It is therefore legitimate for us to ask the Government to produce the evidence that the investment grant system is beneficial to our economy.

I do not want to stray into the future, because I shall be out of order if I do so, but, if we are to stimulate the economy in 1969 and 1970, we must be sure that the money we spend on investment grants will produce an increase in investment. Businessmen do not believe that it will, and only yesterday the Financial Times carried the headline, "Industrial investment boom checked". The Board of Trade estimates that industrial investment this year will rise by 10 per cent. Last year it estimated that investment would rise by 5 per cent., but in fact the figure fell by £13 million.

This debate is timely, because I dare say the Government will be spending £400 million to £500 million on investment grants in 1969, and that sum might be even less productive than the money spent last year. There are various attitudes to investment grants. I do not want to broaden the debate too much. My hon. Friend the Member for Cirencester and Tewkesbury (Mr. Ridley) is in favour of abolishing them. I believe that his argument is attractive because if, in 1968, this grant produced a fall in investment, it cannot be an effective way of stimulating the economy.

What has escaped the attention of the Minister and of the Government is that investment grants should be the means of stimulating marginal investment. Most investment consists of replacing plant and machinery, and old factories. This is done almost automatically. It is part of the business process. If there is to be encouragement to investment, whether by grants, which I believe is the worst method, or by initial allowances, the encouragement must be directed to increasing the marginal rate of investment, that is, to getting a little extra out of the investing public's pocket. That is what investment grants have been particularly unable to do.

The present system of investment grants is not only ineffective, but unfair, because it discriminates against the efficient firm in favour of the inefficient one. It discriminates against service industries, in favour of manufacturing industries. It discriminates against labour-intensive industries, in favour of capital-intensive industries, and it discriminates against non-development areas in favour of development areas.

How can the Minister justify a system which allows a company operating in, say, the Highlands of Scotland, to buy a computer for £1 million, a computer which might produce employment for six academics living with their families in crofters' cottages, and then gives that company £400,000? If, however, a company operating in the South of England in retailing, or warehousing, or wholesaling, spends £1 million on introducing an efficient retail network, or on a wholesale distribution network, or on introducing modern American methods of warehousing, how much will that company get back from the Government? The answer is nothing. This is the sort of anomaly which is thrown up by the system of investment grants.

Mr. Dell

The hon. Gentleman might like to look at paragraph 89 of the orange book to which the hon. Member for Folkestone and Hythe (Mr. Costain) referred. If he does, he might find that his question is unnecessary.

Mr. Baker

I am familiar with that book, because part of my task outside the House is to interpret the tax angles in it. I assure the Minister that I shall be only too pleased to give him chapter and verse of the two companies to which I have referred.

Finally, I have tried to show that the investment grant system is ineffective because it has not produced an increase in manufacturing investment. This is one of the most disturbing features of our present economic situation. The system is unfair because it makes a whole set of arbitrary discriminatory rules against some parts of the country which are considered better than others, and some industries which are considered better than others.

Mr. David Steel (Roxburgh, Selkirk and Peebles) rose—

Mr. Baker

Hon. Members should realise that when the hon. Member who has the Floor says "finally" it does not mean that he has come near to the end of his speech. I shall, none the less, take the hint and conclude my remarks.

If we want to stimulate industrial investment, which I believe is desperately required—and I am sure that there is nothing between the two sides of the House on this issue—and if we are to achieve an economic growth rate of 2, 2½, or 3 per cent., there must be a massive increase in investment. There must be, not a drop of £13 million, but an increase of £300 million in manufacturing industry alone. If we are to get that, we must give inducements to marginal investment, and not to normal investment which industry is doing all the time. The best way of doing that is by having an initial allowance of 50 per cent. and a write-off period of five years thereafter of the remaining 50 per cent.

Mr. Deputy Speaker, I see you sitting on the edge of your Chair. I do not intend to suggest something which requires new legislation, but I believe that what we have at the moment is the worst possible system of all. The system to which I have just referred would, I think, comply within the phrase used by General de Gaulle about gold. It would be "impartial" and "universal", alas not immutable, but this system of investment grants is mutable, and it will be possible to change it, because I am many of my colleagues believe that it is the worst system to adopt to stimulate industrial investment. It is the worst system which has ever been designed by a well-developed economy. It must be changed. It must be altered, and it must go, and in that respect it is like the Government.

5.50 p.m.

Mr. David Steel (Roxburgh, Selkirk and Peebles)

I apologise to the hon. Member for Acton (Mr. Kenneth Baker) for being over-enthusiastic in rising to speak when he stopped for a moment to draw breath. The hon. Gentleman made an interesting speech. The fact that my name appears among others is purely fortuitous, and in a sense unfortunate, because I do not intend to follow the general trend of the argument which has been advanced so far. My experience as a Member representing a development area is the reverse of the general observations which have been made to date.

It must be borne in mind that one purpose of the investment grant system was to stimulate employment and capital investment in particular parts of the country, and in that respect I am not qualified to speak about the other matters raised by the hon. Gentleman. My experience, following the Industrial Development Act of 1966, is that conditions in both employment and investment are a good deal better than they were. Therefore, although I shall make a fairly critical speech, I shall do so on the basis of accepting that the investment grant system is basically good, and should be encouraged and promoted.

Mr. J. Bruce-Gardyne (South Angus)

Before the hon. Gentleman gets to his criticisms, will he deal with the point made by the Scottish Council of the C.B.I. that the improvement which has been experienced in the development areas of Scotland is in no sense attributable to any of these things, including the investment grant system?

Mr. Steel

I do not intend to get into an argument about that. I intend to limit my speech to my experience in my constituency. It may be that the Scottish Council of the C.B.I. has views on how things have improved in Scotland as a whole. I shall not comment on that, just as I shall not comment on the case made by the hon. Member for Acton for tying the fall in manufacturing investment to the investment grant system. I do not think that the hon. Gentleman's case was complete, because he was confined by the narrowness of the debate. Other factors may be involved.

I want to come to the criticisms which I have to make of the method of administering this enormous sum of public money which has been put into investment grants. All the points which I shall make have been made in correspondence with different Ministers at the Board of Trade over the last two months. I represent a constituency which is hoping to attract new industry, generally of the smaller variety. It may be that as the development of the Border region progresses we shall want to attract to the area industries which employ between 200 and 2,000 people, but, generally, the new industries which come to my part of Scotland employ between 20 and 200 people. They are in the small bracket, and it is here that the system of investment grants as administered by the Board of Trade is defective.

The firm of Kenvale Textiles wanted to establish itself at the fairly remote village of Newcastleton in my constituency. The Government are pledged to a development scheme which retains the populations in rural communities. Here was an isolated village community of about 1,000 people. There was very little local industry, and even that amount has declined since the local railway line was closed.

In the middle of October, 1967, the gentleman who owned the firm wrote to me, and I put him in touch with the Scottish Country Industries Development Trust. It was not until 23rd April, 1968, about five months later, that the Board of Trade finally turned down his application for various forms of financial assistance to get the business going. It seems to me that to take five months to go through the process of dealing with a single-man business, to investigate his accounts and the viability of the scheme, is to take far too long to deal with a relatively small amount of public money, and a relatively small industry.

In this instance I make no great complaint. I think that B.O.T.A.C. made the wrong decision. The firm went there despite the lack of assistance. It employs 20 people, and provides much-needed employment. In due course it will probably employ 60 people, but it is greatly handicapped by the shortage of working capital which is needed to assist an essential element in the economy of that small and remote community. This was my first experience of dealing with the Board of Trade.

Perhaps I might now give the House a current example of a larger firm, B. & T. (Essex) Limited, which is being ordered to a new industrial site in Hawick. The firm wishes to have its new factory ready by June to enable it to manufacture toys for the Christmas period. If the factory is not ready in June, the firm will have to put off the whole of its industrial cycle for a year, because everything is geared to the Christmas demand.

At the end of November last the firm applied for a building grant, and, I think for loan capital from the Board of Trade. In the correspondence which I have had with the Parliamentary Secretary, and which the Town Clerk of Hawick has had with the Department, it has become clear that no decision can be expected until the middle of March. Four months is a long time in which to investigate the finances of a fairly small company, and failure to make a decision is affecting the company's whole programme of development.

Only the other day I received a copy of a letter—I have not had the time to follow it up with the Board of Trade—which the Town Clerk of Hawick wrote to the Board of Trade. The letter is dated 29th January, and says that one of the directors, who is handling the business side of operations, tells me that the Board of Trade accountants completed their inquiries about a fortnight ago and are in process of lodging their reports. The information I have received through Mr. Steel to date indicates that it will be the second Wednesday in March before the application is placed before B.O.T.A.C. but I gather that meetings of this Committee are, in fact, held monthly so that there would be an earlier meeting on the second Wednesday in February. I hope that it will be possible to advance the consideration of this application so that a decision can be made this month instead of next month.

Those examples clearly show that the Board of Trade's machinery is universal and omnibus for all forms of industry. If Fords of Dagenham were to go to the Cairngorms, the same machinery would be used by the Board of Trade as would be used for a small man who wanted to settle in a part of the development area of Scotland.

I shall not go into another example of which I think the Minister is aware, and which I have forwarded to the Parliamentary Commissioner, concerning the refusal of an investment grant to Mr. Dorward, but I propose to add to my examples the experience of a firm of photo-finishers in Peebles, a firm which takes trade from all over the country by means of mail orders. It is now building a factory on a new industrial site. It is the first new industrial development in the town, and is very much welcomed as being unconnected with the woollen trade.

At the end of July, just before the Summer Recess, in a Written Answer to the Parliamentary Private Secretary at the Board of Trade, the hon. Member for Aberdeen, South (Mr. Dewar), who is never slow to come to the rescue of the Government, the Government sneaked out the news that they were going to diminish, or to cease to grant, investment grants to service industries employing fewer than 50 people. That sort of announcement should not have been made in a Written Answer just before the House rose for the Summer Recess, because such news is of major importance to small towns in the development areas. It is of major importance to small towns in the development area. It is not perhaps significant in terms of the overall employment of the country, but it is important in terms of these small towns in my constituency, which are trying to attract new industry.

The decision to go ahead with the factory came just after the Board of Trade announcement and I have had it confirmed by the Parliamentary Secretary that the firm will not be eligible, regrettably, for a building grant. It may be that the Board of Trade, faced with my criticisms, feels itself very much under pressure from the Estimates Committee and the Public Accounts Committee. It is true also that the Board of Trade has had some unfortunate experiences in Scotland. We all remember the Cadco affair at Glenrothes and there is some caution, therefore, in the granting of public money. This is right, but, somewhere in the Board of Trade, new machinery should be devised so that the same machinery used to spend £1 million on Cadco is not used when we are talking about a building grant of this figure, or for small allocations to small businesses. The Board of Trade uses a sledge hammer to crack a nut.

There are two ways of getting round this difficulty and I should be glad of the Minister's reaction to them. The first is that the Department should devolve the processing of these applications and have a sub-committee of B.O.T.A.C. or a similar organisation in Scotland to deal with applications of less than a certain value. I suspect that one reason for the complaints I have received is that just as the Estimates show that there has been an underestimate by the Board of Trade of the amounts involved in investment grants, so there has been an underestimate in the amount of work involved. I suspect, therefore, that the officials concerned are grossly overworked in dealing with these matters. If this is so, my suggestion is given added weight for the work on smaller applications to be devolved.

The second is that if it is not possible to do what I have suggested, then a special small unit should be set up by the Board of Trade to process small applications. This would avoid these matters having to be taken before monthly meetings of B.O.T.A.C. and there would be no need for lengthy investigations into relatively small applications.

The investment grant system has basically been good. However, it is too slow and it is critical in its slowness in dealing with the movement of complete small firms as opposed to the larger processes and decisions which must be made by large industries.

The Scottish Office is very much involved in the development area programme in my part of Scotland. I attended a meeting between the Minister of State and the local authorities, at which I made some of these observations. The Minister said that they came as news to him, and he was anxious that I should convey my criticisms to the Board of Trade. I have done so in correspondence.

It should be a matter of general concern that local authorities as well as firms coming into the area feel exasperated and frustrated in trying to carry out the Government's policy of moving firms into development areas, particularly when they find that the Board of Trade's machinery in this matter is cumbersome and unnecessarily slow.

6.3 p.m.

Sir Spencer Summers (Aylesbury)

Although we are primarily discussing investment grants, this is part of a debate based on the proposition that the Government be given authority for an additional £163 million; namely, the total winter Supplementary Estimates.

It is significant that the Labour Party, which is supposed to be the great reformer of the life of Parliament and is anxious to set up all sorts of committees to ensure that Government policies are given adequate scrutiny has at no time since the debate began contrived to provide more than five hon. Members on the benches opposite. For most of the time there have been only three hon. Gentlemen opposite in their place, and most of them have been Government spokesmen or Whips. Considering what hon. Gentlemen opposite say about their concern for public expenditure and, thus, taxation, the disparity of interest between the two sides in a subject like this is evident.

My hon. Friend the Member for Folkestone and Hythe (Mr. Costain) has rendered great service in revealing the fantastic anomalies which inevitably arise in a system of this kind. He quoted many examples of the almost contradictory instructions which are given and explained how it would be almost impossible to deal even in a book with the potential anomalies that arise. The Estimates Committee is precluded from discussing policy. One is, therefore, naturally glad when an investigation of this kind is brought to the Floor of the House because the inhibition in regard to policy matters which applies to the Committee which wrote the Report does not apply to us.

It is interesting to note that this system has its major impact on the cash flow of companies of all kinds. We were told that the import arrangements for the additional surcharge which were designed ostensibly to reduce imports, would not have much effect but would have a substantial effect of the amount of credit resources available and were worthy on that account. If cash resources are such an important part of the Government's weapons, it is strange that the Government should be using a weapon here which is contrary to the restrictions imposed on bank lending, for this is putting more cash from the Treasury at the disposal of companies to which, it is said, the banks should be chary of lending money.

In other words, this system is at variance with the advice tendered by the Chancellor of the Exchequer at the Guildhall recently and makes it still more difficult to understand how a system like this can be defended at a time when the very reverse of assistance in cash is the Government policy.

The Committee was somewhat inhibited in asking whether or not this was a good plan, since clearly the question impinged on policy. We asked, therefore, not for information on which we could judge whether it was a good plan—we should have been precluded from doing that—but what steps the Government had taken to find out whether, in practice, it was a good plan and was accomplishing the purposes for which it was designed. One bit of information we were given in response to questions of that kind appears in paragraph 27 of our Report: A witness said that the Board knew that 'firms who are contemplating substantial investment have been very concerned to try and find out in advance what investment grant they would get, which suggests that this has been a considerable factor in their calculations'. I take it from the context that the inference drawn by the witness about calculations and about whether or not firms should go ahead with certain propositions is an entirely false interpretation of the situation. The calculations to which he should have referred are the amounts of cash that would be needed by companies to finance the projects in question. It is, therefore, false to assume that just because companies ask, "Are we to get a grant?" they are interested to the extent of saying, "We shall or shall not go ahead with the project". They are simply interested to know what effect the project, with or without grant, would have on the cash resources available to them.

We asked what steps had been taken to find out whether the scheme was good. We were told that nothing in the way of comprehensive research had been carried out. It is strange that we should have a system involving the expenditure of £425 million with no steps as yet having been taken to find out whether it is achieving its object.

I freely admit that it is virtually impossible to find out by any scientific means whether that object is being achieved by this method. To give an analogy in another context, I was once asked for my views on whether the Peace Corps field training experience was of value to those concerned. A year after the training experience those who had taken it were asked what effect it had had on their efficacy in the field, and I was asked for my views. I replied that it was impossible for anyone to fill in the questionnaire honestly because it could not be said with accuracy whether the experience, lasting a few weeks a year earlier, had resulted from one of many experiences, such as an event in one's life, coming into contact with a pretty girl or fifty-five or more other factors. Many things enter into the matter when deciding what influences decisions of that sort.

The same applies here. The state of the market, the likelihood of competition, the extent of the profits which will accrue to the company to invest—all these things are vital in deciding whether a project should go ahead or not. It is virtually impossible to find which of these many factors, the addition to the cash flow to the business and so forth, are influencing firms to behave in a particular way. We have had examples to show that in those fields where it was hoped that investment would follow, investment has fallen and where it was hoped that it would fall it has increased.

Whether it be this scheme or all the other influences to which a board of directors is subject it is clear that this is not the paramount one. All this adds up to the proposition that if we cannot scientifically discover with any greater certainty than is apparent at present that over £400 million of public money is achieving the object claimed, it is high time that we stopped spending money in that way.

I am glad that the time and effort of the Estimates Committee has led to discussion on the Floor of the House of the merits of the scheme, which I believe will in the course of time be proved to have outlived its usefulness.

6.12 p.m.

Mr. Cyril Bence (Dunbartonshire, East)

I was encouraged to make a contribution to this discussion by the remarks of the hon. Member for Salisbury (Sir S. Summers). We have passed through a long period when it has been a useful economic exercise for the Slate to collect funds in the form of taxes in order that those funds should be channelled into industrial processes in the regions through industrial institutions and also to individuals. This has been a useful process over the last 40 years.

But when a State is developing technologically and scientifically and the situation of the individual in society and industry becomes more secure, when the techniques of managing the market and finding the product for the market are easier than they were 40 or 50 years ago, I wonder whether the State and society may be approaching a situation in which we are creating a huge complex of feed-pipes to pour out money, having collected it from society, and then starting the process over the next few months of going to the outlets of those pipes to collect our share. As we create greater prosperity for the individual—

Mr. Deputy Speaker

Order. I have difficulty in relating the hon. Member's remarks to the Supplementary Estimate. Perhaps he will help me.

Mr. Bence

Yes, Mr. Deputy Speaker. I am thinking of investment grants. I think there is a process in this method—collecting vast sums of money by taxation from the community as a whole, taking it from our pockets in taxes after we are paid on a Friday, centralising it and putting it back by investment grants into institutions in which we have our interest—which is like emptying some bottles so as to fill another bottle. I hope that I am in order in trying to make the point which I should like to have examined by economists, who often have not been right.

I wonder whether it would be worth examining whether it is right to have hundreds of millions collected in taxation and given back in investment grants, or whether it would be better to leave the hundreds of millions in the hands of businessmen and industrialists to make their judgments on investment rather than pumping the money through the State in ever-increasing quantities. This would be one way of cutting Government expenditure and impelling industrialists—

Mr. Deputy Speaker

Order. This is a proposition which the hon. Member cannot discuss in detail tonight. He must come to the Supplementary Estimate of £45 million.

Sir S. Summers

Does not the hon. Member think it would be a good start in the process, to which he may be coming, to join those who object to spending £45 million in this way?

Mr. Bence

I agree that this £45 million has to be collected. I suppose I have made some contribution towards it. The industry in which I was interested and employed paid something towards it on a Friday and then collected some of it back on the following Friday. We could short-circuit this process which increases bureaucracy by collecting from taxpayers and getting money circulating by what seems an unnecessary process. It would be a good thing to have an inquiry into the whole domestic monetary machine.

Mr. Deputy Speaker

Order. This is very interesting, but I am afraid not on this occasion. We cannot discuss taxation but only the question of the £45 million Supplementary Estimate concerned with investment grants.

Mr. Bence

I do not know from where the £45 million comes, but I presume it is from taxation.

Mr. Deputy Speaker

Order. The hon. Member is perfectly correct, but he cannot discuss where it comes from tonight.

Mr. Bence

Naturally, I accept your Ruling, Mr. Deputy Speaker. I am trying to suggest that we could cut out all the unnecessary complex machinery involved in collecting this £45 million from the people and then giving it back at some other point. I am sorry if I am on the wrong theme, but I am deeply concerned. I think we should consider whether we are channelling too much money through the central State machine and not leaving sufficient in the hands of people to do more for themselves.

6.18 p.m.

Mr. David Waddington (Nelson and Colne)

The hon. Member for Dunbartonshire, East (Mr. Bence) will forgive me if I do not follow him because I fear that if I did I should speedily be ruled out of order. I think there is a great deal in what he said. For a long time I have been worried by the fact that we have moved into a situation in which everyone seems to have a hand in everyone else's pocket. That does not seem to be a satisfactory state of affairs.

In accordance with the practice of the House, I must declare my interest. I am a director of two small cotton manufacturing concerns. What I have to say is not coloured by my interest, which is strictly limited, and I am not often able to devote my time to my interest in that direction. It strikes me as peculiar that this Government of planners who habitually claim to know better than private industry what is good for the country and what level of capacity is required almost always manage to get their sums wrong. It has emerged clearly from this debate so far that this time they have got their sums wrong to the tune of £45 million. That is not "peanuts" when we think of all the trouble there was over school meals a few months ago, and it is not a fluke. The Winter Supplementary Estimates for last year show that at that time they got the sums wrong to the tune of £60 million.

Many of us have the gravest doubts whether investment grants are a good idea. I appreciate that I cannot ask for legislation to scrap them. What I can perhaps do within the rules of order is say that there is a body of evidence to the effect that investment grants are wasteful. All hon. Members on this side will expect the Minister, in the face of that evidence, and at the conclusion of this debate, to try to prove their usefulness, because, as far as I can see, no evidence thus far has been produced by this Administration to prove their usefulness. We are entitled to seek some powerful evidence of their usefulness when common sense tells us that it is not, on the face of it, very sensible to give money to a company whether it is capable of making a profit out of it or not.

It has been pointed out that in large parts of the country—I refer now to the development areas—firms are receiving these grants at double the normal rates. Again, there is powerful evidence that we are not getting value for money. I for my part expect and hope that the Minister will try to prove that part of this £45 million which is referable to the 40 per cent. investment grants in development areas is good value for money for the taxpayer.

My mind immediately goes to the case of the Ford Motor Company, which has a fairly new plant at Halewood on Merseyside. Ford at Halewood now gets a 40 per cent. grant in respect of any new machinery it installs, in addition to the 37s. 6d. a week a worker it receives by way of regional employment premium. I am not anti-American and I have no objection to American investment in Britain, but I am surely entitled to ask whether it is not crazy that, while we are forbidden to make profitable investments abroad, we as taxpayers, and with no financial interest in Ford, are compelled to give the Ford Motor Company a present of £40 for every £100 worth of machinery it buys. To put it another way, how can it be right and in the taxpayers' interest that a company which is 100 per cent. American-controlled should be able to expand on only 60 per cent. American capital? I should like some convincing from the Minister that that part of this extra £45 million which is going into the development areas, and in particular into that development area which is not far from my constituency, is money well spent.

When this scheme was introduced we were told time and time again that it would be very discriminating and flexible, that it was a worth-while reform because only in this way would the taxpayer get full value for money, only in this way would his money be used in such a way that he got a real response by way of industrial investment.

The scheme has proved completely inflexible and quite unable to cope with some of the major problems of today. One example is that of the grey areas. Although for a long time places like Nelson and Colne—my constituency—have been suffering and people have been leaving such areas to go to development areas simply because of the regional employment premium and double investment grants, the Government have merely sat on their backsides, wrung their hands and enjoined us to wait until the Hunt Committee reports. Incidentally, that Report is an unconscionable time acoming. So much for this dynamic, purposive Government. I hope that at the conclusion of the debate the Minister will try—he will have a very difficult task—to prove to me and to others on this side that any of this £45 million is money well spent.

6.25 p.m.

Mr. Michael Shaw (Scarborough and Whitby)

We should all be grateful to my hon. Friend the Member for Folkestone and Hythe (Mr. Costain) for initiating this debate. It is inevitable that certain aspects of investment grants are referred to time and again, not only in the speeches which have been made today, but in those which have been made previously. I well remember the broad and deep division of opinion between the two sides of the House as to the collective merits of the two types of assistance—investment allowances and investment grants—when the Industrial Development Bill went through the House in 1966.

This afternoon I shall deal only with investment grants. The disadvantages which flow from this system as distinct from any other system have been highlighted again today. I have some practical experience of the working of investment grants. I am convinced that this is not the better system. The great weaknesses are just those which were foreseen at the inauguration of the system. There is, first, the discrimination in favour of manufacturing industries as against other industries. The system hits hard at service industries, particularly tourism. This was and is still deeply resented by the tourist industry. Even more fundamental is the objection that this system does not impose any discipline on the industry receiving the benefit to encourage it to make a profit and to earn this reward only after making a profit.

I want to refer to the Report of Sub-Committee D of the Estimates Committee, which examined the Supplementary Estimates. My first point relates to what was called by the Sub-Committee the possibility of a cut-off date for making applications. At present there is no cutoff date. The question was raised by the Committee whether it would be advisable to introduce such a cut-off date so that the Ministry could finalise claims for expenditure made in a particular year. I was glad to note that in its answers the Ministry indicated that it saw no need as yet for a cut-off date.

On the evidence so far, certainly as it appeared before the Sub-Committee, I hold the view strongly that there is no need for a cut-off date. One of the responders to the question was good enough to submit a short memorandum as to the incidence of applications during the six quarters ending the third quarter of 1968. It is clear from that evidence that there is a rapid tail-off in the applications being made in respect of the old expenditure. It seems that old applications will quickly be mopped up in two or three years. Applications for allowance for Income Tax purposes can be made as far back as six years in normal circumstances, and it would appear that claims for investment grants will be made well within that period. On that evidence I believe that the Ministry is right not to seek powers to establish a cut-off date by which applications for the grant must be made.

The next point I had in mind has already been made, but I do not apologise for returning to it. It emerges from Question No. 290, put by the hon. Member for Hampstead (Mr. Whitaker), the most important question put throughout all those proceedings of the Committee: Has there been any research done into the efficacy of the investment grant as at present administered? As my hon. Friend the Member for Aylesbury (Sir S. Summers) said, the answer came in two parts. The first part was to this effect: We do know that many firms, particularly the larger firms, who are contemplating substantial investment have been very concerned to try and find out in advance what investment grant they would get. The point of that inquiry is plain. It is made not to decide whether to make an investment but in order to work out future capital requirements. Unlike Government Departments, an industrialist has to get it right, because if he gets it wrong the banks, at least nowadays, cannot come in to bail him out for the extra. Obviously, therefore, for any major expenditure there must be an inquiry of that kind before it is undertaken.

I add in parenthesis that under the present Government in many more cases than would be normal the question whether the 40 per cent. grant, as it is in the development districts, is given can be critical for the venture, since industrialists know that they are very tightly controlled by the banks nowadays. I regard that as an artificial state of affairs—or it should be. It is rapidly developing into a permanent state of affairs under this Government.

The crux of the matter is that 95 per cent. of investments made in this country—this certainly applies to most of those which I see—are made not on the criterion of whether the industrialist will have some sort of grant but on the judgment of confidence as to the buoyancy and expansion of the economy in the future. If businessmen have confidence, they will not need the investment grant. If they do not need it, it is money which the Government could save by not spending it.

The second interest of industrialists is to see whether, having invested the money they will secure an adequate return as a result. If they see that they will have an adequate return, they will invest. Again, if they have invested on that basis, the Government waste public money by giving them a grant in addition.

The third important factor taken into account by industrialists when investing is the nature and extent of competition facing them or likely to face them. Can they afford not to invest if they are to stay in business? If the answer is that they cannot afford to do without the investment, they will invest. As I say, spurred on by the picture presented by those three factors, and not by whether they will have the grant, businessmen make 95 per cent. of their investments.

It is vital, therefore, if we are to continue this system, that we have far greater knowledge of the effectiveness of investment grants. Here I draw attention to the last part of the answer given by the official to Question No. 290: But there has as yet been nothing in the way of comprehensive research into this matter. That situation must be rectified as soon as possible.

I hope that the Minister will tell us that research is being undertaken as a matter of urgency to find out how effective the investment grant system is in initiating additional capital expenditure. I beg the hon. Gentleman to put into that inquiry the further query which I have already posed: On the assumption that the credit squeeze is no longer with us, is the investment grant such an important element in the decision whether to invest?

In my view, the investment grant system needs to be carefully studied if it is to be continued. I agree with the hon. Member for Dunbartonshire, East (Mr. Bence) when he says that today far too much money is going out of the industrialist's pocket into the Treasury and then back again into his other pocket. Where it is proved not to be necessary, it is time that that came to an end.

6.36 p.m.

Earl of Dalkeith (Edinburgh, North)

We are all grateful to my hon. Friend the Member for Folkestone and Hythe (Mr. Costain) for having initiated this debate and given us an opportunity to discuss important aspects of the investment grant system.

At the outset, I dissociate myself from some of the remarks made by my hon. Friend the Member for Cirencester and Tewkesbury (Mr. Ridley) when he endeavoured, I thought, rather too strongly to depreciate the aims and achievements of investment grants in relation to development districts. However, I should prefer to debate that with him outside rather than here now. I have only one comment to make in passing in that context. The greatest extravagance in which any nation can indulge is to pay large numbers of men large sums of money for doing nothing. Obviously, and rightly so, a great deal of emphasis during the debate has been put on the need to secure value for the money which is handed out by the Government in investment grants. These are large sums, and it is right that we should see that the money is well spent and that we do have good value for it. That requirement must always be kept in mind.

I strongly support my Member of Parliament, the hon. Member for Roxburgh, Selkirk and Peebles (Mr. David Steel), when he asks for a speeding up of the procedures in investigating applications, particularly those coming from small companies which can make such a big difference to small isolated communities such as the one to which he referred, Newcastleton. If the Board of Trade can devise a new method to speed things up, it will be greatly welcomed by many people in many parts of Scotland.

Mr. Dell

The noble Lord will realise that investment grants are now paid six months more speedily than investment allowances. I understood the hon. Member for Roxburgh, Selkirk and Peebles to be talking about grants under the Local Employment Act.

Earl of Dalkeith

Yes, but we must, if we can, cut down any waste of time. The hon. Gentleman gave the example of a toy factory for which it was crucial that the answer should be given fairly early on. Is it possible for the Board of Trade to have a separate Scottish establishment, perhaps responsible to the Secretary of State for Scotland, which could deal with some of the smaller applications?

The only other local point I make relates to Edinburgh, and I shall pass over it quickly for fear of straying out of order. I draw the Minister's attention to the great difficulties created by the geographical boundaries selected for those areas which qualify for development grants because they are development districts and for those which are excluded. There is now the most extraordinary situation whereby Edinburgh, which is the one and only small area excluded from development district status within an enormous area, is undergoing the most awful convulsions—I can only call it that—whereby industries are picking themselves up and moving outside the City boundaries in order to qualify for grant. This is absurd, because it is merely transferring unemployment from one locality to another. It is not adding in any measure to the general increase of the prosperity of Scotland. I hope that the Minister of State will look at this matter.

My main objective is to draw attention to another industry, and to ask the Minister how he decides which industries should qualify for grant and which should be left out. The industry to which I refer in particular is forestry, in which I declare an interest as I am involved to a considerable extent. What criterion does the Board of Trade adopt in allowing the extractive industries, for example, to have grant but not forestry, which performs much the same sort of occupation?

There are four compelling reasons why the Government should consider giving an investment grant for harvesting equipment in forestry. First, it is logical that forestry should be put alongside the extractive industries. Secondly, forestry has an enormous import-saving potential. Timber imports in every form cost the country about £640 million a year. As a result of giving investment grant to forestry, we should get quicker development of machinery and harvesting equipment, greater efficiency and lower costs. There would be quick results.

Thirdly, we should also be encouraging the development of industry in the far away parts of the country—the Highlands and some of the far outlying areas which are suffering depopulation. Fourthly, Scotland is struggling to recover from the terrible hurricane damage of a year ago, and if a grant could be applied to harvesting machinery for forestry, Scotland would be able to overcome its great problems much to the advantage of the nation in that the timber which is now lying all over Scotland could immediately be put to good use throughout the British Isles and could at once save money spent on imports.

I am reluctant to ask the Government at this time for any form of increased spending but there are occasional exceptions to the rule, particularly when it can be shown that the nation will be making a worth-while investment.

Mr. Speaker

Order. The hon. Gentle man cannot ask for increased expenditure in this debate. He can, however, talk about switching some of the £45 million if he wishes to.

Earl of Dalkeith

I was just about coming to my last sentence, my great peroration, Mr. Speaker. I ask the Minister of State to consider this suggestion seriously, since I believe that it would be much to the advantage of the nation as a whole.

6.45 p.m.

Mr. Tom Boardman (Leicester, South-West)

I shall not follow my noble Friend the Member for Edinburgh, North (Earl of Dalkeith) into a discussion of Scotland or forestry, which are far from my constituency, although they are close to my heart. I endorse what has been said by my hon. Friend the Member for Scarborough and Whitby (Mr. Michael Shaw) but at the same time make one exception to his speech. He referred to investment being made on confidence and buoyancy. That is how it should be, but it is not always so. I believe that the grant has distorted investment judgment. I believe that firms tend to invest where they will get a grant, whereas economic sense would not always justify the investment. If the investment grant does anything, it tends to distort the proper business decisions on which investment should be made. My hon. Friend may be right in saying that the grant does nothing. If that is so, it should not be paid, and that may well be the right answer.

My hon. Friend the Member for Folkestone and Hythe (Mr. Costain) did a great service in exposing the administrative nonsense in the system. He revealed its ugliness and, as one might call it, its indecent exposure in that he stripped it and showed us its raw spots. I will add four illustrations, which I believe have deep economic significance to industries with which I am personally concerned or with which my constituency is concerned, of the way the grant is operating harshly or unfairly and makes nonsense.

The first is the footwear trade, which the Minister of State knows well. One of the vital pieces of plant in the industry-is the sets of lasts. On these lasts, the building of the shoe or boot depends. Lasts are supplied in sets of various pairs, shapes, sizes and fittings. But because each last costs less than £50 no investment grant can be paid upon them, although a set of lasts, which is the complete tool, costs considerably more than £50. The industry, which is one of our growing export industries and has a vital rôle to play at home as well, is placed under this penalty and deprived of a grant which I believe it should get. I ask the hon. Gentleman whether he has given further reflection to his legal powers in refusing the grant in view of the British Oxygen case.

The second illustration is the scrap metal industry. It is well known that an enormous amount of saving of imports is achieved by reclamation of ferrous and non-ferrous metals. A letter circulated by the British Secondary Metals Association some time ago gave figures which have not been challenged. These show that the reclamation industry as a whole saves more than £1,000 million annually in foreign exchange, of which more than one-third is attributable to non-ferrous metals. This reclamation is achieved by the use of plant and machinery, and yet modern plant and machinery used in that vital import-saving industry is deprived of investment grant. Can that be right?

Thirdly, there is the illustration of the disposal of trade effluent—I can hardly call it an industry. Investment grant in this case is paid to manufacturers who, in connection with such disposals, put down their own sewage disposal plants or add or adapt their disposal systems in bringing their effluent up to requirements. An industry particularly affected here is the leather industry. The Minister will be aware of the representations made by the British Leather Federation. I should declare an interest, as I am a director of a tannery.

In most cases the treatment of the effluent can best be done at the local authority sewage works. Instead of each manufacturer putting down his own little plant, the large plant of the local authority can be extended or altered to deal with the combined effluent. But in that case the local authority cannot get an investment grant. It can charge back to the manufacturer an annual sum representing the capital cost of the central works, but as no investment grant is paid it often comes to substantially more than the manufacturer's own plant would after he has got the grant. This is an absurd waste of money, and should be looked at again.

My fourth point concerns the administration of the scheme as it applies to plant bought on hire-purchase terms. Plant is often bought by people who have set up in partnership to start a small business. When the business prospers and expands, as most businesses set up by young men of enterprise will, the owners are advised to convert it—I use the term loosely—into a private company, and the plant is notionally transferred to a private company. I say "notionally" because it is the same factory, the same men and the same everything, but the business is an incorporated company instead of a partnership. Yet investment grants that would have been allowed on the future hire-purchase instalments had the business continued as a partnership are not payable to the company, which therefore suffers a loss. This is a deterrent to people forming themselves into a corporate organisation which can expand, and I ask the Minister to look again at it.

If the grants have any economic purpose—and as we are discussing an extra £45 million, the Government presumably think that they must have some—instances such as the four I have quoted, plus the many more ably quoted by my hon. Friend the Member for Folkestone and Hythe should be remedied. The attitude that has appeared when such points have been raised in correspondence and at Question Time shows a complacency which I have heard defined as "compound ignorance". I am told that ignorance is when people do not know, and that compound ignorance is when they do not know that they do not know. I should hate to accuse the Minister of ignorance or compound ignorance, and I hope that his answer will satisfy us that he is guilty of neither.

6.53 p.m.

Sir Keith Joseph (Leeds, North-East)

The Minister of State has nobly, and virtually on his own, sat out this debate. He has a large number of questions to answer, and I shall try to put to him what I think to be the four main ones to emerge from the speeches. There will also be a number of detailed points that he will have picked up, and which we hope he will answer.

We owe thanks to my hon. Friend the Member for Folkestone and Hythe (Mr. Costain) for opening the debate in the way that he did. He gave the House a catalogue of some of the conundrums that result from the arbitrary distinctions inherent in the investment grant system. We look forward to the Minister's comments on what he said.

We also owe a great deal to the Estimates Committee, which put some of the key questions that have recurred time and time again in the speeches today. The disadvantage of the sort of expenditure we are considering is that it is inherently very difficult to predict. We must accept that, but some of us are left with a feeling of amazement at how any Chancellor of the Exchequer can live with runaway expenditure such as investment grants involved last year and again this year. They are costing the taxpayer £425 million this year. Last year there were two extra demands on the taxpayer of £60 million and £89 million, and this year there has been an extra demand, unpredicted when the Chancellor introduced his Budget, of £45 million. The grant system is almost turning into a blank cheque.

Yet the immense sums with which we are dealing may not be the end of the story. There were news items after the Prime Minister's conference at Chequers that all concerned were going away to discover how they could spend more money to encourage investment, and we have the C.B.I. asking that the 1968 investment bonus should be continued during the current year. Therefore, large though the sums are, the demand to increase them may remain to embarrass the Government.

It is true that investment grants are not quite as costly to the taxpayer as the figures might suggest. I understand that to the extent that the grant replaces a company's expenditure its claim to set depreciation against tax is reduced, and this is some offset for the taxpayer.

The purpose behind investment grants, and behind the distinction between the level of grant outside and inside the development areas is at least common to both sides of the House. We all want more, better used investment, and we all want prosperity in all parts of the country. The question raised by the Estimates Committee's Report is whether the present system serves those purposes best. My hon. Friends the Members for Cirencester and Tewkesbury (Mr. Ridley) and Acton (Mr. Kenneth Baker) suggested radical changes which were vigorously opposed by my noble Friend the Member for Edinburgh, North (Lord Dalkeith). Without entering into the argument on this occasion, I would say only that it would be perfectly possible to reconsider investment incentives in general while still giving special investment advantages to the development areas and to any individual industry which made out a good case for special treatment.

We can all agree that investment is vitally important, but most of us on this side of the House would add that it is by no means in itself a panacea for this country's needs. It is first the quality, quite as much as the quantity, of investment that matters. The marketing, design and production cost of our goods matter equally.

Nevertheless, we start in agreement that investment is vital. But it was my hon. Friend the Member for Aylesbury (Sir S. Summers) who was the first in today's debate to put his finger on the key issue. My hon. Friend, who was on the Committee, quoted from paragraph 27 of its Report to ask the crucial question, "How effective is the investment grant system in increasing investment?"

I should like to put four questions to the Minister. The first is that put by my hon. Friend the Member for Aylesbury: what is the link between investment grants and investment? The question was also put vigorously and effectively by my hon. Friends the Members for Cirencester and Tewkesbury, Acton and Nelson and Colne (Mr. Waddington). My hon. Friend the Member for Scarborough and Whitby (Mr. Michael Shaw) correctly emphasised that investment decisions are made far more on the grounds of confidence, hope of profit and a buoyant market than they are because of the amount of availability of investment incentives.

As many of my hon. Friends have pointed out, throughout the application of these investment grants, manufacturing investment has been stagnant. Meanwhile, paradoxically, commerce and distributive industry investment, which gets no grants has increased. The Government have to explain now, in these circumstances, the expenditure of the taxpayers' money can be justified. We know that the President of the Board of Trade has said that he accepts this paradox, but that he believes that investment grants have prevented manufacturing investment slipping as much as it would have slipped. This may or may not be a good argument, but we cannot accept it on the say so of the President of the Board of Trade.

We hope that the Minister of State will address himself to the link, to the paradox that commercial investment, without investment grants, has increased, while manufacturing investment with grants has decreased. Will he explain what justification, if any, there is for believing that manufacturing investment would have decreased even more but for the grants? The first question to the Minister of State is: what is the link between investment grants and manufacturing investment?

I leave aside the very valid point made by my hon. Friend the Member for Leicester, South-West (Mr. Tom Board-man) that investment grants may have a distorting influence on investment decisions that are made. The second question to the Minister of State is: what is the link between investment grants and jobs in the development areas? We note that the main reason for the under-estimation by the Government of the cost of investment grants was that they assumed that the development area component would be 20 per cent., when it has turned out to be nearer 33 per cent. What is the measure of the benefit to the development areas compared with the extra cost to the taxpayer? Does he accept that there are investments, sometimes quite large ones in the development areas, which receive large investment grants but which would have gone to those development areas anyway, for good commercial reasons?

Mr. Dan Jones (Burnley)

How can we say that?

Sir K. Joseph

It would be easy if one wished to check, by talking to the individual firms. It is my belief, without quoting cases, although I would be prepared to do so in private, that many firms would admit that the investment grant was no more than a bonus, received as the result of a decision that would have been made anyway. Secondly, we ask the Minister of State to tell us how many jobs have been created in the development areas by the investment grant system, and by the extra investment grants given in the development areas.

We note the comments of the economic Review of the National Institute of Economic and Social Research that: The most obvious interpretation is that this incentive … has the effect of systematically segregating the most capital intensive industries in the assisted areas and the labour intensive industries outside them. This is the very opposite of the objectives of the Government and the Opposition. We know from the Board of Trade's publication that the largest slice of this huge investment grant sum coming from the taxpayers' pockets, has gone to the chemical industry, the most capital intensive of all industries, the one least likely to bring large numbers of jobs with it. We are left with the thought that perhaps an alternative use of part of the money spent outside development areas would produce more jobs inside them, perhaps by better roads, more help to industry for retraining and lower taxes.

The third question is what are the Government's views of the prospects? Quarter after quarter the Government have predicted increased manufacturing prospects. Quarter after quarter their prediction has had to be cut down. We have from the Government a sort of manufacturing investment mirage. It all looks handsome in the distance, but as the time approaches it fades away. Only last month we had cheerful forecasts for an increase in manufacturing investment during 1969. But the opinions on which that forecast was based were given before the Chancellor's November package. We gather from the Financial Times this Monday that business is less confident, or rather a smaller proportion of business is confident now than it was four months ago, that it will be increasing its manufacturing investment during 1969. Will the Minister of State give us the latest Government opinion on this?

I resist the temptation, because we so want to hear the Minister of State, to go into the burdens of the overheads on industry which this whole grants system involves. My last question, to which we want a categoric answer is: will the Minister say whether or not the research requested by the Estimates Committee into the effectiveness of expenditure on investment grants is being commissioned by the Government? The four points I have put from this Box are: what is the link between investment grants and manufacturing investment; what is the link between investment grants and the number of jobs created in development areas; what are the prospects for manufacturing investment in 1969; and is the research requested by the Estimates Committee being put in hand?

7.7 p.m.

The Minister of State, Board of Trade (Mr. Edmund Dell)

I will certainly try to deal with the very large number of questions raised during this interesting debate. It is a good thing that we have had the opportunity to discuss investment grants, and although it has been a critical debate, it has been useful. Let me first state certain points of agreement with what the right hon. Member for Leeds, North-East (Sir K. Joseph) said. Investment is vital, it is not a panacea, and it is as important, if not more important, to secure the right quality rather than the right quantity of investment.

One question which has been put during the debate is whether investment incentives assist one to achieve this necessary level of investment. There have been some hon. Members such as the hon. Member for Cirencester and Tewkesbury (Mr. Ridley), with the unexpected assistance of my hon. Friend the Member for Dunbartonshire, East (Mr. Bence), who thought that any system of investment incentives was undesirable. I do not propose to argue with that very much. The experience of both parties in Government has shown that they are wrong. The Industrial Policy Group, although not in favour of our present system of investment incentives, is in favour of a system.

The hon. Member for Leicester, South-West (Mr. Tom Boardman) thought that the investment grant system distorted the pattern of investment, if it did anything. Any system of investment incentives distorts the pattern of investment. The investment allowance system with its discrimination in favour of development areas, which the previous Government adopted, distorted the pattern of investment, and deliberately so. Either this is a criticism of the whole system or a point which we can note in passing and get on to the main matters raised.

Mr. Tom Boardman

My criticism was that it distorted the proper economic argument, not the pattern of investment

Mr. Dell

I note the hon. Gentleman's point. I think that I have already replied to it.

If we want a system of investment incentive—and it is on that proposition that the rest of my remarks will be based—it seems to me that the investment grants system has substantial advantages. The fact that it is a cash grant is of psychological importance, because it is more clearly understood by industry. It is also more clearly understood by industry in that there is a greater degree of stability in the level of investment grants. The investment allowance system was changed again and again. The hon. Member for Folkestone and Hythe (Mr. Costain) reproached us about the uncertainty of the investment grants system. I think that the uncertainty in the investment allowance system greatly exceeded it. However, uncertainty on all the points which the hon. Gentleman raised in criticism of the investment grants system can be substantially removed in almost every case by consulting the local investment grant office.

I grant the hon. Member for Folkestone and Hythe and other hon. Members who made this point that there were cases in the early history of the investment grant system, when we were gaining experience of its administration, of the policy being changed. But that period is, I hope, substantially over. The right way to discover whether one is likely to be entitled to an investment grant is to go to the investment grant office. A substantial advantage of the investment grants system is that it has had this greater stability. When we changed the rate, it was upwards, and we gave two years' notice of the fact that after the end of 1968 it would revert to the original levels.

The regional incentive is a most important aspect of the investment grants system. I note that many hon. Members opposite do not believe in discrimination in favour of the development areas. The problems which the hon. Member for Folkestone and Hythe and other hon. Members raised are, unfortunately, inherent in discriminating in favour of the development areas. Certain difficulties are created when machinery crosses borders, but I do not see how we get over them if we discriminate in favour of development areas. That is the basic element in the policy.

Criticism has been directed against the way in which the investment grants system selects manufacturing industry for assistance. This is a reasonable discrimination. After all, manufacturing industry is responsible for 80 per cent. of our visible exports. It so happens that it is in manufacturing industry that the level of investment in this country has mainly lagged compared with countries like Germany.

The right hon. Member for Leeds, North-East said that there was this paradox: investment in distribution and services has risen, investment in manufacturing industry has not risen. I should have thought that this was support for the proposition that it is on manufacturing investment that we need to concentrate our investment incentives.

Mr. Ridley

The hon. Gentleman must address himself to the point that this treatment does not seem to have worked and that the level of investment in manufacturing industry has not risen. Why does he think that it has not, and what is he prepared to do about the matter?

Mr. Dell

I agree that I must address myself to that problem, and I promise the hon. Gentleman that I shall do so.

The investment grants system is discretionary; the Board of Trade has a discretion in its administration. The reasons for this discretion are very powerful. By this discretion, we can avoid the extension of the area of benefit in the way done under the investment allowance system, which was extended by a succession of court cases, which increased its uncertainty, into most peculiar areas. This discretion, which has been criticised, is a valuable and essential part of the system. But it is not administered in a haphazard way. It is not administered in response to Treasury pressure to discriminate against particular people in order to save money. Discretion is operated in order to maintain consistency in the operation of the investment grants system.

Sir K. Joseph

If investment is made in a development area which would have been made there anyway and which will bring very few new jobs, would the Board of Trade use its discretion not to give it an investment grant?

Mr. Dell

Certainly not, because to do so would be inconsistent with the policy of the Act and with the maintenance of consistency in the administration of the investment grants system.

There is a point about the investment grant system which hon. Members opposite have tried to get away from whenever they have spoken about speed. The investment grant system has within it the potentiality of reducing the period of payment even further. Already it is 12 months compared with 18 months under the investment allowances system. That, taking into account discounted cash flow calculation, increases the value of the grant even further.

There is the criticism that the system is not profit-oriented. The hon. Member for Scarborough and Whitby (Mr. Michael Shaw) made that point. It is also made in the somewhat academic review of the investment grants system published by the Industrial Policy Group. This is not a substantial criticism of the system. Even if one gets a 20 per cent. grant or a 40 per cent. grant, one has still to put up 80 or 60 per cent. of the money. People will not do that unless there is the prospect of profit.

The hon. Member for Roxburgh, Selkirk and Peebles (Mr. David Steel) was concerned with the interest of small firms. New small firms are often of great potential value to the economy. But a new small firm does not yet have a profit record. Either it has not a profit record or it has not a profit record sufficient to get the full benefit of the investment allowance. Therefore, the investment grants system is of substantial benefit compared with the investment allowance system.

Criticism has been made of the fact that the Board of Trade has not yet made any attempt to assess the effectiveness of the investment grants system in promoting investment. This criticism is a little odd because during all the years of the investment allowances system no attempt was made, as far as I know, to assess its effectiveness. It would have been very difficult to make such an assessment because of the continual changes and uncertainty connected with it.

The hon. Member for Aylesbury (Sir S. Summers) put forward a most extraordinary proposition. He said that if we cannot scientifically establish the benefits of a system we should not adopt it. If that principle were followed in life, in government, or in the conduct of industry we should never take a decision. We cannot scientifically establish the benefits of the investment grants system any more than we could establish the benefits of its predecessor. We can make a judgment on the basis of evidence. We may be wrong. It may be a good or bad judgment. The evidence may be powerful or otherwise. But we must make a judgment. We cannot rely on scientific certainty in the way that the hon. Gentleman suggested. Nevertheless, I accept that we shall have to make an attempt to assess the effectiveness of the system. We have relatively short experience of the operation of the system—two years or so.

There are many incentives to invest besides the investment grant system: profitable demand; availability of cash; confidence in the future. These things, as hon. Members have said, affect investment decisions as much as the availability of investment incentives, perhaps more. The balance between these factors is very difficult to establish.

Then there comes the question of their effectiveness in development areas. The differential investment grant is not the only incentive to people to invest in development areas. There is the Regional Employment Premium, the Selective Employment Premium, the I.D.C. policy; all these things combine to make a total policy to increase employment in development areas. To select out one element and to ask what is the effect of this element is very difficult. What one has to do is to see the results of the total policy. If it is possible to find indications of the effectiveness of one element, by all means do so, but we propose to study this—

Mr. Kenneth Baker

Is not this very disturbing? I agree that it is difficult to segregate one item, but the one item which the Government have segregated, namely, investments grants, will cost between £400 million and £500 million in this current year, and cost £425 million last year. It is disgraceful for a Minister of the Crown to say that he is sorry but he is not quite sure how effective this is; it is one of six factors. It happens to be the most expensive factor, and we want value for money.

Mr. Dell

I agree that it is an expensive factor, that we want value for money and that we should study this. One must also remember that a further factor which is effective both in development areas and outside is the general level of economic activity. I put it to the hon. Gentleman, as I put it to the House, that the investment allowance system also could have been studied and was not. We are proposing to study the effectiveness of this system as far as it is possible to do so, but I do not want to tell the House that we will study it and leave the House under any illusions as to the extent to which this question can be scientifically established in the way in which the hon. Member for Aylesbury required.

Mr. J. T. Price (Westhoughton)

When the Minister is carrying out this study, will he pay particular attention to the discrimination now shown in development areas in the payment of the 40 per cent. grant as against the 20 per cent. grant in respect of those industries already successfully established within the development areas? In other words, could not the Government effect considerable economies if they were less undiscriminating in the dispensing of public money and had regard to the needs or the capacity of the industries already there to engage new labour? With great respect to what the Minister has said, this is not being done, and it ought to be studied in depth.

Mr. Dell

My hon. Friend raises a point which links up with the question put to me by the right hon. Gentleman relating to the effectiveness of the investment grants system in creating jobs. The investment grant is available on an asset. An asset is installed by a firm in order to maintain its competitiveness. By maintaining its competitiveness it maintains employment. Investment grants, therefore, are not just concerned with creating new employment; they are concerned with maintaining existing employment in competitive industry in development areas, and this must be borne in mind. The answer to the question how many jobs are being created cannot be given. Jobs are being maintained as well as being created. In the development areas we nave had over the last few years difficult problems associated with the contraction of various industries. It has been vitally important to create new jobs and also to maintain existing jobs, and where industry can be competitive to enable those industries to expand in development areas, based on that competitiveness. All these factors have had to be taken into account, and I cannot give an answer in the way the right hon. Gentleman wants to that specific question.

Sir K. Joseph

The Minister is bringing in R.E.P. and S.E.T. premiums, points which we did not raise. We are asking a simple question: will he isolate the projects of manufacturing investment for which investment grants have been given in development areas, and tell us how many new jobs have been created with them? That surely must be contained in the books of his Department.

Mr. Dell

Investment grants are paid not just on new projects; they are paid on existing projects, on new assets in an existing firm. This is the point which my hon. Friend was making.

Mr. J. T. Price

I am glad the Minister has come right to the point. I do not agree with the system and I have said so on numerous occasions in this House, and during the passage of the Industrial Development Bill which established the system I was a continuous and consistent critic of it. I am sorry that I was unable to join in the debate earlier in the day since there are far-reaching comments which I should like to have made.

Mr. Dell

I am well aware that my hon. Friend does not agree with this. I have followed my hon Friend's comments on the system over the years. I do not agree with my hon. Friend. What we are concerned with here is investment in assets which replace other assets, and, therefore, one cannot give an answer to the question asked by the right hon. Gentleman any more than an answer could have been given to a similar question on the effect of investment incentives given in development areas under the previous Government.

Despite the qualifications which must be placed in advance on any such inquiry, we think that such an inquiry would be useful, and we are undertaking an interim appraisal with which industry will be associated.

There is, however, no question of investment grants ceasing. We must maintain the priorities on which the system is based. It is vitally important, as it was when investment grants were started in 1966, to increase the rate of investment of productive industries. Investment grants are the most important means of encouraging investment in those sectors which can do most to help the balance of payments.

The point was put to me that there is no evidence which can be produced in such an inquiry that the system was at all effective. This is a matter of judgment, and we shall perhaps learn more as a result of the inquiry which we are conducting. Nevertheless, in my judgment it is effective. This judgment is based on the contact which we have with industry; on the fact that the level of investment in 1967 and 1968 fell less than was to be expected and was prophesised in respect of that investment cycle; on the fact that we believe that the movement of investment is now upwards and on the level of investment in development areas.

Sir S. Summers

Will the Minister tell us what is to be the nature of the inquiry? I ask because the Committee of which I was Chairman asked the Department to find out if it was feasible to assess the effect of the system. There are two quite separate questions, and I should like to know which is to be inquired into. One question is: what is the effect of the system? The second question is: is it feasible to find out the answer to that? Which will he do?

Mr. Dell

Clearly, we have to do both. My earlier remarks about the difficulties of such an inquiry dealt with the second point made by the hon. Gentleman. It is difficult to assess the effectiveness of any investment incentive system, but this is a problem which we are trying to tackle. We shall do this as best we can, with all the limitations which such an inquiry must have, and industry will be associated with it.

Criticisms have been made about the fact that we are dealing with a large Supplementary Estimate. One hon. Member said that we are now dealing with a level of investment grant with an expenditure three times the original Estimate. The original Estimate for 1967–8 was £166 million. There was a Summer Supplementary Estimate of £60 million, and a Winter Supplementary Estimate of £89 million, making a total of £315 million for the year. The total Estimate for 1968–9 will be well over £400 million. This is not, as a matter of arithmetic, as much as three times £166 million, but in any case the original Estimate for 1967–8 represented payment on three-quarters of a year expenditure only, whereas the figure of well over £400 million represents payment on four-quarters of expenditure plus overspill from the previous year. There is the further point that the 1968–9 Estimate represents payments at the higher rates of 25 per cent. and 45 per cent., whereas the £166 million related to grants of 20 per cent. and 40 per cent.

I think that it was accepted that there is necessarily difficulty in estimating with absolute accuracy the level of investment grants in any financial year. Taking the position at the moment, for example, on which we would have to make an estimate for 1969–70, we have available to us esimates of the actual level of investment in the second and third quarters of 1968. In respect of the fourth quarter of 1968 and the first quarter of 1969, which is the period with which we are concerned in making an estimate for 1969–70, we have only forecasts based on Board of Trade inquiries. Here, to start with, is a major element of uncertainty.

There is also some uncertainty, until we gather greater experience, as to the proportion of expenditure in manufacturing industry which will qualify. These are factors of uncertainty which must have been associated with the system of investment allowances also because, although they took the form of rebates against taxation, presumably the Government of the day wanted to know what would be the total in any year.

A second uncertainty has been the level of investment in the development areas as a proportion of the total. As has been said, we started with 20 per cent. We are now working on a figure of 33⅓ per cent. That in itself justifies the view that the system has been effective in directing more investment to development areas. But this is an uncertainty in the nature of the system until we get the proportion of investment reasonably well established.

Then there is the problem of the rate of claim, to which the hon. Member for Scarborough and Whitby referred and on which the Estimates Committee commented when it asked whether there should be a cut-off point because so many claims are put in very late. The hon. Gentleman argued that there should not be a cut-off point. We have a suggestion from the Estimates Committee, and we shall consider it. But again I must point out that a cut-off point would mean considerable difficulty for many firms who might otherwise find themselves out of time.

Then there is a temporary uncertainty which has made estimating more difficult, relating to the existence of the investment allowance option. On a substantial part of their expenditures in 1966 and, to a certain extent, in 1967, firms have been able to claim investment allowances instead of investment grants. It applies to expenditures on assets already contracted for when the grants scheme was introduced. It was uncertain how many firms would opt for investment allowances, rather than grants.

There is the further factor creating uncertainty that, at any given time, 10,000 to 15,000 claims are under consideration, representing grants of between £35 million and £50 million. It is only at the last moment that one can be sure how much will fall on one side of the line of the end of the financial year and how much on the other. However, I accept that we must make this estimate as accurate as possible, and I hope that, with the fuller figures that we will have for 1966 and 1967, as old claims come in and are dealt with and paid, we shall be able to establish a much firmer basis for this estimating than we have succeeded in doing so far.

I was asked a number of specific questions by hon. Members. The hon. Member for Edinburgh, North (Earl of Dalkeith) suggested, though I was not entirely clear whether he spoke of investment grants or grants under the Local Employment Acts, that there should be a grant office in Scotland. There is a grant office in Glasgow, dealing with the whole of Scotland.

Then the hon. Member dealt with the difficulties that arise from the existence of development areas and the fact that they have; to have boundaries. I acknowledge those difficulties. The problem is how to solve them while maintaining development areas. Unfortunately, boundaries anywhere tend to create difficulties.

Earl of Dalkeith

My specific point is that we have one very small area excluded from the very large area of the development district. It is in such a case that these complicated problems arise.

Mr. Dell

I note the hon. Gentleman's point. However, difficult and complicated problems arise on the borders of development areas generally.

The hon. Member for Roxburgh, Selkirk and Peebles made a speech which, as far as I could understand it, was not on the subject that we have under discussion. He appeared to be speaking about grants under the Local Employment Acts, grants which were subject to B.O.T.A.C. inquiries, and delays in the making of building grants, all of which are most important subjects. Unfortunately, we are dealing with investment grants under the Industrial Development Act. I am afraid that Mr. Speaker would rule me out of order if I followed the hon. Gentleman into these areas of discussion.

The only point at which the hon. Member came on to the subject under discussion was when he referred to a firm whose complaint he has referred to the Ombudsman. It is a subject about which he has been in correspondence with me for some time and on which I will no more comment than he did, as he has referred it to the Ombudsman. I might perhaps say in passing that I wish that he had reserved his comment in The Guardian, too, before referring it to the Ombudsman.

As far as I can see, the remainder of the hon. Member's remarks were not on the subject with which we are dealing, though I congratulate him on getting them in—

Mr. David Steel

If the hon. Gentleman feels that he cannot follow me into the subjects that I raised, perhaps he will consider replying to me in writing. Incidentally, my article in The Guardian was written in the hope of persuading him to change his mind long before I considered sending the case to the Ombudsman.

Mr. Dell

I am sorry that the article failed to persuade me. However, I will make a general point about small firms and investment grants. I recommend them to seek advice from investment grant offices, and then perhaps there will be less of the difficulty that this firm has experienced.

The hon. Member for Leicester, South-West asked me about the de minimis situation. There is the British Oxygen case. The appeal has been heard, and judgment has been reserved. We are waiting for the judgment. The hon. Gentleman will not expect me, therefore, to comment on the de minimis situation.

The hon. Gentleman also raised the matter of the scrap metal industry, which has been covered in Question and Answer in this House. I very much regret the distress that this causes the scrap metal industry. I accept its contribution to the economy, but I am afraid that within the policy of the Act I am unable to accept its arguments. I hope that I have covered the points which hon. Gentlemen have raised in the course of the debate.

Mr. Peter Blaker (Blackpool, South)

I thought, from the answer to the intervention from my hon. Friend the Member for Cirencester and Tewkesbury (Mr. Ridley), that the Minister would say something more about the point that, in spite of investment grants, investment in manufacturing industries has fallen and that investment in service and distributive industries has been buoyant. I have listened fairly intently, but I do not think that the hon. Gentleman has said anything on this subject except that he feared that investment in manufacturing would have fallen more but for the grant. Is that the hon. Gentleman's only answer on this point?

Mr. Dell

That is part of my answer. The real test of the effectiveness of an investment grant system will come in a period of buoyant demand, such as we are now entering. The test will lie primarily in the level of investment in manufacturing industry achieved in such a period. The hon. Gentleman knows that we are now expecting an increase in the level of investment. The last Board of Trade sample review, which covers a wider sample than the Financial Times, makes that point, though I accept that the answers were probably not for the most part informed by the November measures. Nevertheless, we shall have a further forecast in due course, and I think that this will be the test. The hon. Gentleman should not underrate that there was not the expected fall in the level of investment during 1967–68. If he looks back at the forecasts made, for example, by the C.B.I. at that time, which led the Government to introduce the 5 per cent. supplement, he may begin to wonder whether the investment grant did not have a positive effect at that time.

Earl of Dalkeith

Will the hon. Gentleman look at the forestry industry and harvesting grants?

Mr. Dell

I will look at anything. But, as the hon. Gentleman knows, grants are available for forestry from the Ministry of Agriculture, for planting and maintenance, I think. I do not claim to be an expert on that matter. I think that grants for forestry are more appropriate to that Ministry than the Board of Trade, but I will think about it and write to the hon. Gentleman.

I have tried to deal as fully as I thought necessary with the questions which have been raised. I hope that the House will in due course be prepared to approve this Supplementary Estimate.