HC Deb 13 May 1970 vol 801 cc1259-341

4.7 p.m.

Mr. Patrick Jenkin (Wanstead and Woodford)

I beg to move Amendment No. 10, in page 11, line 26, leave out ' 45 ' and insert 42.5 '.

I begin by expressing the thanks of the Opposition to the Chief Secretary for the procedural Motion which we have just accepted. I am sure that this will be for the convenience of both sides of the House.

Yesterday, we were debating personal taxes—income tax and surtax—and today we have the opportunity to debate company taxation. I am aware that this matter never rates quite as many column inches in the popular Press as do debates on income tax and surtax, but I suggest that this debate is every bit as important as that which we had yesterday, because of its influence on the economic health of the country.

It is said that companies have nobody to be kicked and no soul to be damned. But the simple fact is that companies and those who manage and work for them are responsible for the overwhelming proportion of the process of wealth creation which goes on in Britain today. If companies are hampered by too heavy a burden of taxation, or by the wrong kind of taxation, the effect on the national effort will be serious and all our objectives will be frustrated.

We on this side advance two contentions. We believe that grave damage was done when the new system of corporation tax was introduced in 1965, partly because of the manner of its introduction with the minimum of consultation, the minimum of preparation and the maximum of confusion and muddle, and partly because the form in which it was introduced, with its double taxation of distributed profits greatly increasing the bias against distributions, has driven a wedge between the company and its shareholders.

Mr. Joel Barnett (Heywood and Royton)

Is it the policy of the official Opposition, then, to reverse this procedure and have the distributive tax working the other way?

Mr. Jenkin

The hon. Gentleman must learn to contain his soul in patience: all will be made clear. I said in the Budget debate what we are proposing to do, and I will refer to it again today.

Our second contention is that even accepting—which we do not, the existing shape of corporation tax, we think that the rate is too high and must be reduced. The Amendment will reduce it from 45 per cent. to 42½ per cent. and goes no further than reversing the increase which the Chancellor made last year.

In the Budget debate—and I hope that I have the attention of the hon. Member for Heywood and Royton (Mr. Barnett) —I said that my party will aim to reform corporation tax so as to reduce the bias against distribution, and that our currently preferred reform—I emphasise that no final decision has yet been reached—would be to move to the French-Belgian system, which they callavoir fiscal, whereby the withholding tax on distributions is allowed as credit against the company tax paid by the corporations.

In that debate, the Chief Secretary drew attention to the recent report for the European Economic Commission by Professor Van Den Tempel, recommending, in effect, that the Commission should aim to harmonise on what he calls the " classical system ", which is the system which we have in this country at present. At that time, I must confess that I was not aware of the Van Den Tempel report, and, on further reflection, that was hardly surprising: it is not available in this country, and, so far as I know, there has been no mention of it in the columns of the British Press. However, the Chief Secretary has been kind enough to supply me with a copy, for which I am grateful.

Like so many Common Market reports, it is a formidable document and it gains as little in readability in the translation from the original Dutch as did the Finance Act of 1965 gain in its translation from the original Hungarian—

Hon. Members

Oh, no.

Sir Douglas Glover (Ormskirk)

Credit where credit is due. It was a very good crack.

Mr. Jenkin

I am grateful to my hon. Friend.

I cannot claim to have made an exhaustive study of the Van Den Tempel report, but from a brief look at it, and from consultations with people who follow these matters in this country, I have the gravest doubt about whether the E.E.C. countries will ever wish to adopt its recommendations. The French Government abandoned the classical system of corporation tax two days before we adopted it—one of the greater curiosities of the party opposite's fiscal reforms.

In Germany, the Social Democratic Party, before the last general election, tabled in the Bundestag a draft Bill to move from the German split-rate system to the French-Belgian avoir fiscalsystem. Two years ago, the Segré Committee, also under the aegis of the Community, said that the French system would be acceptable as the basis of Community legislation, but only if the bias against non-resident taxpayers was removed. The present French system has a particular impact on foreign investors.

But the Segré Committee went further —the French have since accepted this—and said that the French-Belgian system could become the basis for international taxation within the Community. It is of interest to note that the recent Franco-German and Franco-American double taxation conventions have clearly been drawn up with this in mind.

Therefore, despite what may be said by the learned professor—a Dutchman who, I agree, enjoys a considerable reputation within the Community—the Community will, in the end, I believe, harmonise around the French-Belgianavoir fiscalsystem. Therefore, I am not in the least dismayed by the Van Den Tempel report which the right hon. Gentleman flourished briefly during the Budget debate. The recommendations of this eminent but academic Dutchman will not carry much weight on the other side of the Channel and they are unconvincing for this side of the Committee.

4.15 p.m.

Our second contention is the main subject of the Amendment—that the rate of taxation on companies is now too high. We propose a cut of 2½per cent. I estimate the cost—it must be an estimate, since we have not the machinery on this side—at between £100 million and £120 million. When, last year, the Chancellor increased the rate from 42½ per cent. to 45 per cent., the yield was estimated at £120 million in a full year, but, as he knows, profits are somewhat reduced in the current year and are likely to be for some time ahead. Therefore, the cost of our Amendment may be a little less than £120 million.

My argument in favour of a cut is twofold. Since 1965, the weight of taxes on corporate profits has increased sharply and is now heavier than in most comparable countries. Second, as a consequence, both the incentive to invest and the resources for investment are now too low for economic health. By cutting corporation tax, we should make British industry more competitive and give a new, badly-needed stimulus for investment.

On the argument that the weight of company taxation has increased, I will begin with the statement by the Chief Secretary on Second Reading on 5th May: … companies are paying no greater proportion of their income in tax now than they did ten years ago. In 1960 the proportion of companies' gross income taken by tax was 25.1 per cent. The provisional figure for 1969 is 23.1 per cent. If tax on dividends is included, the 1969 figure was exactly 34 per cent. compared with 34.7 per cent. in 1960."—[OFFICIAL REPORT, 5th May, 1970; Vol. 801, c. 227.] I recognise that the right hon. Gentleman was there concerned to repel attacks from two fronts. The T.U.C. had argued in its Economic Review that company taxation as a percentage of profits had declined since 1960. It spoke of " the downward trend in the proportion of profits taken in taxation over the past 20 years " and quoted a number of figures to support that contention.

On the other hand, of course, in its Budget representations, the C.B.I. had made an exactly contrary proposition, talking of " the increased burden placed on corporate profits in recent years ". It went on to say that the current rate of corporation tax was much higher than in pre-corporation tax days and was significantly higher if judged by international standards. The C.B.I. said: …although several comparable countries impose a higher tax on retained profits, the aggregate tax on distributed profits is almost without exception much less than that in the United Kingdom; this applies even when it is not a feature of a tax system that distributive profits should be taxed, as in Germany, at a lower rate than retained profits. I hope that it will be accepted on both sides that, when we talk about taxation of corporate profits, we mean the combined effect of corporation tax plus the Schedule F tax on distribution. [HON. MEMBERS: " No."] Hon. Members may say " No ", but the Chief Secretary and the T.U.C., as well as the C.B.I., have produced figures on that basis and I am perfectly happy to argue it in that way.

Why do these conclusions differ so widely? The T.U.C. says that there has been a reduction; the Chief Secretary says that it is much the same; and the C.B.I. has said that the burden is increased.

Let me deal, first, with the T.U.C. In its table—and I do not necessarily criticise this as a manner of presentation—it has made the figures represent successive three year periods. The last such period is 1965–68, during which it claims that the tax on corporate profits declined from 33.1 per cent. in the previous three year period to 30.9 per cent. By taking a three-year period it has effectively concealed the rising trend that took place during those years.

More important, the T.U.C. has adopted the Treasury basis of calculation of profits. I have never understood, perhaps someone can explain, why the Treasury adopts a very curious and idiosyncratic definition of profits in all the national income accounts. It takes the gross trading profit before depreciation including rent, non-trading income and income from abroad. This is a concept of profits which businessmen simply do not understand and never use.

A very much fairer and more realistic definition of profits is what the businessman understands by pre-tax profits, net profits after all deductions including depreciation except tax. If company tax is taken as a percentage of profits on that basis a study of the Financial TimesAnalysis of Industrial Profits shows two things. Before 1965–66, there was a fairly steady decline in the tax burden on companies. That is not disputed. After 1965–66, the burden has risen quite sharply.

The figures taken from theFinancial Timesanalysis formed the basis of a study by Mr. Stuart Mansell and his conclusions were given in a recent article in theInvestors Chronicleof 24th April. He said: As a percentage of pre-tax profits…corporate tax has increased from about 41 per cent. to 45 per cent. since 1966. Of course it has. The Government have put up corporation tax. Hon. Members will remember how we argued in the 1965 Finance Bill on the basis of a 35 per cent. corporation tax rate and how often the Chief Secretary and the then Financial Secretary would argue that the weight would be no heavier compared with the previous system. Already, we have had an increase of 6d. in the rate of the withholding tax, 7s. 9d. to 8s. 3d. When the 1966 Budget came along, we were told that corporation tax was to be not 35 per cent., but 40 per cent. In 1968, it went up to 42½ per cent. and last year the right hon. Gentleman put it up to 45 per cent.

The weight of corporate taxation has increased during the past three years and it is sheer nonsense to argue to the contrary. How does the Chief Secretary reconcile that with what he said in the debate on Second Reading? I ask the Committee to look carefully at his actual words. He said: .…companies are paying no greater pro-portion of their income in tax than they did 10 years ago."—[OFFICIAL REPORT, 5th May 1970; Vol. 801, c. 277.] That was a very cunning form of words, because it wholly conceals the fact that companies paid less and less tax in the first years—there was a steady reduction in tax between 1960 and 1964—while there has been a steady increase from 1965 to 1969.

How were we able to reduce the rate of tax on corporate profits? Here again, Mr. Mansell's article makes it quite clear. He says: It is true in a crude sense that in the postwar years there has been a steady decline in tax which companies pay as a proportion of their profits…this decline has come about mainly because an ever increasing proportion of corporate profits has been spent on new plant and equipment.…. He went on to say that there has been an increase in total fixed capital formation as a proportion of gross corporate income rising from under a quarter to about a third over the period. This makes it doubly clear what nonsense it is to talk about corporate tax profits before allowing for depreciation because if we are dealing with more and more depreciation year by year then, naturally, to leave that out would give a wholly distorted effect of the weight of taxation on corporate profits. So let us hear no more about the declining burden of tax on company profits, or even such misleading statements as " the burden is no greater than it was in 1960." Under this Government the taxation of company profits has risen sharply whereas under their predecessors it fell steadily.

Let me turn to the consequences of this increase in the last four or five years upon investment. If rising corporate taxation were merely part of the general political argument on tax it would be an issue of importance. It achieves a much greater significance if it is looked at as a significant impediment to investment. It cannot be stated too often that the weight of tax on corporate profits enters directly into a company's appraisal of its investment projects. This has always been so and it has become more acute since more and more companies, under pressure from the N.E.D.C. and other sources have turned to using discounted cash flow techniques.

Under that technique it is the net-back after all taxes and deductions which shows up in the return on a proposed investment. If the taxes go up, the point at which it ceases to be worthwhile to invest goes up, too. Therefore, rising taxation must inevitably lead to lower investment—lower than it would otherwise have been. There are many other factors which influence levels of investment, but taxation is without any doubt among the most significant.

Let us see what is happening to investment. It is common ground that there has been a mild upswing in investment from about mid-1968 following the rise in export demand occasioned by devaluation. There are no surprises about that. However, the C.B.I. survey published last February showed quite clearly that this upswing is now ending. It said: For the first time since June, 1967, the balance of respondents expect to authorise less investment in plant and machinery in the next 12 months than in the previous 12 months. If the relationship which has generally held between the C.B.I. series and the change in actual investment continues, we can expect the growth of investment to slacken by the end of 1970…. The rest of the report goes on to try to analyse some of the reasons for this. In part, the sheer shortage of cash occasioned by the credit squeeze has undoubtedly imposed a barrier to investment. In part—and I am sure that every hon. Member whose business it is from time to time to look at investment projects will agree—the profitability estimates now being thrown up simply do not encourage boards to release funds for investment.

Rising wages are already squeezing profit margins and prices are rising rapidly in consequence as companies struggle to maintain a reasonable level of return on their capital. Where competition or Government interference through the prices and incomes policy precludes rises, then it is investment which becomes the victim. We all agree that investment in Britain is far too low and has been for too long. It is significantly lower than overseas.

The Guardianput it well last October when it wrote: Unless industry increases the rate at which it adds to and improves the efficiency of its productive capacity, then before long there will be a relapse in the balance of payments. Consistent and accelerating economic growth provides the only real guarantee of a healthier balance of payments. And there can be no growth without a real increase in the allocation of resources to investment. If that was an accurate statement of the position as of 23rd October of last year —and it certainly was—how much more serious is the situation today?

One way for the Government to break the vicious circle of declining profit margins and declining investment would be for them to cut the rates of corporation tax. This would both increase company liquidity and give a great boost to morale in industry. The Government would, in effect, be saying to industry, " We recognise that it is on faster industrial investment that all our policies depend. By cutting tax on profits we are giving tangible proof not only that we want to encourage more investment, but that we regard higher profits as the best way of getting it."

Unfortunately, I cannot see hon. Gentlemen opposite ever saying anything like that. The Chancellor, let alone the Chief Secretary, could never bring himself to strike such a note. It is because the next Conservative Government will do just that that I confidently commend the Amendment to the Committee.

Mr. Barnett

The hon. Gentleman will recall that I asked him a question earlier and that he promised to answer it.

Mr. Jenkin

I specifically called the hon. Gentleman's attention, by referring to his constituency, to the point in my speech at which I answered that question, but he was so busily engaged in conversation with his hon. Friend the Member for Ashton-under-Lyne (Mr. Sheldon) that he did riot hear me.

Sir Gerald Nabarro (Worcestershire, South)

I congratulate my hon. Friend the Member for Wanstead and Woodford (Mr. Patrick Jenkin)—[Interruptionl]—and I note that the Chancellor of the Exchequer again ostentatiously leaves the Chamber, as he ostentatiously left yesterday, immediately the Chair calls me to speak. Indeed, this is the third occasion on which he has done that. I suppose that he has been called to urgent Cabinet duties.

I congratulate my hon. Friend the Member for Wanstead and Woodford on a splendid speech, which embraced all the technical aspects of corporation tax and the dreadful implications of the increases in company taxation which have occurred since corporation tax was inaugurated in the Finance Act, 1965.

All my hon. Friends were unanimous, at the onset of this form of taxation, in pressing for a rate not higher than 35 per cent. which was, in our view, con- stant with the required liquidity of companies of all kinds to which corporation tax would apply. If the correct rate was 35 per cent. then, we deem that the correct rate today should certainly not be higher than 40 per cent. In seeking a reduction to 42½ per cent., the Amendment is a token to signify that we regard the rates of corporation tax as being excessive and how, in present industrial and commercial circumstances, it is essential that they be reduced.

I approach my duties this afternoon from a different angle from which my hon. Friend approached his, admirable though his approach was in every way. I wish, first, to consider the yield of this form of taxation, so far as we are aware, since its inauguration. In 1968–69, corporation tax yielded £1,346 million. In 1969–70, it yielded £1,687 million. In 1970–71, it is estimated that it will yield £1,900 million. It is difficult, with changing rates of corporation tax—the original rate was 40 per cent., which was increased to 42½ per cent., and last year further increased to 45 per cent.—to know when the increased rate will be translated, in monetary terms, to increased revenue, due to the great variation there is in the calendar span of the chargeable accounting periods of companies of all kinds.

It is, therefore, difficult to relate an increase in the charge of corporation tax to the revenue yield year with year. The fact is, however, that when corporation tax was 40 per cent. the yield was estimated to be £1,346 million. Now that it is 45 per cent. the yield is thought to be £1,900 million. Thus, an increase of one-eighth in the tax, if appliedpro ratato the earlier figure of £1,346 million, would have given a yield of corporation tax of the order of £1,545 million. But it is not £1,545 million. It is £1,900 million. This suggests that the yield of the tax from company profits has increased, apart from the advance in the rate of corporation tax, by £355 million in a short period of two years.

This suggests to me that extracted from the liquidity—from gross profits, if one prefers it that way—or diminished from the cash flow of companies is an additional £355 million on account of the increase in corporation tax and the huge enlargement of the rate from this form of taxation, which is today very much bigger than was originally anticipated by the Treasury.

My hon. Friend the Member for Wan-stead and Woodford applied himself largely to the impact of these excessive rates of corporation tax on investment in the private sector of industry. He made only a passing reference—not because he attaches less importance to it than I do, but because he could not give an encyclopaedia of references to all aspects of corporation tax in a short speech—to the effect of the rates of this form of taxation on prices, and he said that prices were rising very rapidly.

It is this aspect of the problem to which I particularly wish to refer. We had a controversy just over an hour ago with the Minister of Agriculture, Fisheries and Food about the rise which has occurred in food prices. This is the gravest aspect of inflation today. I just do not believe the Minister when he says that in 1969 food prices rose by only 5½ per cent., or by just over 1s. in the £. I do not believe him.

Mr. John Nott (St. Ives)

Nor does any woman.

Sir G. Nabarro

I will willingly give way to my hon. Friend if he wishes to intervene.

Mr. Nott

I was mumbling words to the effect that I support my hon. Friend. I am, of course, not a housewife, but I occasionally go into shops. It is easy to see that it is totally wrong to say that food prices have increased by only 5½ per cent.

Sir G. Nabarro

I am grateful for that support.

Sir Ian Orr-Ewing (Hendon, North)


Sir G. Nabarro

I willingly give way to my hon. Friend.

Sir Ian Orr-Ewing

There cannot be an hon. Member who has not been beset by his wife to raise the housekeeping money by certainly more than 5½ per cent. in the last year as a result of increased food prices.

Sir D. Glover


Sir G. Nabarro

Would my hon. Friend like to comment on this aspect, too?

Sir D. Glover

My hon. Friend is, perhaps, not aware that I am quite an expert on this subject. My wife was not well for about 12 months and I had to do the household shopping. I know from practical experience by how much goods have increased in price in the last year, and they have increased by a jolly sight more than 5½ per cent.

Sir G. Nabarro

I am grateful to my hon. Friend the Member for Ormskirk. Does my hon. Friend the Member for Salisbury (Mr. Michael Hamilton) wish to intervene?

The Chairman

Order. I think that we must limit interventions and have some speech as well as interventions.

Sir G. Nabarro

I am sorry. I will give way to my hon. Friend the Member for Salisbury and then—

The Chairman

Order. We cannot have three interventions in a row.

Mr. Michael Hamilton (Salisbury)


The Chairman

Order. I have ruled and the hon. Member for Salisbury (Mr. Michael Hamilton) will have to wait.

Sir G. Nabarro

I am sorry, Mr. Irving, but I was led away by the exuberance of my hon. Friends. The Member for St. Ives (Mr. Nott) in Cornwall, my hon. Friend the Member for Hendon, North (Sir Ian Orr-Ewing), my hon. Friend the Member for Ormskirk (Sir D. Glover), in Lancashire, and my hon. Friend the Member for Salisbury, in Wiltshire—all parts of the United Kingdom—are at one with Worcestershire, South in finding that food prices are rising precipitately and that 5½; per cent. inflation of food prices in 1969 announced by the Minister of Agriculture, Fisheries and Food in his statement earlier this afternoon was a gross understatement. May I give way to my hon. Friend now?

Mr. Michael Hamilton

I hope that my hon. Friend will point out that currently food prices are now rising by 12.6 per cent.

Sir G. Nabarro

I am grateful for my hon. Friend's prompting and support.

My case is that the projection of food prices upwards is caused very largely by the fact that wholesale and retail distributors of food work on tiny margins of profit. When corporation tax is levelled at the excessive rate of 45 per cent. in order to maintain reasonable profits from their enterprises it is quite imperative that food distributors raise their general level of prices for the increased corporation tax is an essential and direct item of cost.

It is costed into the price of the food in the same way as the tin plate referred to by an hon. Member opposite at Question Time is included in the price of tinned food or any other ingredient in the business. Tax is an essential element in cost, especially corporation tax. Whereas the Tories maintained company taxation at a much lower and generally declining level of incidence throughout their period of office, a declining level of application for company taxation which had the effect of stabilising food prices and much less inflationary impact on food prices than is the case today. I believe that the huge increase we have suffered in the last year or two is very largeley due to the Labour Government's policy of increasing year by year the amount of direct company taxation.

Of course, there can never be direct proof or otherwise of this statement; it is a matter of opinion, but every businessman is with me on this. I do not expect Labour accountants to agree with me. The benches opposite are strewn with chartered accountants who have joined the Labour Party. They are really neither business nor professional men. They have never earned a jot nor tittle in trade and commerce. I prefer real Tory capitalists.

Mr. Richard Wainwright (Colne Valley)

I am sure that the hon. Member, in the midst of his exuberance—

Sir G. Nabarro

Not exuberance, enthusiasm.

Mr. Wainwright

On reflection, the hon. Member will agree that one of the great drawbacks in this House is the appalling shortage of chartered accountants on either side.

Sir G. Nabarro

I do not think that I can reply to that assertion. I do not wish to be rude to the right hon. Member for Gloucester (Mr. Diamond) this afternoon, as he has lost the Chancellor's aid and support.

My attention was riveted on this matter yesterday by the front page of theDaily Mail, but theDaily Mailmissed the point. It quoted the effects of an important conference and confrontation with the Minister of Agriculture, Fisheries and Food on food prices, but did not mention the impact of taxation. I wonder why that was left out. The newspaper reported: Grocers Warn of Big Rise in Food Prices. Food prices are bound to increase dramatically soon, grocers warned yesterday. Higher wages and transport costs have already eroded recent price rises.… The grocers are finding it almost impossible to hold back increases for as long as 28 days in order to give the early warning of 28 days to the Minister that he is trying to insist on, so fast are costs increasing I suggest to the right hon. Member for Gloucester that this rate of increase in food prices is not dissociated from the fact that as between 1969–70 when the yield of corporation tax over the whole field of companies was £1,687 million and has advanced to £1,900 million in 1970–71, an advance of no less than £213 million in a single year, that the advance in these food prices is directly related to that huge increase in the collection of corporation tax, a large part of which goes on to food prices.

4.45 p.m.

I go further. The whole of the £213 million is put on the retail prices by manufacturers, wholesalers, retailers, distributors and others to try to maintain their profit margins. Does the Treasury think that businesses can absorb—repeat, absorb—the selective employment tax or the increased duty on petrol or oil for distribution or the increased corporation tax and all these other vast increases in direct and indirect taxes to which I referred on Second Reading of the Bill? Of course they cannot. They go straight on to prices and the inflation we suffer today in food prices and elsewhere is directly related to the rise in corporation tax of 2½ per cent. last year, 2½ per cent. the year before, and the fact that the Labour Government had deliberately escalated the corporation tax from 40 per cent. two years ago. [Interruption]

Is the hon. Member for Heywood and Royton (Mr. Barnett) mumbling? I shall happily give way if he wishes to intervene so that he may stop mumbling. This big corporation tax is the principal contributory cause of rising prices. That is the complement of what my hon. Friend the Member for Wanstead and Woodford said about the decline in investment by private industry and the sad omens for the future.

The Chief Secretary to the Treasury (Mr. John Diamond)

I have followed the hon. Member's speech with great care. I am not asking him anything about his argument, but, purely on a matter of fact, do I understand him to say that in the companies of which he has first-hand knowledge and responsibility it is now their practice, when costing the goods they put on the market, to include in the costing, just as much as the metal—he referred to tin containers —corporation tax at its then current rate?

Sir G. Nabarro

First, it is the practice of all companies to include in their costings the incidence of direct taxation and all indirect taxation when calculating the net return or earning capacity of their investments as my hon. Friend the Member for Wanstead and Woodford said. Secondly, in calculating price levels they include taxation provision in their margins of profit. Both are equally applicable and the higher the corporation tax goes then the higher retail prices will rise. The higher the selective employment tax on food, transport and distribution goes, the higher the retail prices will go.

Mr. Diamond

I am most grateful to the hon. Gentleman for giving us that information. I was not asking him about that. I was asking him to be good enough to give me first-hand evidence—I have no right to ask him to do it; if he wishes to do it, I shall be grateful—of what happens in the company where he is responsible and has first-hand knowledge.

Sir G. Nabarro

All companies take into account in their costings the incidence of direct taxation. I see the hon. Member for Heywood and Royton indicating dissent. He has never been the managing director of a company and has no knowledge of these matters other than auditing the accounts of companies. He has no right to criticise.

Mr. Sheldon


Sir G. Nabarro

Did the hon. Member for Heywood and Royton say " Nonsense "?

Mr. Barnett

My hon. Friend the Member for Ashton-under-Lyne (Mr. Sheldon) said " Nonsense ", but I would have said it.

Sir G. Nabarro

Both the dreadful twins say " Nonsense ". I aver—I have no doubt that I shall be supported by every hon. Member on this side—that every company that costs its products properly will take fully into account the incidence of direct taxation.

The Financial Secretary to the Treasury (Mr. Dick Taverne)


Sir G. Nabarro

If they were not to do so, the inference of the Financial Secretary's reply would be that the greater the taxation on the profits of a company the less the margin of net profit is to become. With the degree of increase in taxation levied by the Labour Government profits would by now have disappeared altogether had companies not increased their profits to allow for additional taxation, year by year.

I hope that the hon. and learned Gentleman follows me. [Laughter] The hon. and learned Member may laugh in scorn, but he, again, is one of those who have never run a whelk stall in his life. He has never run anything at a profit. He is merely a lawyer who picks on capitalists for fees. He picks on capitalists' earnings in the form of fees. [An HON. MEMBER: " Battens."] " Battens " is the word. The hon. and learned Gentleman is one of these legal parasites. Now I am being led from my major argument.

Sir D. Glover

Leech, bloodsucker.

Sir G. Nabarro

The plain fact of the matter is that all direct taxation is inflationary; and the higher corporation tax on the profits of companies is forced by the Labour Government, the greater will be the increase in wholesale and retail prices. The Government have themselves to blame most largely for the degree of inflation which we are suffering today.

As the Prime Minister wants to fight the forthcoming election on the record of the Labour Government, I will happily join issue with him on their record on taxation, their record on inflation, and their record on the cost of living; for corporation tax is a major culprit—one of the causes of these huge increases in prices. On that, the Labour Government will founder.

Mr. Sheldon

The hon. Member for Worcestershire, South (Sir G. Nabarro) gave us his usual entertaining quarter of an hour.

Sir G. Nabarro

Not " entertaining ".

Mr. Sheldon

It was very entertaining. I am paying the hon. Gentleman a compliment, and I hope that he will take my remark in that way.

I must take up the hon. Gentleman's point about firms including the effect of corporation tax in their costing, because it may well be that there are some misguided people who, on reading an account of this debate, will feel that they had got the matter wrong before the hon. Gentleman's intervention.

I am sure that the hon. Gentleman knows that what happens is that at the end of the day what determines the price is the competitive position. Although it is undoubtedly true that many firms are not in such a competitive position, I was assuming that the hon. Gentleman was directing his remarks to those that were particularly so, because he illustrated at some length the case of the supermarkets and the groceries.

It is here that we have had very high levels of competition indeed. It is a travesty of the facts to assume that these people go round charging what they think will leave them with the desired net profit after they have taken account of corporation tax and other direct taxes. Being supremely competitive, they try to work to the finest possible margins. The taxation they have to pay is the result of their profitability.

Sir D. Glover

The hon. Gentleman is not disproving the argument advanced by my hon. Friend the Member for Worcestershire, South (Sir G. Nabarro). The hon. Gentleman says that traders work to the finest possible margin, but in arriving at those finest possible margins they take into account the on costs which they must incur, which include taxation.

Mr. Sheldon

We are talking about " costs ". When traders work out their costs, because they are working in an extremely competitive position they try to add up all the various costs they incur in producing their articles; and their profit is a result of that. Out of that profit comes the taxation.

Mr. David Howell (Guildford)

Is not the hon. Gentleman confusing pricing policy and investment policy? When it comes to project evaluation, the level of taxation is taken into account. That is done in private industry, although it seems that the Government's project analysis and evaluation is rather less effective.

Mr. Sheldon

I thought that it was clear that I was referring to pricing policy. When I was giving illustrations of what goes on in supermarkets, I was giving the pricing policy and the way in which prices are established. When I pointed to the case of uncompetitive industries, I conceded that the hon. Member for Worcestershire, South might have some such point. Then the hon. Gentleman referred particularly to supermarkets, where competition, although not as great as it used to be, is still very large; and in such pricing policy direct taxation has little, if any, effect.

Sir G. Nabarro

I was not referring only, or even notably, to supermarkets. I was trying to demonstrate that the three branches of taxation—that is, selective employment first, purchase tax second, and corporation tax third—all have a dynamic bearing on the price of food and that the increased cost of food is directly a result of the increase in those three forms of taxation brought about by a Labour Government.

Mr. Sheldon

When the hon. Gentleman says " the cost of food ", he means " the price of food ". We are talking about prices. The effect of direct taxation upon prices is insignificant. Of course, there will be some remote connection, but in pricing policy the connection is very little, if any.

I will not go into the question of other taxes. We are not discussing those other taxes. The hon. Gentleman should bring that question up at the suitable time.

The effect of corporation tax on prices in a supermarket is as far remote as anything can be found in analysing the various components of the prices that are charged.

Mr. Nott

Will the hon. Gentleman congratulate my hon. Friend the Member for Worcestershire, South (Sir G. Nabarro) on the originality of his accounting procedures?

Mr. Sheldon

I distinctly noticed that when the hon. Member for Worcestershire, South turned round to survey the benches behind him in search of support, as he tried to find support on another matter, on this matter he signally failed to get any support save, alas, for that of the hon. Member for Ormskirk (Sir D. Glover).

Sir G. Nabarro

The hon. Gentleman is being rather unkind. You, Mr. Irving, prevented further hon. Members on these benches from rising to support me.

Mr. Sheldon

You, Mr. Irving, prevented the hon. Gentleman from getting support, not on the question of pricing policy, but on the cost of living. The hon. Gentleman had no support on the question of the pricing policy. It is obvious that the hon. Gentleman has no support in this matter, because this Committee is usually fairly well-informed. The hon. Gentleman is the sole member of the Committee to have a lapse of judgment on this occasion.

The hon. Member for Wanstead and Woodford (Mr. Patrick Jenkin) sought to show that Britain had a higher level of tax on companies than other comparable countries.

Mr. Patrick Jenkin

A higher level of tax on corporate profits.

Mr. Sheldon

I accept the hon. Gentleman's qualification, because clearly he is taking into account the fact that, although we may have a high level of corporate taxation, the amount that we give back to industry makes the total burden upon industry much less. In view of the very large sums given by way of investment grants as well as other aids to industry, the net cost to industry of corporation tax is much less than what might otherwise appear to be the case from a study of the Financial Statement.

One can argue about the way in which this is done; whether it is right that we should discriminate; whether having taken money in one form we should give it back in another; but to argue that the burden on industry is great is a misconception. One can argue about the method, but not about the burden.

The hon. Member for Wanstead and Woodford said that Schedule F was a tax on companies. I differ from him on this—

5.0 p.m.

Mr. Patrick Jenkin

If the hon. Gentleman contests what I said, he must get it right. It is a tax on company profits. Clearly, it is not a tax on companies. That is what I said, and if the hon. Gentleman disagrees perhaps he will spell out why.

Mr. Sheldon

Of course it is a tax on company profits. I see no real distinction on which I particularly wish to dwell. I am prepared to accept the hon. Gentleman's interpretation, but he must understand that it is a tax on company profits which are utilised in a specific way, and that is not quite the same thing. If a company decides to do certain things with its profits, it will be subject to certain taxes. If it decides to do otherwise, it will not be so subject, and it is this which is important, because the company, as an entity, can go on expanding in a way which will eventually yield large profits if it decides that for a certain time it will reduce the levels of distributed profits.

One of the problems has arisen because we have not had the expansion that we expected. I am sure that in future years we can expect that expansion as a result of the Government's policies. Once we get into this level of high, sustained growth I expect that the distribution policies which have been set in a mould because of the unadventurous rate of growth that we have had may be reassessed, as will be the policy on investment, and then there will be an opportunity to survey again the relationship between Schedule F and the rates of income tax, corporation tax and other matters. At the moment, we are set in a mould, and that mould may not be with us for ever.

Mr. Nott

Schedule F affects the directly distributed, and not retained, profits. A private company which is growing fast cannot finance its expansion purely out of retained profits, and Schedule F is a serious and damaging tax on the ability of fast growing companies to raise capital.

Mr. Sheldon

I find that argument difficult to understand. The hon. Gentleman is saying that a company trying desperately to obtain money should make great distributions.

Mr. Patrick Jenkin

My hon. Friend the Member for St. Ives (Mr. Nott) is right. How does the hon. Gentleman think that a company will ever be able to raise capital in the market unless it is prepared to offer investors a reasonable return on their money?

Mr. Sheldon

Not when it is expanding at its greatest rate. Perhaps the hon. Gentleman will consider some of the highest fliers in the United States. One such company—I shall not name it, but I am prepared to do so if requested—grew at an enormous rate. For nine years it did not make a distribution, and the value of the stock rose from 1 dollar to 130 dollars because of a sophisticated investing public who knew what the company was about. The company was at the forefront of modern technology, and people knew that it would yield great profits in the years to come.

In this country we have an over-obsession with the systems of the past. We fail to recognise that companies are growing at such a rate that the old dogmas, the old methods of learning by rote, do not apply in some of the most interesting situations that we are facing today.

Mr. Nott

To say that people invested in that American company for nine years is irrelevant. The hon. Gentleman must mean that they were buying shares from those who were selling them. If the company raised new capital, the point is different. This American company clearly did not raise new capital.

Mr. Sheldon

It did, based on an understanding of the company's prospects, and an acceptance by the banking houses of the assessment by those who knew what it was all about. What appals me is that we do not have this sophisticated understanding of how companies need to operate, and the value of operating in a particular way.

Mr. Peter Hordern (Horsham)

I do not think that the hon. Gentleman appreciates how the stock market works. The price of this American company increased not because its retained earnings improved, but because of the expectation of shareholders of a higher pay out eventually.

Mr. Sheldon

That is the whole burden of my argument. I should not have thought that that intervention was necessary. The shareholders were sophisticated enough to understand the technology in which the company was involved, and its prospects. As a result money, was pouring in to such an extent that the company could expand without making a distribution.

Sir Ian Orr-Ewing

The hon. Gentleman has not named the company; perhaps he would. I cannot help feeling that it must have been a company which made a technological break-through in some area, and, therefore, was not subject to the normal price competition and could finance itself on expectations. That is the case with a new invention, but it is not true when there is the price mechanism to which the hon. Gentleman referred earlier.

Mr. Sheldon

It is Recognition Equipment, and it is at the forefront of technological progress. There are a number of competitors now, and there were then.

Nevertheless, the sophistication was such that people were able to make an assessment which was of benefit to the firm, to the industry, and to themselves. It is this kind of sophisticated approach which we seem to be lacking. We seem to be lacking in the approach which enables a firm with good ideas to be financed profitably and properly.

Mr. Patrick Jenkin

The hon. Gentleman is deluding himself if he thinks that that wholly exceptional case represents the sort of pattern which one could expect to operate across industry generally. We have that sort of case here, but it is a rare bird.

Mr. Sheldon

Of course, I am not saying that, in general, companies can go for years without making a distribution. I have cited an extreme case. There are many examples between that and the stagnant run-down company which the hon. Member for Worcestershire, South was detailing. There are many modern progressive industries which could be helped by a different approach from that which is now taken. That is my only point, and I hope that as a result of the various interventions I have been able to make clear what I am trying to say.

Mr. Peter Bessell (Bodmin)

The hon. Gentleman has been extremely generous in giving way, and I thank him for doing so again. I want to follow his argument. Is he really suggesting that the American system of marketing products in advance of production by floating shares on the Stock Exchange and obtaining large sums of money, very often on nothing more than ideas, it is a sound method of business? Does he not agree that it is far better to adopt the system used in this country, which is based on a proven record before money is obtained? Is not that better than the American system which the hon. Gentleman seems to be advocating?

Mr. Sheldon

If the hon. Gentleman had been listening he would have realised that I was not advocating a general adoption of the situation relating to this American company. It was obviously an exceptional company. I detailed it to show the kind of pattern which can emerge between this company at one extreme, and companies such as that mentioned by the hon. Member for Worcestershire, South at the other.

I was trying to show that between the two there is a whole spectrum of industries which the hon. Gentleman has not considered. There is a whole range of experience, ways of doing business, and of conducting operations from which we can learn. This run-down, shattered old industry which the hon. Member for Worcestershire, South detailed is by no means the kind of typical industry which we should be considering.

Sir G. Nabarro

I did not, from the beginning of my speech to the end, mention a run-down, shattered, or old industry. The whole of my speech was directed to the simple, perfectly honest and straightforward proposition that the whole of the increase in corporation tax finds its way into inflationary increases in wholesale and retail prices, and that is an unexceptionable doctrine accepted by all good businessmen.

Mr. Sheldon

It was not accepted by the hon. Gentleman's hon. Friends. He must remember that the firms operating in that kind of way well qualify for the description of run-down, shattered old firms. A firm operating in that peculiar way in its levels of costings of raw materials, labour and taxation, and doing its pricing in that way is heading rapidly towards that end if it is not run down already.

I now turn my attention to some other aspects of the introduction of corporation tax about five years ago. I was one of those, and I think that they included a number of hon. Gentlemen opposite, who welcomed this as a broadening of the base. One of the unfortunate aspects is that it is of little value for economic management. We cannot expect perfection from every tax, but we must be aware of its limitations. It cannot be used for economic management largely because of the time lag. By the time the corporation tax becomes due the economic situation for which any change in the rate of the tax was devised has tended to change considerably. So it does not have the direct effect on the economy that we might wish and which is obtainable from other forms of taxation.

The importance of the tax is that we have increased a yield under the profit tax system of 5.8 per cent. of total tax revenue to a level of 10¾ per cent. raised by corporation tax; the figures were 5.8 per cent. in 1965 under profits tax and 10¾ per cent. from corporation tax in 1969. Those figures are not directly comparable, but they give us some indication. I am grateful for the table produced in reply to the hon. Member for Worcestershire, South, which I have used.

We have seen that the tax has produced a large sum of money—£1,900 million—with very little political disadvantage. [Laughter] That is important, because this is a political place and to be able to make the changes in that way can sometimes be the only way they can be made.

What we must consider against that is the cost to industry in efficiency, modernisation or lack of it, and so on. My own view is that the effect of corporation tax upon incentives is very small and probably insignificant. This is very important, because to say that we had a level of taxation that struck at the very heart of the industry of this country and its need to modernise and expand would be one of the most serious charges that could be levelled against any tax.

But I do not see it like that. If I were given the choice of how I would like to see corporation tax move up or down in relation to other taxes, if there is a relationship between income tax and corporation tax, I would like to see a rather greater burden on corporation tax and a rather smaller one on income tax. We could obtain money to reduce income tax in other ways, but I believe that those managing industries would be more susceptible to reductions in income tax and increases in corporation tax.

Therefore, what we are left with is the possible disincentive effect of corporation tax upon investment. Clearly, this is a matter of some concern, if only for the cash flow. But we have seen that in regard to cash flow the tax is by no means as burdensome because of the large numbers of aids the Government give in investment grants and other forms of assistance.

Sir D. Glover

The hon. Gentleman has spoken about these things balancing. He said that the Government give money back. There is a great fallacy in what the hon. Gentleman says, because the tax is collected generally, over the whole of industry, and the benefits go back in a very specialised direction. It is just as big a burden on 75 per cent. of industry. Therefore, there is not very much in the hon. Gentleman's argument.

5.15 p.m.

Mr. Sheldon

We can argue that the way in which the money goes back to industry is not as it should be, or that industry should be left freely to decide. These are respectable arguments, but I have come to very different conclusions. I believe that there are certain matters on which central Government can take a wider, more comprehensive view. Other countries, like Japan, France and possibly even Germany, are coming to that kind of conclusions. The hostility between Government and industry in this country is almost unique. It is special to the United States and Britain, and is found in hardly any other countries, mainly because industries there derive from Government.

There is not the bitter hostility between Government and industry that we have, as industry looks upon Government as an outside body that tries to regulate it rather than a body that tries to assist it. Because of that basic difference in attitude, we do not have that relationship which I hope will develop over the years as a consequence of my right hon. Friend's policies in taxation and other matters.

It can be argued that investment grants and the other aids to industry are not being channelled in the best possible way. We all have our views on the precise way in which these sums of money should be given to industry for purposes that the Government can understand in certain different ways—not necessarily better—from industry. As a result, I do not consider the burden to be great. I consider the cost of collection to be very reasonable, and I look forward very much to seeing corporation tax retaining its important place in the taxation system.

Sir Ian Orr-Ewing

We are discussing a very important part of a Budget which increased taxation revenue by £1,200 million. It would have increased it by £200 million more if there had not been a slight cutback.

I support the Amendment to cut corporation tax from 45 per cent. to 42½nt. The tax has a substantial effect on investment. The hon. Member for Ashton-under-Lyne (Mr. Sheldon) touched on this, but he did not develop the matter in depth, and I hope to go rather further than he did. The Chancellor recognised early in his Budget speech just how important investment was to the country. He said: The second requirement is an improved and sustained growth of industrial investment. Later, he said: We cannot put this right overnight, but it must be an essential aim of economic policy to increase manufacturing investment…."— [OFFICIAL REPORT, 14th April, 1970; Vol. 799, c. 1224.] This is not being done.

The Financial Secretary took rather a complacent attitude the next day. He said: What I can tell the House, and what is universally accepted, is that the rate of increase in manufacturing investment in 1969 over 1968 was 11 per cent., which is a very healthy rate of increase."—[OFFICIAL REPORT, 15th April, 1970; Vol. 799, c. 1411.] If he had been speaking about such a percentage increase in real terms, that would have been healthy, but he was not. In real terms it amounts to 5.7 per cent. Moreover, when we look at the record over the past four years of the expansion of industrial investment we see that our rate is very disappointing. I compare the percentage with the figures given in Table 13 of the White Paper, " Preliminary Estimates of National Income and Balance of Payments 1964 to 1969."

It is right to point out here that one plans industrial investment at least a year ahead. All companies produce their capital budgets at least a year in advance, so that figures for 1965 which I shall quote were planned and put into operation in 1964. It is, therefore, realistic to quote the 1965 capital investment as being for the last year of Conservative policy. In 1965, the capital expenditure was £1,309 million. By 1969, the latest year for which figures are available, this had expanded to £1,428 million. Thus, in four years, capital investment in real terms had expanded by 10 per cent., or only 2½per cent. per annum. This is not enough for a competitive industrial nation dependent on advanced products for its livelihood.

I will give the figures for plant and machinery. In 1965, a total of £2,226 million was spent on these, and in 1969 this had risen to £2,401 million—an expansion of 9 per cent. in four years, or 2¼ per cent. per annum. A lot of that machinery has to come from West Germany and Switzerland in the form of machine tools. [An HON. MEMBER: " Why?"] Because in Switzerland, for example, they have great expertise, and have had for a long time, in the small machinery which the electronics industries use. We need them for solid state transistors technology and integrated circuits. This machinery was developed for the watch industry, in which Switzerland has been pre-eminent. I agree that it is a shame that we have to get our machinery from abroad but one must buy in the best market. Devaluation has meant that more British £s have had to be spent so that the actual investment in plant and machinery is less than the figures I have given.

I want to compare our performance with those in Western Europe. I shall use the figures of what is being spent on manufacturing investment as percentages of gross national product. The figures are for 1967, the last year for which they are available. In the United Kingdom, it was 3.9 per cent., a reduction from 1965; in France it was 5.6 per cent. and in West Germany, 5.8 per cent. The Prime Minister used to love to quote the case of Sweden when he was Leader of the Opposition—a position which he will shortly be occupying again. The percentage in Sweden was 5.2 per cent. But Sweden has had a Socialist Government for a long time and one has always to pay a price for that in the amount of cash available for investment. Sweden is low in the league table. The United Kingdom's figure was 3.9 per cent. and the figures of our West European competitors considerably higher. This is disturbing to any Government. It certainly disturbs my right hon. Friends who will soon take over responsibility.

The Board of Trade was over-optimistic in the last analysis it published on 21st January. It said, talking of manufacturing investment, that it would rise about 10 per cent. in real terms between 1969 and 1970. This is a gross and optimistic exaggeration of the position. The C.B.I. took its survey rather later and published its analysis on 19th February. It noticed that there had been a considerable turn round. The Board of Trade survey was conducted in November and December. The C.B.I. survey was conducted later. It said: There is no marked change since October in the general degree of optimism about the business situation. Orders and output are on fairly buoyant trends, but two disturbing features of the present Survey are the replies to the questions on investment on the one hand and on costs and prices on the other. For the first time since June 1967 the balance of respondents expect to authorise less investment in plant and machinery in the next twelve months than in the previous twelve months. That is a more realistic picture. I have grown up in the light engineering industry and among my contacts in it I find considerable uncertainty about the future. All of us are being forced to cut our programmes by shortage of cash and the continuing squeeze which has gone on for a long time.

I want to quote the case of a large company with 15,000 employees in electronics to give the measure of just how much money the Government are siphoning off from industry and which inevitably forces industry to cut back on research and development and investment programmes because the money just is not there. I give a list of some of these levies: employees P.A.Y.E., £2 million a year; purchase tax £0.7 million; national insurance contributions, £1.2 million; graduated pensions £400,000; selective employment tax not recovered £200,000; rates, £0.4 million; import duties £1 million; corporation tax—almost the largest in the list—£1.6 million; import duty on finished goods, £1.9 million—exceptionally high that year because the firm was bringing in colour cathode ray tubes for television sets. The import deposits scheme cost the firm £1.2 million. The whole amounted to £9.7 million siphoned off by the Government. On a per capita basis, for every person employed by the firm, £600 per annum is being siphoned away in different forms of levy by the Government.

Mr. George Brown (Belper)

I notice that the hon. Gentleman includes a lot of interesting things, even the rates. Can he tell me what is the capital employed in that anonymous business and what the return on that capital was at the end of that year?

Sir Ian Orr-Ewing

I have not those figures. I can give the right hon. Gentleman the total sales for 1968, which were £60 million. The Government siphoned off £10 million, and that is relevant.

Mr. Brown

The hon. Gentleman must recognise that, at the end of the day, the interesting factor is how much capital is employed and what return the firm is getting on it, even after, to use his phrase, these things have been siphoned off. Can he tell me the return? Was it 6 per cent., 7 per cent., 10 per cent., 15 per cent. or 25 per cent.?

Sir Ian Orr-Ewing

The company is Mullards, which is part of the Phillips Group, and I have not its permission to quote the figure, but no doubt the right hon. Gentleman can look it up in the Library. I know of no company in this highly competitive industry which is making a post tax 10 per cent. on capital employed. If any company is doing so, it is doing very well, because competition in the industry is severe and sophisticated.

I come back to the necessary cutback as a result of the Government's policies. I cannot believe that this is a good thing. I think that it is particularly bad because the engineering industry is responsible for so much of our exports, as the right hon. Gentleman recognises. It is there that we see the profits turning down and getting much slimmer while all the time wages and costs go up precipitately. One only has to read the Sunday newspapers to see the turndown in profit margins and to look at the shop advertisements to realise that costs are going up. Massive wage settlements are going to make these profit margins even slimmer.

How do we compare in taxation policy with other countries? One thing is clear. We do not give any help to small companies. We should be more generous to them because they are often the innovators. The Holloman Report in the United States made it clear that new inventions and innovations often come from small and medium sized companies much more quickly than from big companies.

Mr. George Brown

indicated dissent

Sir Ian Orr-Ewing

The right hon. Gentleman shakes his head. Does he contradict the Holloman Report?

Mr. Brown

It really is not true of large parts of British industry—for example. textiles, of which I know something. To argue that innovations come from small companies is to stand all our knowledge on its head. It is not the case.

5.30 p.m.

Sir Ian Orr-Ewing

That also applies to the chemical industry, but I said that I was concentrating on the engineering industry, which is responsible for so much of our exports. It is certainly true in engineering that much of the innovation comes from small companies, and this has been borne out by the many who have surveyed the position. We give no sort of incentive to the small company. The Labour Government have done exactly the opposite with their close company legislation.

In the United States, for instance, corporation tax is paid at only 22 per cent. on the first 25,000 dollars of profits and at 26 per cent. above that figure. Then there is the Sub-Chapter S arrangement in the United States whereby young engineers, young inventors, can form a partnership with a rich man who wants to invest his money. Any losses can be set against the entrepreneur's income over five years. This is another way of getting partnerships going and getting small companies going in specialist areas, companies which may later become worth while, " go public " and add to the prosperity of the nation at large.

In Japan, 28 per cent. is paid on the first £20,000–3 million yen. Above that, the rate is 35 per cent. In Germany, on undistributed profits the rate on the first £1,000 is only 39 per cent. and over £5,000 profits a year it is only 49 per cent. In Germany, as we all recognise and praise, for this helps to create the market, one pays only 26½ per cent. on distributed profits compared with 42½ per cent. in this country. In all these areas not only is lower taxation paid, but there is greater incentive for small companies to grow into something worth while.

For these reasons, I hope that the Committee will support the Amendment and seek to reduce the burden of taxation on the companies which are the wealth creators for the nation.

Mr. Bessell

Before coming to my main comments on the Amendment, I should like to refer to the argument advanced by the hon. Member for Worcestershire, South (Sir G. Nabarro).

I realise that, in the considerable debate which took place across the Floor of the Committee, it appeared that the hon. Member for Worcestershire, South was advancing a rather unusual form of accountancy. Nevertheless, he has experience of the management of companies, as I have, and there was a point in his argument which appeared to have been missed by both sides of the Committee.

If a company or corporate body is about to produce an article for sale, it does not cost it out in the sense that it says that this is the amount of the cost of the tin, this is the amount of the cost of the components, this is the amount of the cost of the labour, this is the selling margin, and this is to account for corporation tax, adding corporation tax to its direct costs, as the hon. Member suggested. I agree with the Chief Secretary that that is not what is done.

On the other hand, the object of running a company is to produce a profit for those who have invested in it. In reaching a net as opposed to a gross profit, it is necessary to take account not only of the cost of raw materials, the cost of components, the cost of labour and the cost of overheads, but, for example, selective employment tax and, if one is involved in direct transportation, the cost of petrol, which also means a tax, and perhaps purchase tax, although that is rather exceptional. In arriving at a net profit, one takes into account the cost in terms of corporation tax, certainly if one is arriving at a dividend figure.

Therefore, the hon. Member for Worcestershire, South was advancing an argument not quite as remote as some hon. Members appeared to think. Perhaps he did not express himself as clearly as he might, but he was pointing to a crucial point which certainly carries weight with me, and I say that as one who, as has the hon. Member for Worcestershire, South, has experience of running a business direct.

There is a feature of the Amendment which I should like to make clear. It is that the Amendment which appears in the names of the right hon. Member for Enfield, West (Mr. lain Macleod) and his hon. Friends is identical with that tabled in the names of my right hon. Friend the Member for Devon, North (Mr. Thorpe), the Leader of the Liberal Party, and my hon. Friends and for convenience, quite correctly, the Table Office put the two together. I should not wish it to be thought that there had not been separate, yet identical, thinking.

Looking back over the attitude of my party towards corporation tax, I found that I made some reference to this subject in my maiden speech on 12th November, 1964, when we were in Committee on the emergency Budget. I look back on it with some nostalgia, for, as some hon. Members are aware, I am not seeking reelection at the forthcoming General Election. Not surprisingly, perhaps, I looked to see what I had said on the subject of corporation tax when I first entered the House. I said: A curious feature of the Budget proposals is the fact that the Chancellor has announced measures which will form part of the annual Budget proposals next April. That would be 1965 He has given advance notice of a capital gains tax and a corporation tax which, in principle, we welcome—".—[OFFICIAL REPORT, 12th November, 1964; Vol. 701, c. 1231.] The Liberal Party has always maintained that, within the framework of our taxation system, a corporation tax is essential.

As the hon. Member for Wanstead and Woodford (Mr. Patrick Jenkin) has done, I looked through our lengthy debates which we had in 1965. I recall supporting the hon. Member and his hon. Friends in the proposal that the initial tax should be at the 35 per cent. level. Having looked at that and the answers then given by the Government, I thought it wise to contrast the situation in 1965 with the current situation. I do not think that I can do better than quote from the Chancellor of the Exchequer making his Budget Statement on 14th April. He said: Our policies on taxation and public expenditure have transformed the accounts of the public sector as a whole. A borrowing requirement of £1,956 million in the financial year 1967–68 was reduced to one of £450 million in 1968–69 and then replaced by a surplus of about £600 million in the financial year just ended. There has thus been a turn-round in the public sector accounts of about £2,550 million in these two years. I accept that the Chancellor would have been a very bad politician if he had not used his Budget speech as an opportunity to congratulate himself and the Government on the reversal of fortunes in Britain's financial position. But, having said that—[Interruption] Invisibles are part of it, but we have a surplus on invisibles, too, which we cannot ignore and I shall not try to ignore it.

Sir Ian Orr-Ewing

Not today.

Mr. Bessell

I do not know what evidence the hon. Gentleman has for saying that, but I do not want to argue it.

Having made that confident statement to the House and to the country, it is strange, when expansion is clearly desirable to maintain the impetus of exports and productivity so that we can have the growth which is necessary to enable us to compete in export markets, to look at a later part of the speech of the Chancellor of the Exchequer in which he said: It will be apparent from what I have already said that the Resolutions to be put before the House "— those were the ordinary tax Resolutions— will provide that the standard rate of income tax should be renewed at 41.25 per cent. and that the same surtax rates should apply for 1969–70 as for 1968–69; but, like the standard rate of income tax, the surtax rates will now be expressed as percentages. The Resolutions will also provide "— and this the crucial point— for the renewal of corporation tax at its present rate of 45 per cent."—[OFFICIAL. REPORT, 14th April, 1970; Vol. 799, c. 1214 and 1252.] I understand and accept why the Chancellor felt it necessary last year to announce an increase in corporation tax before the current year. It was obviously necessary to give that warning. I understand, too, why in the financial condition of the country in which the right hon. Gentleman had to make his Budget Statement in 1969 it was wise to anticipate that he would need to make a greater call on taxation to provide income for the Government's expenditure programme.

But, in today's very much brighter conditions which the Chancellor took pride in explaining to the House at such length, I should have thought that this would have been a golden opportunity to give industry a shot in the arm and to say to the people who, after all, have been responsible for Britain's economic recovery, " You have done well. We want you to do better. As an incentive for higher productivity, investment and growth in industry and towards our export programme, I have decided to ignore my proposal made in 1969 and, instead of making the level of corporation tax 45 per cent., I shall keep it at 42.5 per cent." That is something to which industry and the country were entitled.

I do not believe—and this is where I take issue with the Chancellor—that his loss of revenue in a full year would have been as great as he perhaps expected. For example, I do not believe that, given that kind of encouragement, industry would not produce a great deal more and that the consequence in the long term would have been to have given him a greater revenue even than by increasing corporation tax.

I looked f1294 speech made by my hon. Friend the Member for Colne Valley (Richard Wainwright), who leads the Liberal Party so admirably in debates on the Finance Bill.

Mr. Diamond

I endorse entirely what the hon. Gentleman says about the hon. Member for Colne Valley (Mr. Richard Wainwright), but express a little surprise about what the hon. Gentleman says about maintaining and not increasing the rate of tax. The rate of tax went up last year. What we are proposing now is the rate of corporation tax for the financial year 1969–70.

5.45 p.m.

Mr. Bessell

I may not have expressed myself very well, and I am glad of the opportunity to clarify the point. The rate was at 42.52 per cent, last year, but the Chancellor in his 1969 Budget Statement announced an increase for the year 1969–70 to 45 per cent. Am I correct?

Mr. Diamond

My right hon. Friend announced an increase for the year 1968 —that is, the year ending 31st March, 1969—on which the tax would be payable during the following 12 months, depending when the accounting period ended.

Mr. Bessell

I misunderstood. I accept the correction, and I am grateful for it. I should not want to mislead the Committee or to go on record making an error of that kind. However, it does not detract from my argument that it would have been a considerable boost to industry if the Chancellor had felt it right to make a reduction this year. That is the purpose of our Amendments.

I turn to the speech of my hon. Friend the Member for Colne Valley—and I note with gratification the Chief Secretary's comments about the way in which he leads the Liberal Party in these debates. My hon. Friend spoke during the Committee stage of the Finance Bill on 7th June, 1967, when he advocated a reducation in corporation tax. He made the point at the end of his speech—and I should have hoped that after a three-year lapse it would have been noted by the Chancellor in the light of the opti- mistic picture which he presented in his Budget: I hope that if there is to be a degree of reflation, as I believe there should be, its first fruits will go to those business concerns which are successfully jumping over the enormous hurdles, both in the shape of obstacles to foreign trade and the difficulties of trade at home, because they deserve it."—[OFFICIAL REPORT, 7th June, 1967; Vol 747, c. 1159.] That is the burden of what I am saying. Not merely do they deserve it, but they must have it.

I could not agree more with the comments of the hon. Member for Wanstead and Woodford (Mr. Patrick Jenkin) and other hon. Gentlemen that the incentives necessary for industrial expansion are simply non-existent. I do not say that the Government have not given a great deal of assistance to industry in the development areas in recent years. I paid tribute to it last night and I was glad of the opportunity to do so. But, when it comes to whether money will be invested in industry for that essential expansion, I return to my first point. I do not think that the hon. Member for Worcestershire, South was far wrong. Corporation tax is a factor which must be taken into account, and it is absurd to suggest that it is not. It affects industrial investment and consequently industrial expansion. Therefore, whether or not industry deserves it, it must have it.

Last night, the Chief Secretary said that if an employee had said to him that he was not prepared to work harder unless he had a tax incentive he would not employ him. He was not as blunt as that, but that was the implication of his remarks. I am entirely with the Chief Secretary. If a person who is employed in a company in which I have any say told me that he was not prepared to work longer hours or to make any additional effort which would result in an increase in his wages, because he was afraid of the tax he would have to pay, I would make certain that that man was not on the payroll for any longer than I could help, because this attitude would show a total lack of responsibility towards the company for which he was working. I am with the Chief Secretary on this, but I am not so sure when it comes to industrial investment.

A person investing money in industry or in commerce inevitably looks to see what will be the return after taxation. With the present level of corporation tax, which has jumped from 35 to 45 per cent. compared with 1965, if the incentive has not been taken away, it has been seriously endangered. The Amendment seeks to do no more than to reduce the level to 42.5 per cent. In the light of the optimistic statements of the Chancellor and the change in the economic situation—and I am the first to pay tribute to that—and in the light of the effort which has been made by industry to bring about that change, I should have thought that a reward was due to industry. But, much more important, if we are to have the expansion and development on which the future world trade of this country is to depend, incentive must be given.

There comes a point when taking away incentives, reducing incentives or failing to provide incentives has an effect upon people who are engaged in business and industry and they begin to wonder if their effort is worth while. It is at that point that the country runs into grave difficulties and dangers.

I have looked again nostalgically at the maiden speech I made on 12th November, 1964. I recognise that at any moment we may find ourselves plunged once more into a General Election—

Sir G. Nabarro

The sooner the better.

Mr. Bessell

Although I am not a contender for a seat at the forthcoming election, I agree with what the hon. Member for Worcestershire, South said—the sooner the better. This may well be the last speech I shall have the privilege of making—

Mr. Nott:rose

Mr. Bessell

I would rather not give way.

Mr. Nott

I was about to say something nice about the hon. Member as a fellow Cornish Member. The hon. Member for Bodmin (Mr. Bessell) has been an admirable Member in Cornwall, although he is not a member of my party. This is the last opportunity I shall have of saying that to the Committee.

Mr. Bessell

I am grateful to the hon. Member for St. Ives (Mr. Nott). I did not want the rest of my speech to be interrupted, but for that kind remark I was glad to give way.

Mr. George Brown

Before the hon. Gentleman gets to the last part of his speech, which will not be interrupted by me as I do not share this generous view, may I question something which he said that struck me as being rather odd? He said that he thought it was wrong for a workman to work out what he would receive after paying tax if he worked overtime, and that such a man would not appear on his payroll for long. He then said that he expected an investor like himself to work out what he would receive from an investment after paying tax, and he thought that was quite proper. Will the hon. Gentleman explain to me—

Sir D. Glover

On a point of order. Is it necessary for the right hon. Member for Belper (Mr. George Brown) in intervening to make another speech? Cannot he make his own speech if he catches your eye, Mr. Irving?

The Chairman

All interventions should be brief. I will bring this intervention to a conclusion when I think it is appropriate to do so.

Mr. Brown

I am just asking the hon. Gentleman why he differentiates between the workman and the investor. They both apply the same process. Why is it right for the investor and wrong for the workman?

Mr. Bessell

I said that some time ago, but I will come back to the point. It is interesting that the right hon. Member for Belper (Mr. George Brown) should raise it. He has of course misunderstood—that goes without saying. I was agreeing with a comment made by his right hon. Friend the Chief Secretary last night. The right hon. Gentleman was referring to the speech of an hon. Member on the Opposition benches in which he said that an employee might refuse to do overtime or additional work if the incidence of tax is too high. I felt, as the Chief Secretary did, that if a person genuinely looked at it only in that way and was not prepared to give any extra effort to the company and earn more money even though it was taxed, he clearly had not got an eye to business and was not the kind of person who would make a good executive. The average investor is the trustee of other people's money and has to consider what he is doing on behalf of other people. This is certainly true of merchant banks and others. The private investor looks to see what his net profit and his tax liability will be, and an employee who is looking at a job will see what his tax level will be. I accept that it is the same thing, but I am sure that the right hon. Member for Belper would not wish investors to withhold money or workers to withhold labour. Yet we could reach a point where both could happen. It has not happened yet with income tax, but it could happen with corporation tax, and that is the point I am making.

To return to my earlier speech. I concluded by saying: I have crossed Jordan. That is what I felt like, I was very nervous. If I have landed safely on the other side it is only because of the courtesy of hon. and right hon. Members of this Committee. I wish to thank them for their forbearance."—[OFFICIAL REPORT, 12th November, 1964; Vol. 701, c. 1233] I shall shortly cross back over Jordan and should like to take this opportunity, if you will allow me to do so, Mr. Irving, to thank hon. and right hon. Members on both sides of the Committee for their indulgence towards me while I have been on their side of the river.

6.0 p.m.

Mr. John Cronin (Loughborough)

The hon. Member for Bodmin (Mr. Bessell) made an interesting speech, finishing on a graceful note which must have been agreeable to every hon. Member. I am sure we are all sorry that he is to leave us in the near future.

I am in some difficulty in following his arguments in support of the Amendment. He referred to incentives, but the effect of incentives is difficult to assess because so much depends on the psychology of the person who is paying the tax. There may be some disincentive when a person does something involving personal effort and is paid for the total time spent. But I cannot see how there can be any disincentive in the case of a corporation when such a circumstance does not arise. The Royal Commission on the Taxation of Profits and Incomes, which reported about 12 years ago, went into the matter of incentive and found no real evidence of disincentive in taxation in regard to individual effort. Taxation must work both ways as an incentive or disincentive. It may be argued that a man will work less hard, or a corporation less effectively, because some of the wages or profits accruing will be taken away by tax. But equally it could be argued that the more taken away in taxation, the harder the person or persons would work in order to gain in the long run after taxation.

The hon. Member for Worcestershire, South (Sir G. Nabarro) made an interesting and entertaining speech with his customary panache. He produced the rather exotic argument that the effect of corporation tax was to increase prices, particularly food prices. He suggested that corporation tax was costed into prices by firms when they were assessing costs. I am sure that he was pulling our legs. Prices surely must be based on the competitive situation.

Sir G. Nabarro

The hon. Gentleman must not accuse me of pulling his leg. Any cost accountant responsible for fixing retail prices on behalf of companies will tell him that the return on capital employed is first calculated net after the incidence of corporation tax, and second in regard to retail prices on the incidence of all forms of tax. The first consideration is S.E.T., then purchase tax, and then corporation tax, which are taken fully into account in assessing retail prices.

Mr. Cronin

I accept that S.E.T. and purchase tax would be taken into account, but I cannot see that corporation tax, which is a direct tax on profits, should be taken into account. Any well-run business—and I am sure that any business with which the hon. Gentleman is associated is well-run—will take into consideration primarily the competitive situation.

Sir D. Glover

Of course, a competitive element is involved. If my hon. Friend the Member for Worcestershire, South (Sir G. Nabarro) and myself are in competing enterprises, we both have to take these matters into account in calculating our costs. Our competition starts when we have taken those matters into account.

Mr. Cronin

The hon. Gentleman is making an assertion, but is not introducing any new argument. Surely in any well-run business prices are based on getting the maximum profit consistent with the competitive situation. There can surely be no other way of running a business.

I notice that the hon. Member for Worcestershire, South did not rise to the fly cast to him by my right hon. Friend the Chief Secretary. He was wise not to do so.

Sir G. Nabarro

The hon. Gentleman must observe the niceties of customary parliamentary procedure. In this Committee we never talk about any individual's tax liability and we never talk about the private financial affairs of individual companies or their liability to taxation. That is a well accepted rule in all quarters of the Committee.

Mr. Cronin

I am interested to hear what is almost an admonition from the hon. Gentleman. But I seem to recall some years ago, when I took part more regularly in the Committee stages of Finance Bills—

Sir G. Nabarro

We miss you very much.

Mr. Cronin

—the hon. Gentleman himself talking in an extroverted way about his own tax affairs.

Sir G. Nabarro

I am sorry to intervene again, but the hon. Gentleman is confusing the issue. I did what I did in 1961 to demonstrate that the tax inspector had allowed me to charge the cost of painting white lines on my tennis court at home against the maintenance of the court for the purpose of calculating my liability to Schedule A. I was poking ridicule at the law. And, what is more, I won.

Mr. Cronin

I wish to treat the hon. Gentleman with the utmost courtesy, but if I pursue the question of his tennis court much further I am sure I shall be called to order.

I shall turn to some other arguments. It has been suggested that corporation tax is a heavy burden on the companies concerned. It is noteworthy that the Amendment of the hon. Member for Wanstead and Woodford (Mr. Patrick Jenkin) reverses the increase in corporation tax which took place last year. The Chief Secretary last year said that the increase in taxation from 42.5 to 45 per cent. would bring in an increased return of £120 million. There was in that year a total increase in profits of £500 million. With that sort of increase in profits, companies surely can bear an additional burden of £120 million.

I hope that my right hon. Friend will be able to give some figures to show the extent to which profits have increased during the last year. But unless there has been a large decrease in profits in the last year, which is quite impossible to contemplate, it can hardly be suggested that the burden is too severe for companies to bear.

Mr. F. A. Burden (Gillingham)

What worries me about the hon. Gentleman's argument is that he is confining his remarks to very big companies. He must remember that both last year and this year there have been more bankruptcies and insolvencies than have occurred for many years. This is an important factor, particularly in regard to small businesses.

Mr. Cronin

That is an interesting point, but surely the hon. Gentleman is not suggesting that these bankruptcies and liquidations are brought about by the 2½ per cent. increase in corporation tax.

Mr. Burden

It is the straw that breaks the camel's back.

Mr. Cronin

In view of the figures I have advanced, one can hardly say that the 2½ per cent. increase in corporation tax constitutes a severe burden, or even a moderate burden, for the companies concerned.

I could not follow the hon. Member for Wanstead and Woodford when he said that corporation tax drives a wedge between shareholders and companies. Surely there is already a gap between them. The amount of influence shareholders have in their companies' affairs is very small unless a catastrophe occurs to the company. I cannot believe he puts that point forward as an important argument.

One interesting argument which the hon. Gentleman advanced was that corporation tax has an adverse effect on investment. If that was the case, it would be a serious reason for advocating its reduction. But does he seriously suggest that, when a board of directors considers investing in a new venture, it decides that it must not do it because the rate of corporation tax is so high?

Mr. Patrick Jenkin

As the hon. Gentleman has asked me a question, perhaps I might answer it. No, of course it does not. However, I do not know whether the hon. Gentleman has ever studied a discounted cash flow appraisal of an investment project. There is always one column of it showing the amount of tax which will be paid on the profit, and that can then be discounted. If the required rate of return is not reached because the tax payment is too high, the company will not proceed with the investment project.

Mr. Cronin

Obviously a board of directors will consider all relevant factors, but I suggest that this would be a minimal factor. I am a director of a successful electronics company. I cannot recall anyone saying at a board meeting that we should not invest in this or that direction or enter this or that market simply because corporation tax is too high. This is a patent absurdity. I cannot imagine that any board of directors—

Mr. Patrick Jenkin

I answered the hon. Gentleman's question and said that no board of directors asks itself in that form and answers the question in that way. However, any company which is properly run is bound to take tax deductions into account when working out the net return on a proposed investment.

Mr. Cronin

I do not think that there is any disagreement between us. Obviously, tax deductions are taken into account, but they are not a major factor in making an investment decision. I think that the proportion of investment decisions affected by corporation tax considerations is very small.

Sir Eric Errington (Aldershot)

The harm that corporation tax does is exemplified in close companies working with the shortfall. That is where the real effect of it is seen.

Mr. Cronin

I accept that corporation tax has an adverse effect on close companies. However, that is an argument for reducing its incidence on close companies. It is no argument for a general reduction.

The important point to bear in mind is that, if this corporate taxation were reduced, it would have to be made up by taxation from another source. If we accept that the country at the moment is having the right amount of taxation in accordance with the general balance of trade situation, I suggest that hon. Gentlemen opposite should consider carefully what taxation they would apply to make up for the shortfall as a result of the reduction proposed in the Amendment. I suggest that the companies can best carry the burden of taxation and that there is no case for reducing that burden in a way which inevitably will increase the burden on other people who are less able to afford it.


6.15 p.m.

Mr. David Howell (Guildford)

I regret that the debate seems to have drifted away from the sharp focus on industrial investment provided by the hon. Member for Bodmin (Mr. Bessell) and my hon. Friend the Member for Hendon, South (Sir H. Lucas-Tooth). They concentrated on what is, after all, the key issue, industrial investment. I am sorry that there were not more hon. Members on the back benches opposite to hear their contributions. I do not know where all the Government supporters are. No doubt they are in other rooms planning new and ambitious ways of spending taxpayers' money. I am only sorry that their plans will be disappointed.

Industrial investment has been the Achilles heel again and again in the country's economic programme and recovery. We have to face the fact. Now that we have a balance of payments surplus, we are in business if we can keep it right and get the rapid rate of increase in industrial investment—and in the output investment ratio—that is essential.

It is not just a matter of a good balance of payments by itself. It is important to keep in mind that with it must go a sound underlying investment trend. If that trend is weak, static or negative, we are no more in business than we were back in the wasteland days of Government two or three years ago. We shall be back to square one. All the gloss and glitter and huffing and puffing about our wonderful economic recovery will turn to dust and ashes in our hands.

That is the key issue. I would be the first to concede that not all the wisdom and answers to the problems of industrial expansion and a rapid rate of investment of new plant and equipment are contained in this Amendment. The impact of the tax rate on the motivations of people who make investment decisions is not the whole story.

I read a recent very interesting U.S. submission to the O.E.C.D. on industrial investment in the United States. It made the point that at least half the energies and motivation lying behind the rapid rate of investment in the United States and the high output investment ratio come from a general group of motivations which the Americans call the " management alertness ". It is the management alertness of the American manager which provides this markedly high output investment ratio and this continuing high rate of manufacturing investment.

Behind this management alertness there lie a number of causes. Pride in the prestige of the firm and the profit potential: the availability of stock options that is very important to drive management forward to make good investment decisions. I feel that this latter point should be catered for in a Clause of the Finance Bill. It is one of the sad-nesses of this now ending period of Socialist rule that right hon. and hon. Gentlemen opposite decided to knock out stock options in the 1965 Finance Act. It was pointless and a major blow to our efforts to increase investment.

The other point made in the United States submission was this. If we want a high rate of investment and high quality investment, it is essential for those who make the decisions to feel that, if they are pushed too hard by their companies, they can start their own businesses, accumulate capital rapidly and not be hampered in building up their businesses by legislation forbidding stock options or by excessively high company tax rates. That is an important part of the psychological pattern leading to a high rate of investment. All those points were made in that submission, and they are extremely relevant to our investment situation.

The United States submission made another point which seems to be essential to industrial expansion in this country. It said that these are the motives which lead to a high rate of investment and a high output investment ratio. But it talked also of the size of the area in which profit-motivated investment decisions can be made. By this, it meant that the larger the public sector or the public area of the economy or the area covered by investment decisions which are not made primarily on profit criteria and the smaller the area of the private enterprise sector, the weaker will be these motivations and the less successful, overall, the investment performance.

This, of course, is another way of describing the size of the resources taken by the Government and put into the public sector as against that left in the private sector pocket, either for consumption or for saving or for investment. But it is saying more than that, as the American report emphasised. I was not here last night, but I read that the Chancellor said that we on this side should not worry too much about the public sector, because it was not large by comparison with other countries and there were certain community needs which had to go on being fulfilled, and that our line of argument was therefore wrong.

It is the right hon. Gentleman who is wrong. It is not just the quantitative size of the public sector which is at issue but the quality of the decisions taken in the public sector. It is the type of decisions which. instead of being taken in the private sector, are taken in the public. It is on these issues that there is such a startling difference between this country and the United States or many other countries. It is these issues where we have the circular process which my hon. Friend mentioned, of taking money in taxation, churning it in the bureaucratic machine into services of various kinds or subsidy by all kinds of agencies and aids and handing it back to industry. It is as it passes through this process that all the half-baked decisions and impact of a departmental bureaucracy play upon it and all the weaknesses in the policy analysis and policy making machine in Government are allowed to influence it. That is where we get the dangerous influence on investment decisions and the dangerous restriction of investment which marks us out from other countries.

The things which I have in mind are too much Government control of commercial research or of the information handling processes or of advanced industrial design. I mean the Government tendency to use the majority of in-house consultants or to dominate the data handling world or to provide more and more industrial advisory services at below cost—which are financed out of taxation in the first place. These may not sound the fashionable areas of the 1950s or 1960s, but they are the high growth points of the 1970s. If the Government dominate these areas and believe that they must spend taxation on these things, and that decisions on these issues must be made in the public sector, they are making sure that investment decisions will be dominated in the 1970s by the ethos of the public sector and by the ethos of Government Departments, rather than of profit-driven decision-making.

This applies, of course, to these new areas, which I believe are the important ones. But it applies just as much to the whole vast traditional area of capital use and capital evaluation and capital programmes in the public sector. The bigger this sector, the more it covers these vital areas of decision-making, the smaller the area left in which profit-driven decisions can be made.

It is not just a question, as the Chancellor said, of measuring the size and the proportions of investment and the proportions of income generated in the private or public sector. Perhaps, on that alone, reasonable comparisons can be made—not with West Germany or Japan, but with France and Italy—perhaps. In quantitative terms, their public sectors may be about the same as ours.

But it is when we come to the type of decisions being made and the type of areas being dominated and influenced that we see the difference.

The more that our Government are in research and consultancy and data handling—the explosive growth areas of the 1970s—the more the decisions in these areas and the more investment decisions generally will be weak, inefficient and based on bad policy analysis.

It is that great public " soft centre " of our economy—not its size but its nature—which makes us so desperately vulnerable and liable to have an overall bad investment decision performance. It is the philosophy of believing that one must take the money in taxation through high corporation tax, as suggested in the Clause, transfer it, process it in the great Departments of State into advisory services or into grants and subsidies and then hand it back. It is that belief which is eating at good industrial investment decision and rapid investment expansion.

I turn now to the other way in which the present high level of corporation tax is sometimes justified by Government. They say—the hon. Member for Ashton-under-Lyne (Mr. Sheldon) has already said it today—that the money may be taken away in high taxation, but it is given hack in grants and subsidies, particularly in investment grants, in very large quantities. That of course is true, but it begs the main question—what is the method by which it is given back? Who gets the grants? Are they the right people? Are the decisions by the bureaucratic machine for reallocating grants here, there and everywhere, in the development areas or the non-development areas as good as the decisions which would have been made if the money had been left with the taxpayer—in this case, the companies?

There is room for argument on either side on this. Even if the resources must be reallocated by the Ministries and the machines, there is room for argument about the method by which it is done. There certainly is, in the reasonable and open mind of the hon. Member for Ashton-under-Lyne. He admitted that the present method of distribution of investment grants and other development subsidies and aids leave a great deal to be desired. This is a point which my right hon. and hon. Friends on the Front Bench have put again and again—that the method is ineffective and does not produce the results at the right cost which the taxpayer would have the right to demand. When it comes to producing new jobs and accelerating development in development areas, we propose better, more sophisticated and more effective methods of doing so.

Every time we bring that forward, many people in industry listen to us. The Prime Minister will not listen to us, because any suggestion that the method is wrong is immediately distorted by him into a proposition that we are attacking the whole idea. But this sort of thing gets less and less surprising from the right hon. Gentleman when one sees his latest dubious taste in advertising technique. This is something which we have learned to live with, I hope not for very much longer.

But the method is wrong. The hon. Member for Ashton-under-Lyne said it, and the right hon. Member for Middlesbrough, West (Dr. Bray), a former member of the Government, has commented even more graphically on the large-scale waste arising from the various methods of re-channelling and re-diverting money taken from industry and the taxpayer back into industry, and on the lack of effect it has in achieving what is supposed to be the policy goal—which is more jobs.

It is, I suppose, regrettable that, after 15 months of waiting, we still do not have the real study which the Government have promised us again and again on the effect of these grants, subsidies and investment incentives. It is more than regrettable: it is a shocking thing. If the Government are going to do a study on a large chunk of public funds of this size, amounting to £600 million per annum, it is little short of incredible that the Ministry of Technology cannot organise itself to produce this study in less than two years, as it will be in the end. The study will not be available, as the Minister told us the last time we questioned him, until the end of the year.

I am told that the Ministry of Technology is a shambolic place to work and that decisions are taken in odd ways there. But even so it is incredible that they should take so long to come forward with a reasonably analytical study of how these vast sums are taken from industry and handed back in various ways.

Perhaps I should not go too far here, because, in the end, I have doubts about relying on analysis for the answers to these questions. Yesterday, the hon. Member for Ashton-under-Lyne, in an excellent speech—much better than his speech today— called for analysis of the effect of income tax on incentives.

6.30 p.m.

He was saying that this would produce answers. In the same way, I suppose, several of us have been guilty of calling for an analysis of the effect on investment incentives and investment decisions.

I think that we can rely too much on this sort of behaviouralist analysis. In the end these matters are highly debatable, highly subjective, and they depend on the prejudice and instincts of the politician putting forward the argument. It would be scarcely credible if this study of income tax incentives or investment incentives under a Government from the benches opposite came out with arguments against their own prejudices, or with arguments which were watertight against their prejudices. Similarly, if the analysis were done under a Conservative Government we would take the points which reinforced our prejudices, and reject those which did not. In the end someone must have a good honest prejudice and force it into policy-making machines. That is what needs to be done about investment incentives.

That is what we must do. I believe that,inter alia, the right hon. Member for Middlesbrough, West is right; that the present system is wasteful and incompetent and takes too much in tax and gives back too much in inefficient waste; that the whole system could, first, be more selective—that is our case against the present system of grants—and, second, be conducted at a lower level in the sense that less should be taken in taxation, and less handed back. There could be lower taxes and a more selective distribution of subsidies and grants. That would be a major contribution to better industrial investment decision-making, and that would be totally in line with the Amendment.

The third and final means by which the Government can influence the rate of industrial investment is company liquidity. We know that the Government's monetary policy and their decision this year to have another whopping great surplus on central Government account is part of their tight money strategy. Obviously it is having, and will throughout the year continue to have, a telling effect on company liquidity. Many company reports and comments of company chairmen are showing it.

The Government have decided to run yet again this year this huge Budget surplus. It is necessary for the Government to operate this forced saving on this large scale because, if they release this money into the economy, it will not go into investment, but will be gobbled up in higher wage increases as more and more wage earners struggle to maintain their living standards as prices bubble up beneath them and they try to maintain their position. This is the psychological climate which has been created by the Government's mistakes, and it means that the Chief Secretary and the Chancellor live daily, and I trust not too uncomfortably, on the horns of a dilemma which restrain them from reducing this large Budget surplus.

The philosophy of the Labour Government, which we have known over the years, is that forced savings are necessary. The theory is that individual saving will not come about, or is undesirable anyway. But forced saving must be established and a high Budget surplus—the new thing for the Labour Party—must be obtained year after year so that any additional spending can be undertaken by the Government rather than be left to private enterprise and industry.

A high Budget surplus also enables the Chief Secretary to come to the House —for two years running now—and say with a smile, or perhaps with a serious look, " Public expenditure is under control. Look at this wonderful surplus. Everything is all right ". The right hon. Gentleman is using words and language in a completely different sense from the sense in which I use them. I do not regard public expenditure as in any sense under control. I shall never regard it as under control until there is proper and systematic scrutiny of a whole range of public programmes, certainly in the Treasury, and ideally by the House, a systematic running critique as Peter Jay called it inThe Times. When we have such a system, and the House has placed on record its wish to have it, we shall have public expenditure under control.

It has nothing to do with a Budget surplus, or with the success of the Chief Secretary or the Chancellor in raising so much in taxes and maintaining tax rates so high that they can cover even their enormous public expenditure programmes and still have something left over. Whether one goes with the strategy or not, the price that is paid is low investment, as it must be. A tight money policy restrains company liquidity, prevents savings, and ensures that we have low investment.

The trick or challenge for the Government now, perhaps in the last few weeks of their existence, I do not know, is to see whether they can break out of this familiar pattern. There is a balance of payments surplus, but always with low investment, always with a feeble and dwindling trickle of new investment. If they can change that pattern, and have a rapid growth of investment, they will earn my respect and good wishes, but if it is just the old story we do not want to hear it.

We on this side of the Committee coined the phrase, or brought it into public debate, that in Britain we needed a high investment, high wage, high research economy. That is what we argued for way back from 1964–65. I admit I sometimes feel that we have not kept that goal of policy as sharply in focus as we might. But the Amendment is in line with that goal, whereas the resistance to it and the determination to keep the levels of company taxation as they are are dead against it.

Mr. George Brown

I shall be brief. I have thoroughly enjoyed listening to this discussion, and I find myself exceedingly puzzled. The high wage, high research, high investment goal about which the hon. Member for Guildford (Mr. David Howell) spoke most certainly did not exist when we came to power in 1964. None of the three things existed then.

As I understand the argument, although it has wandered a bit, as the hon. Gentleman rightly said, it is that if corporation tax were fixed at some lower level than 45 per cent.—42½ per cent., 40 per cent., 37½ per cent.—we would achieve this high investment, high wage, high research goal. There is no evidence at all for that. In fact, during the years when this Government have been in power all three things have been happening.

Mr. Hordern rose

Mr. Brown

No. I have only just got to my feet. Nobody will argue that we have not got a higher wage economy. I can understand hon. Gentlemen opposite always complaining about this. Nobody will argue that we have not got a higher research programme. Part of my life nowadays is spent looking at what is done in research. We have a much higher research programme going on private enterprise-wise, private enterprise-cum-public enterprise-wise, and public enterprise-wise only, than we had in 1964. With respect to hon. Gentlemen opposite, we also have a much higher investment programme now.

As I listen to this discussion I think back to the situation in October, November and December 1964, to my discussions with industrialists—admittedly most of them Tory, but some of them Liberal—and asking them what I should do. I think back to how we got the National Research and Development Council, the N.E.D.C., and the " Little Neddies " going, and how we got them started on a programme of increased investment.

I think that some hon. Members in this House must be so completely out of touch with what has happened as to be almost totally blind. We have a much larger investment programme going on now. I am thinking at this moment of the large companies. I will come to the smaller companies later.

Mr. Hordem

Concerning investment, the right hon. Gentleman must realise that what he says is absolute nonsense. Not only have we the lowest proportion of the gross national product devoted to manufacturing industry of any of the E.E.C. countries, but the rate of growth of investment is.2 per cent. under this Government whereas it was plus 2 per cent. every year under the Tory Government.

Mr. Brown

One problem has been to persuade capitalists to understand the importance of investing. It has been an uphill job. The odd thing is that the hon. Gentleman can sit on the Front Bench as a proponent of private enterprise —of capitalism—and actually take it as a point in his favour that the Conservatives failed to do what they should have done as a matter of course.

When we came in we had to find some way to stimulate—[Interruption.]—I wish that hon. Gentlemen opposite would listen. We had to find some way of stimulating private enterprise—" capitalism ", if hon. Gentlemen like the word—to realise that industrial investment was the most important thing. The hon. Member for Gillingham (Mr. Burden) grins and thinks that he is scoring a tremendous point.

Mr. Burden rose

Mr. Brown

With respect, let me develop my argument.

Mr. Burden

I ask the right hon. Gentleman not to get personal.

Mr. Brown

With respect, let me develop my argument.

If it is still so bad, all right, somebody is being so bad. But the large companies are being very good. The large industrial complexes in this country are investing. I could mention one which last year put £70 million into new investment. Our problem is that so much of our industry is small scale. So much of it is taking out instead of putting in and is not high wage, high research and high investment conscious at all.

I am not making a case for more public enterprise. I could not be more bored by any argument than talk about whether it is more public or more private. In the end the balance works out. In the end we go public where public investment is needed. We have partnerships. I have been a great advocate of partnerships in my day. This is an outworn argument whether it is public or private. It is a question of the scale, the size, and what matches what requirements.

No matter what we do about taxation —the large public companies apart, the public sector apart—too few of our businesses attend to the job of investing and replacing outworn machines.

Mr. Burden


6.45 p.m.

Mr. Brown

Because I do not think that they are up to the job. If two, three or four big private enterprise companies had not come to the rescue, let us face it, Lancashire would be dead. The whole of the textile industry of this country would be dead. The tax system being what it is, being what hon. Gentlemen opposite attack, it is still true that a handful of companies rescued Lancashire by replacing the machines and putting in new capital investment. The hon. Member for Colne Valley (Mr. Richard Wainwright) knows as well as anybody that mills and machinery that had been written off years ago have now been replaced with new investment worth 100 times as much. This is what has rescued Lancashire. This has been done with increasing success between 1964 and 1970, despite the taxes which hon. Gentlemen opposite attack. My point is that it has been done in that climate.

Mr. Burden


Mr. Brown

I will go on. Somebody said that taking the money away and handing it back bureaucratically was very bad. Oddly enough, it has turned out to be very good. I am not a great admirer of bureaucrats. I have had my fights with them. But if we want to get it down selectively, it has turned out to be the best means we know of doing it.

Mr. Patrick Jenkin


Mr. Brown

I must go on. I have listened patiently and not interfered. There is something here which needs to be said. The hon. Gentleman has not been here for a large part of the discussion.

I am not, like the hon. Member for Bodmin (Mr. Bessel), announcing my valedictory speech and proposing to leave the place, but as I look back on five most fascinating and interesting years, because I have been able to play a small rôle, I realise that what changed the situation in the regions of this country was when we deliberately took a hand and said, " We will not have this old business of tax reliefs ". The argument was that if somebody made a profit he got a tax relief and somehow, by the grace of God and all the rest, it would get to the right place. We said: " No, we will not do that. We will raise the money from everybody and then we will try, God helping us, to make the best decision that we can as to where it should go ". This is what has changed the situation in the regions.

Hon. Members have referred to the polls and introduced into their speeches references to the coming General Election. If hon. Gentlemen opposite do not realise what has hit them, they had better start thinking about it now.

I have shown that the situation has changed in the regions—not as much as I would have liked and not as firmly as it might have changed—and boards of directors and great corporations are nowadays making their investments based on a number of issues, one of them being where they will get the largest grants for developing their businesses. Do people go to Skelmersdale or Ulster because they like those areas? Do firms establish branches in the North-West and elsewhere because they like those places, or because 40 per cent. grants are available? When hon. Gentlemen opposite talk about the bureaucrats interfering, that is the sort of interference they must bear in mind.

We raise money overall so that we can redistribute it in certain areas and in certain other ways. Perhaps it is about time that we adopted a more sophisticated approach. It is time that we had a little more money for Swadlincote. These all involve bureaucratic decisions, and it is these decisions against which hon. Gentlemen opposite are arguing.

Since 1964 things have changed. These changes have improved investment decisions and people now sneak freely about discounted cash flows. I recall the first meeting of the N.E.D.C. that I chaired, at which Fred Catherwood, the director, discussed the question of discounted cash flows, and the C.B.I. faces there looked extraordinarily confused. It was almost the beginning of the use of the term for most of them. Now it is understood.

The hon. Member for Bodmin referred to a problem which I wish to discuss, though from a somewhat different angle. It is the problem caused by a large number of small businesses being inadequately staffed and being unable to understand, take into account and assess all the changes of which I have spoken. If I were still in the Government I would be asking myself if the time had not come for us to establish some sort of organisation, or perhaps a number of bodies, to develop the present climate of thought of the great corporations, now that we have regional industrial planning really under way.

We now need to discover how we can produce some organisations which will bring small and medium-sized firms into this area of thinking. The C.B.I. does a first-class job in its own way, but it is too big for what I have in mind. We need a federation or association to which the smaller firms can belong.

The hon. Member for Hendon, North (Sir Ian Orr-Ewing) spoke about small firms doing the inventing. I agree that many bright ideas begin in small firms, but the problem in Britain is that while we are marvellous at having bright ideas and doing research, we are not awfully damn good at developing them, and we certainly lose out on commercial exploitation.

I do not want to get rid of small family firms, force amalgamations or even force partnerships between the private and public sectors, though there is a lot to be said for that. We must find a way to enable small, medium-sized and family firms with ideas to develop and exploit those ideas.

If this is to be done, access to funds and brains is necessary. I do not see how that will be achieved except by the actions of those whom hon. Gentlemen opposite scornfully describe as bureaucrats. It will come from something that we will have to produce nationally. And to do that we will need finance. In other words, we must take the finance from where we can get it and use it for the best possible purposes.

Sir Ian Orr-Ewing

The right hon. Gentleman is absolutely right in his broad argument. Is he aware that there is a way of doing what he wants to do and that it has been done by a small business centre alongside Aston University in Birmingham, where it has been possible to bring together and test products and have expertise in finance so that managements may be advised on how best to get their invents more broadly based and so how to get them off the ground?

Mr. Brown

As a member of the Convocation of Aston University—it happens to be my university—I accept what the hon. Gentleman says, and I have had the honour to play a small part in that process. We are proud of what is being done there, but I do not believe that any of us at Aston would claim for what is being done as much as the hon. Gentleman is claiming for it.

Having listened to most of this discussion, I suggest that hon. Gentlemen opposite are wrong and that the level of corporation tax is not a deterrent factor. The money that the nation gets from it is used for purposes which would otherwise not get financed, and I reinforce what my hon. Friend the Member for Loughborough (Mr. Cronin) has said on this issue.

Hon. Gentlemen opposite keep on pressing us to reduce this and that while keeping up expenditure on this and that. If we do not raise money we cannot use it for any purpose, so that their equation does not add up. I do not believe that the level of corporation tax has hurt anybody very much—[Interruption.] Somebody is bound to be hurt a little, obviously—but the money that is raised is being redistributed in a useful way, including for the improvement of every under-used region of the nation.

When I think of the position in the regions when we came to power in 1964 and compare that with the position today, it is obvious that they are benefiting from the selective use we are making of the moneys that we raise.

7.0 p.m.

Mr. Michael Shaw (Scarborough and Whitby)

This has been a fascinating debate. I am sorry that more hon. Members were not here to hear the opening speech of my hon. Friend the Member for Wanstead and Woodford (Mr. Patrick Jenkin) and other very thoughtful speeches. Those who have been here, as we heard from the right hon. Member for Belper (Mr. George Brown), came to hear and stayed to speak. This testifies to the interest in the general debate.

The right hon. Gentleman rather put me off early in his speech by claiming that an increase in investment had taken place, for which he took some credit under this Government. When my hon. Friend the Member for Horsham (Mr. Hordern) repudiated this claim and showed that the contrary was the case, instead of taking the opprobrium the right hon. Gentleman blamed the businesses themselves for not having continued to expand their investment programme under a Socialist Government. I parted company with the right hon. Gentleman there. I also parted company with him when he claimed great credit for investment grants as against investment allowances. Every evidence seems to show that even the Government themselves are having considerable doubt as to the wisdom of the change they made.

Such is the length of time that these changes in regional policy take that I believe it is only now that we are beginning—and only just beginning—to get the full effects of what my right hon. and learned Friend the Member for St. Marylebone (Mr. Hogg) did for the North-East in 1963–64. Both parties are as keen as each other to see that the regions return to prosperity. I very much regret what is happening in certain parts of the development areas. Socialists are trying to infer that we will get rid of development areas when we get back to power. My right hon. Friend the Member for Leeds, North East (Sir K. Joseph) has said on many occasions that that is not the ease. We shall not alter the boundaries until the conditions are right for such an alteration and prosperity has returned to those areas.

Much has been said this afternoon on the subject of investment. I believe it right that that should have been the main target of the debate, but as it has been so well covered I wish to look at a different aspect of the corporation tax burden, or, to take it more widely, the burden of taxation on companies. It was well set out by my hon. Friend the Member for Wanstead and Woodford in his opening speech, and I believe it is felt very keenly by companies throughout the land. The hon. Member for Ashton-under-Lyne (Mr. Sheldon) did not go along with him when my hon. Friend claimed that in looking at company taxation one should include the withholding tax of Schedule F. He said that Schedule F could be regarded as a tax only if the profits were used in a certain way. Inherent in this is a difference in philosophy. The divorce of companies from their shareholders which has taken place since this Government came to power is for the bad.

Shareholders are treated very differently from the way in which taxation-wise they were treated before. They find that when considered as a separate entity from the company from the taxation point of view they are treated much worse than debenture holders or other such debtors. The introduction of corporation tax and withholding tax took place in 1965, when. I fully accept, I was temporarily absent from the House. When the first Conservative Budget is introduced and the great change comes about, I am confident that I shall not be absent. When the full complexity and full import of what was done in 1965 first came through to the public and to industry and commerce, there was a general feeling of horror and bewilderment. The history of the taxes, although we have learned more or less to live with them, in general has proved that first reaction to be right.

My big theme in this debate is that the introduction of these taxes has led to a great change in the relationship of directors, shareholders and debenture holders. This aspect has not been touched on this afternoon. That is why I am developing it to the exclusion of others. Dividends are now much more expensive in relation to salaries than they were under the old system. Dividends are now much more expensive in relation to interest payable than they were under the old system. The enlargement of these differences is harmful to our commercial and industrial life. The larger these differences become the more restricted become the methods of financing businesses. The means of financing businesses should be chosen as far as possible on commercial and financial requirements of the situation rather than on the taxation implications of those means.

I know of private companies where directors were wont before the war to pay themselves modest salaries and for the rest, because they along with other shareholders had a stake in the company, to rely on their dividends to make up their income. Because of the incidence of taxation and the differences built up between earned income and savings income, investment income, they were forced more and more—so were their companies—to pay more of their income by way of salary and to look with not much favour on increases in dividends. This meant that over the years the interests of the directors and the shareholders became more divergent. Today in such a company—this happens many times in varying degrees throughout the country—directors maximise their salaries and are not very interested in maximising the dividends because of the great cost of doing so. Today equity capital is very expensive to service.

In 1964, under the old system of company taxation, to pay a gross dividend of £100 to shareholders, a company had to earn £133. Today to pay a gross dividend of £100, a company has to earn £182. To pay the same dividend they have to increase profits by 37 per cent. No wonder companies are short of money in these difficult times for profit-making. It may be argued that companies should not pay out all their profits by way of dividends. Let us look at the situation. Take the case of a company that regards it as a reasonable cover when its dividend is covered one and a half times by its net profit. In 1964 to pay a gross dividend of £100 the company would have to earn £199. In 1970, with the same retention—not the same proportion but the same retention as in 1964—for a gross dividend of £100 the company would have to earn £253. It would have to increase its profit by 27 per cent. to pay the same dividend.

This shows the true cost to companies in holding their position compared with previous years. It shows how difficult it must be if they have, merely to maintain their dividend, to increase their profits, in the case I have quoted, by 20 per cent. If they want, as they should, to plough back money for additional investment, the situation becomes very difficult. Costs are rising all the time. Not only are costs of servicing capital, in the sense of servicing the dividend to shareholders, rising, but also with the credit squeeze and high interest rates the cost of servicing borrowed money has risen.

Would a reduction in corporation tax as envisaged in the Amendment increase consumer spending? The hon. Member for Loughborough (Mr. Cronin) implied that it would; he suggested that the whole climate is that we do not want to increase consumer spending. The answer to the hon. Gentleman is that a reduction in corporation tax would not increase consumer spending. If there were a reduction in corporation tax, the consequent saving would go in easing the credit position at the bank and in increased investment. I do not believe that it would have an undesirable effect on the economic situation if such an easement were made. The Amendment should be supported on every possible ground as a first stage in further reductions.

Mr. Burden

I am sorry that the right hon. Member for Belper (Mr. George Brown) has departed. He assumed when I was smiling that I was making fun of him. In fact, I was smiling because he was referrring to a company with which we are both rather closely associated.

The right hon. Gentleman, in company with other speakers, made some interesting points. However we may argue, the higher the taxation on companies the less possible is it for them to put aside money for investment. Whatever may be argued, it is right that people who invest in companies should have a reasonable return on their money in terms of dividends. Some companies do not in the early years pay out good dividends. It is obvious that in the present situation companies which are paying low dividends, but whose prospects are excellent, may find it very difficult to obtain money on the open market to enable them to expand.

The Government, if they came clean on this question, would admit that there comes a point at which company taxation at a very high level limits and restricts company expansion, to the detriment of the economy generally.

The right hon. Member for Belper dealt with the importance of small companies. He glossed over this point in an unfortunate way by saying that Britain has a peculiar inventive genius; we have ideas; we produce new things, but for some reason we do not exploit and develop them as well as we should.

7.15 p.m.

Many of the new inventions which originate in Britain are made in small, privately owned companies. It may be that those who make them do not develop them themselves because they do not have the necessary knowhow, equipment and cash. But Britain gets a big reward from the patent rights and overseas development. When people with inventive ability who are capable of introducing new elements into industry are absorbed into a giant company, they may lose their impetus, because in many instances they are denied opportunity to give expression to it.

Far from discouraging small firms where these inventions might develop, we should do much more to encourage them. I believe that larger companies and corporations will be able to help small companies that might make these developments.

The right hon. Member for Belper spoke about what has happened in Lancashire. It is fair to point out that much rationalisation in the Lancashire cotton industry was undertaken by the last Conservative Government. This cleared the way for much of the new investment that has taken place, particularly in the company with which the right hon. Gentleman and I are associated and which has led the way in investment in recent years. But this is only one company.

My hon. Friend the Member for Wan-stead and Woodford (Mr. Patrick Jenkin) pointed out that, whereas investment during the five years of Labour government has been at the annual rate of .2 per cent., it was at 2 per cent. during the 13 years of Conservative rule. Nothing that the right hon. Gentleman said led me to believe that the companies to which he referred would not have made just as much investment in the last five years if there had been a Tory Government. As the total figure during the last three years has been at an average of .2 per cent., the implication is that under a Conservative Government it would have been much more generally across the board and certainly would not have dropped below 2 per cent.

Much has been made about the way in which corporation tax has enabled the Government to redistribute quite a lot of the money they have raised in this and other taxes in development areas, to encourage new industries in Scotland and in other places. A few days ago my right hon. Friend the Leader of the Opposition pointed out—he was not challenged—that every new job that has been provided in Scotland since the Labour Government came in has cost no less than £72,000. There is something wrong here. The whole question should be re-examined. I am sure that the Chief Secretary, with his inquisitive accountancy mind, will be looking into this matter in the near future. No doubt the right hon. Gentleman will be able to give us an answer at some time, in the future, if the present Government are still in office.

The whole situation is serious when compared with the situation in countries overseas. We must have investment in the highest technological know-how and in the most modern and up to date machinery if we are to improve our economic position. I was greatly interested in figures recently produced by the E.F.T.A. countries. The figures are illuminating, but at the same time disquieting.

Those figures show that from 1959 to 1968 the growth rate in the E.F.T.A. countries was 4.7 per cent In this country it has averaged only 3.2 per cent. Industry in those countries has expanded much more rapidly than ours. The gross national product in the E.F.T.A. countries is £880 and in this country it is £100 less. In addition, from 1959 to 1968 the exports of those countries work out at about 9.8 per cent. and imports 9 per cent., whereas the growth in imports and exports in this country has been at a rate of about 6 per cent.

These disquieting figures show that we are beginning to fall behind in the race for overseas markets and in the expansion of our industries in markets overseas. This applies particularly to the E.F.T.A. continental countries with which we have had the closest possible association and for which area we have been the principal manufacturing country.

May we be told how our investment compares with the continental E.F.T.A. countries and whether they suffer the same savage rate of company taxation as we do? Whatever the Government spokesman may say, the only way in which the standard of living of our people can be assured at its present level, and indeed to rise above it, is if we are able to compete in the world markets with our exports. Unless we invest in industry, in new machinery and in new techniques, in which we are sadly lacking under the present Government, there is no real economic future for this country or possibility of any great advancement in our living standards.

Mr. Tom King (Bridgwater)

I wish to make only a brief intervention. I believe that I can claim to be the latest recruit to this House from full-time work in industry and the latest person to have had more than a part-time interest in the problems which lie at the heart of the issue which this Amendment attempts to tackle.

I strongly agree with the words written in a recent article by my right hon. Friend the Member for Leeds, North-East (Sir K. Joseph) when he stressed the importance of the Government providing the right climate in which industry can be encouraged to do its job. All Governments—this applies to both parties—tend to make excessive claims for the contribution Governments make to the progress of industry. One of the most offensive claims made in recent years is the Prime Minister's claim about the restructuring of British industry. He made one speech to the T.U.C. in which he laid great stress on the efforts this Government had made to get industry going. From my own observations I know that industry started to wake up in the period 1958–60 when the first impact of the new management techniques started to operate. The development of our industry and expansion of our exports has been a progressive and gradual trend since then.

So in the development area the growth pattern is continually being refined. We on this side are suggesting further refinements. It is a developing policy and it would be outrageous if this Government were to claim all the credit for recent improvements in the development areas.

In an article celebrating its fifth birthday, The Times Business News said that the conclusion it would draw from its first five years was that things had generally happened more slowly in the first five years than it had predicted; that the bad news had happened more slowly and the good news had been slower in coming. Surely this is the lesson of the past five years, that the Government have expected things to happen more quickly than in fact has been the case. There is a considerable lag built into the system. This happened after devaluation. When at first the results did not come, there were fears that the benefits had been dissipated. When were the results supposed to show? Anybody with experience of booking export orders knew that we were on a three or four years' haul before the real benefits would come.

Mr. Burden

Would my hon. Friend not agree that the great improvement in the balance of payments last year was due in great measure to the capital goods ordered then being read for delivery and that last year was probably the important year in regard to benefits flowing from devaluation?

Mr. King

If I carry on my thesis not only would I agree with my hon. Friend but I feel that this process will go on for longer than is expected. These benefits tend to happen slowly. We are getting better at predicting effects, but we must not forget that results come rather more slowly in market terms.

We recognise in the Amendment the need for more incentive, whether personal incentives to leaders of industry or incentives to shareholders, in order to recognise the need for capital investment. We do not predict that doom is just around the corner if the Government fail to take up our suggestions. We are setting the scene for something for which we shall have to pay the penalty in five or ten years' time. This is a plan for the future, not a matter of imminent change or collapse. It involves prudent steps which might be taken now to establish the right climate in which to give real investment incentive and to enable us to build on a sound foundation on which our balance of payments, not next year but in ten years' time, and in 20 years' time will be built.

[Mr. GOURLAY in the Chair]

Mr. Diamond

I appreciated that short but relevant intervention from the hon. Member for Bridgwater (Mr. Tom King), who comes freshly to our scene and who rightly claims that he can make a rather special contribution. I share with him the view that there is a lag in new economic development which neither we nor the United States have understood. I also share with him the view that this is a new phenomenon to which we must pay careful attention.

I share the view that the important thing is to develop a basic system and a climate in which everyone will feel that it is possible to move ahead and invest. We have had a very long debate and I would say on behalf of the Government that no minute spent discussing investment, is a minute wasted. We all know that it is a most important part, if not the most important part, of possible growth in our economy and growth in the standard of living of us all. None of us knows the whole answer to this. A number of people are trying hard to understand the myriads of motivations which go into it. Discussions on these matters are most welcome and I have listened carefully to all that has been said.

We are of course concerned with corporation tax. The Amendment proposes a reduction of corporation tax of £120 million in a full year, as the hon. Member for Wanstead and Woodford (Mr. Patrick Jenkin) correctly estimated, and about £60 million in the current year. To put that into context the total amount estimated to be raised at the 45 per cent. rate for the financial year 1969 is £1,900 million. The more relevant figure is the total of dividends for 1969, because corporation tax can fall on retained profits and on dividends or partly on one and partly on another. Total profits distributed by way of dividend in 1969 was £1,800 million. If the whole of the £60 million for the current year came off that one source, and I do not for one second say that it would, it would reduce it from £1,800 million, supposing it were to be the same figure, to £1,740 million or, in a full year, from £1,800 million to £1,700 million.

This is a very small proportion of the total distributed during the year. To say that liquidity is determined by the increase in the rate of corporation tax is an argument I do not find wholly persuasive. The hon. Gentleman raised the problem of the decrease in company liquidity over the last year. This is true, but it was preceded by two years of net increase in company liquidity. The figures show an increase in 1967 of £305 million and in 1968 of £106 million making a total of £411 million and a decrease last year of £357 million. There is a net increase in financial assets over the last three years of £54 million. I did not quote these figures to demonstrate that £54 million was not so very different from £60 million, but it so happens that it is not.

The lack of liquidity has not been demonstrated. On the contrary company liquidity has improved over the last three years and in relation to an alternate source from which additional corporation tax of 2½ per cent. could be found, we have a fund of £1,800 million with which to provide either for £60 million this year or £120 million in a full year. I do not believe that there is any argu- ment on the basis of liquidity which determines whether companies, by virtue of the increase in the rate of corporation tax last year and which the Opposition are seeking to reduce, are prevented from making investments and from increasing their rate of investment.

It is also claimed that the rate of corporation tax is heavier here than in other countries—

Mr. Patrick Jenkin

We must get this right. No one has ever advanced that and manifestly it would be rubbish. The rate of taxation of corporate profits is heavier here than elsewhere.

Mr. Diamond

The hon. Gentleman says that the point I first made has not been advanced and clearly it would be rubbish. That is a relevant, clear and entirely acceptable comment. I will gladly read out the rates of corporation tax applying to a number of countries. The hon. Gentleman is saying that what he has in mind when he refers to corporate profits and the tax which they have to bear is both the tax which the company has to bear and the tax which the shareholder has to bear on his income. We are right back at our original argument and have made no advance. I am sorry because I have made the position clear over the years and the hon. Gentleman usually takes a good point very fast.

We are back at the old argument that a company need only pay 45 per cent. or whatever the rate is, on its profits tax and nothing else if it does not distribute dividends. The fact that it distributes dividends means that it puts income into the hands of an individual and our tax system is such that we tax individuals on their income. The company, under the tax on the distributed profits is acting with a song in its heart as an unpaid agent of the Inland Revenue, collecting taxes from the shareholder and handing it over to the collector of taxes. I cannot accept that we should talk about corporation profits taxation as meaning the tax borne both by the company and individuals deriving income from the company.

The hon. Member for Guildford (Mr. David Howell) in a most interesting speech talked about the United States position with approval. I am not sure whether he had in mind the United States rate, but he was talking with approval of the attitude to investment in the United States where the standard rate of corporation tax is 48 per cent. There have been surcharges in each of the last two years so that for 1969 the rate was 52.8 per cent. and for 1970 54.4 per cent. The basic rate, I admit, is 48 per cent.

I am not, therefore, persuaded that the inadequate increase in investment in the private sector—an inadequate rate of replacement—which we all recognise, is due to a small increase in the rate of corporation tax or even to the absolute rate. That cannot be demonstrated. What, then, is it due to? All of us wish that we knew the whole story. The right hon. Member for Enfield, West (Mr. kin Macleod) has come in. I was bold enough to say before he came in, on behalf of the whole House, that not one of us knew the whole story and wished that we did.

The Government have tackled this situation in a number of ways. We have gone on to investment grants. The hon. Member for Wanstead and Woodford has made it clear that when companies—he had in mind sizeable and knowledgeable companies and we all know that if we could bring up the level of the less efficient to that of the more efficient in this matter we would not have problems with the economy—consider investment proposals one of the criteria they use is discounted cash flow. He said in that connection that one takes account of how much cash one is going to receive, not surprisingly, and that one's cash is affected by the amount of tax one pays. That is true. But one also takes into account the investment grant.

Not only does one take into account investment grant. One takes into account the variations of investment grant in different areas. One puts all this on paper before one. Part of the whole process of changing from investment allowances to investment grants was to make the position clearer. My right hon. Friend the Member for Belper (Mr. George Brown), who made an interesting and valuable speech, is very well informed on this topic. The hon. Member for Bridgwater knows that this is going on and told us so. He is our most recent recruit. Perhaps he left it a bit late but there we are. He just managed to get in and give us the benefit of his recent. fresh and informed knowledge of this topic.

This is one of the ways in which one brings the matter home. If we are to believe the hon. Member for Bridgwater, it was necessary to do so because this new kind of thinking and calculation did not go on in earlier days. He suggested 1958 or 1960, I believe. At any rate, it is a comparatively recent development, as all of us recognise. Therefore, the Government have not done a bad job in drawing the matter to people's attention in business and pursuing it in terms of regional development.

Mr. Terence L. Higgins (Worthing)

The Chief Secretary's argument really only applies in the case of people who do not know how to take into account discounted cash flow. If they do not know how, they pay more attention to allowances than to grants.

Mr. Diamond

It is not my habit to be unduly discourteous and point the finger at anyone. That is a nice way of saying that I agree with the hon. Member for Worthing (Mr. Higgins) but need not necessarily particularise. If people are not going to need encouragement to do it, all well and good, but we reached the conclusion that there was need for encouragement to firms to be a little more up to date in their assessment and measurement of the benefits of investment and the most recent recruit opposite, the hon. Member for Bridgwater, has just confirmed this.

Mr. Higgins

The right hon. Gentle. man has not taken the point. If a firm thinks in terms of discounted cash flow, it will truly evaluate the value of allowances. It is only if one believes that firms are incapable of doing this that one thinks that they pay more attention to grants than to allowances.

7.45 p.m.

Mr. Diamond

I am coming to allowances now. No doubt the hon. Gentleman has in mind policy discussions which have been going on in the Opposition with regard to investment allowances, and I have in mind what the right hon. Member for Enfield, West, said about it in a recent discussion. He gave us to understand that the Conservative Party was giving serious thought to switching to investment allowances rather than having investment grants. I would say not that it is impossible to have a regional bias in investment allowances but that the Conservative Government never had that bias.

The difficulties are clear and obvious. The Conservative Government, under whom there were investment allowances, did not introduce into those allowances any regional bias. Free depreciation was a way of avoiding dealing with regional bias in investment allowances. Of course one can have a regional policy based on direct subsidies of a variety of other kinds. What we have done has been of great help in encouraging firms to look at the real value of their investments, and I hope that they will continue to do so and will attach far more importance to the figures and to their attitudes with regard to investment.

The hon. Member for Guildford quoted to us a United States report which said that a lot of importance was to be attached to the altertness of management. What that report was saying and what I believe—although I repeat that none of us knows the whole story—is that what is at the root of the willingness to invest and replace more frequently is an attitude of mind more than a financial inducement. We in this country are very conservative —" conservative " with a small " c ". There has been no poll on that topic. My experience and unsupported theory in more recent years is that there is an attitude of mind in which we depart very considerably from the American attitude for example. They are much more ready to scrap and reinvest and because of that only to have regard to propositions which are more attractive in terms of return on capital. There is much to be said for being much more selective about it.

My right hon. Friend the Member for Belper said something very similar when referring to small firms and their investment habits. He said that we did not think that they were up to the job. That is another way of saying, " Alertness of management ". I do not think the two are very different. If we could get at that attitude of mind, we should be doing great service to our people and the economy in encouraging much greater readiness to scrap and invest in something newer, after going to great care, of course, to do all the measurements in all the forms that have been indicated.

Mr. George Brown

There is something that I wish I had said at that point and perhaps my right hon. Friend will agree with me. Companies small or big should be more willing to scrap and replace sooner. Does my right hon. Friend agree with what I think I should have said at that point—that workers must, therefore, be more willing to work machines to death as soon as they can?

Mr. Diamond

My right hon. Friend the Member for Belper knows that there are a few topics about which I know a tiny bit, but that which he has raised I know nothing about. What is more important when speaking from this Box, I have no Departmental responsibility in that respect. However, I readily admit that reinvestment often involves expensive machinery and for that expensive machinery to be used sensibly requires new attitudes to double shift or treble shift working. We all recognise that it brings many social and other difficult problems which management has to learn to tackle.

I welcome any contribution which anybody has to make from anywhere in the Committee on this important, interesting and not wholly understood topic of the motivation of new investment. I cannot think that what determines that, or what has a measurable effect on that, is this 2½ per cent. in corporation tax, for that is what we are discussing. As I said yesterday, we are in the position where we have to exercise a priority in deciding whether we can relieve the burden of taxation within this modest £200 million in financial terms, not in resources, but in financial terms.

My right hon. Friend explained in his Budget statement the kind of priority which we would adopt. The Opposition are now suggesting that the first claim on that and the first claim as to £120 million in a full year should be made by companies. I have explained already that the burden of company taxation, measuring like with like, that is to say, corporation tax alone, or corporation tax plus Schedule F, or gross or net—I cannot measure net after depreciation, but I can measure net after fixed capital replacement, which is very much the same thing —has not been greater in the past year than ten years ago.

Hon. Members opposite say that it is not a straight line but is saucer-shaped. I confirm that it is saucer-shaped. I supplied the figures on which the arguments have been based. There is nothing to hide about this. Surely it is not suggested that we have not let anybody know that the rate of corporation tax has gone up from 40 per cent. to 42½ per cent. and from 42½ per cent. to 45 per cent. We have not hidden that. But the net impact is such that, although saucer-shaped, the two edges of the saucer are level and there is broadly the same burden of taxation—in fact, it is slightly less —on company profits as there was ten years ago.

So it is not the excessive burden which has caused the inadequate investment. It is certainly not the 2½ per cent. This is why I was rude enough to interrupt the hon. Member for Bodmin (Mr. Bessell), who was taking the view that we were effectively putting up the rate 2½ per cent. this year. The proposal before the Committee is for a reduction. If the Government are asked for a reduction, responsibly they must say that this is not the first priority, and I cannot recommend the Committee to accept the Amendment.

Mr. Hordern

I should like to start by congratulating the hon. Member for Bodmin (Mr. Bessell) on his valedictory speech. I had the good fortune to listen to his maiden speech. I should like to say only that he has passed back over Jordan, as he described it, as gracefully as he crossed it in the first place.

This has been an interesting debate and the number of speeches have been rather greater than first appeared likely. One of the most worthwhile contributions, as always, came from my hon. Friend the Member for Worcestershire, South (Sir G. Nabarro). He talked about the effect of taxation on the economy and in particular on the wholesale and retail trade. He said that wholesale and retail distributors worked on very fine margins and he said that it was right to draw attention to increases in taxation which inevitably resulted in higher prices. This point was taken up by many of my hon. Friends to whom my hon. Friend was courteous enough to give way. The effect of high prices is becoming ever more apparent in the economy and to the people, and it will become increasingly apparent over the coming weeks.

However, the point that my hon. Friend was making was that the Labour Party believed in a high taxation economy. He said that the retail and distributive trade understood and wanted higher profits and less tax. Labour Members prefer the system of investment cash grants because, as the right hon. Member for Belper (Mr. George Brown) said, they prefer a system by which the civil servant hands out the cash to allowing the money to be retained by the companies which can make up their own minds about whether to invest.

The right hon. Member for Belper made an extraordinary intervention. He claimed that the Government had succeeded in raising the level of investment since the Labour Party gained office. I remind the Committee that this increase in the level of investment in the last six years has been 0. 2 per cent., whereas the increase in industrial investment averaged 2 per cent. over the 13 years that we were in power.

Mr. Sheldon

As the hon. Member believes that firms should be allowed to decide their own investment without guidance from the Government, can he explain why his party had an investment allowance system?

Mr. Hordern

I will come back to that. We are now dealing with a reduction in the rate of corporation tax and I propose to concentrate on that.

Mr. George Brown

As the hon. Member has misquoted me, let me get it quite clear. I did not at any stage say that I thought it better for the civil servants to hand out the money. What I said was that, under our system, the money was used selectively to better results. That is quite different.

Mr. Hordern

I do not know what the right hon. Gentleman thinks he has said now, but it is perfectly clear that the meaning is that the civil servant knows better than public companies how to invest. That is the meaning of what he said.

Mr. George Brown


Mr. Hordern


Mr. George Brown

On a point of order, as the hon. Member does not give way. If he wants to assert—

The Deputy Chairman

Do I understand that the hon. Member for Horsham (Mr. Hordern) has given way?

Mr. Hordern


Mr. Brown

It is free for the hon. Member to assert that a consequence of what I am saying is what he suggests. What he must not do is to put words into my mouth. I did not say that and I do not believe it to be true. I believe that our method of running it is tremendously superior to anything the Opposition would put in its place.

Mr. Hordern

Let us agree that the consequences of what the right hon. Gentleman said remain the same.

The Chief Secretary spent some time in discussing the reduction in the rate of corporation tax which we are proposing. It is very modest compared with the amount by which corporation tax has been increased since the old system of income and profits tax on companies in 1964.

When corporation tax was introduced we were told that the rate should be about 35 per cent. and that this was equivalent to the standard rate of income tax in the old form at 8s. 3d. in the £ which had itself been increased by the Government from 7s. 9d. But the rate was not 35 but 40 per cent. It was raised to 42. 5 per cent. in 1968 and to 45 per cent. in 1969. I suppose that we should be relieved that it has not been increased again this year on the Pavlovian principle that if one stops being beaten over the head one feels a lot better. But an increase of almost 30 per cent. in company taxation is large by any standards, even for this Government.

8.0 p.m.

The real disadvantages of our system of corporation tax are well known and have been debated in this Chamber for many years. But I refer again to the emphasis on retentions rather than on distributions, the bypassing of the capital market, and the damaging effect of the close company legislation. All the arguments have been well ventilated and I do not wish to repeat them. My right hon. Friend the Leader of the Opposition warned when corporation tax was introduced that it would make the fat companies fatter—or words to that effect. No doubt the fatter companies are thinner than they were, thanks to the Government. But the way in which corporation tax works is still a positive disincentive to distribute.

It does not necessarily follow, however, that because there is a disincentive to distribute, the money thereby retained is necessarily invested. What is happening is that some companies are actively lending money to other companies and bypassing the banking system altogether. This is a new phenomenon. There is now a very active market in such loans.

I do not think that the corporation tax was designed with that end in view, but that is what is now happening. It will last at least as long as the credit squeeze lasts and possibly longer, partly because there is no incentive to distribute earnings under the corporation tax and no particular incentive to invest them in new plant and machinery. Of course it is true that it is partly due to the very high level of interest rates. When a company of the standing of Imperial Tobacco has to pay 10½ per cent. in the market, clearly it must be a very attractive investment to justify that sort of rate.

Sir G. Nabarro

Would my hon. Friend complete the sentence and go on to say that to guarantee 10½ per cent., 1990 to 1993, which must surely represent, not only in the longevity of the fixed term loan but the record high level of interest, an entirely new departure in lending arrangements in the whole of our history?

Mr. Hordern

I agree. Who knows, we may even see higher rates, and for longer periods, judging by the way in which the gilt edged market is going because of the credit squeeze.

The C.B.I. made the point in a recent publication that the average return on capital fell from 14. 7 per cent. in 1964 to 12 per cent. in 1968. If 12 per cent. is the average return on capital now, there is not much margin between that and the real cost of borrowing even to prime companies. Therefore, in talking about the form of the corporation tax, it is clear that there is little or no incentive to invest. When this is combined with the other difficulties which have been put in the way of companies, such as high interest rates, higher petrol duties, the forced loan through selective employment tax and the absurd distinction between manufacturing and service companies, it is not surprising that one of the most lamentable failures of the Government has been to secure an inadequate total level of investment.

It may not be easy to prove that there is a direct causal relationship between investment and output, but the fact is that our increase in investment and our output is low both in historic terms and in relation to other countries, and it is difficult to see how output can increase without higher investment.

Let me take our position in investment first. We know that gross domestic fixed capital formation by all industries, except dwellings and public services, increased by .2 per cent. between 1964 and 1969—that is, at one-tenth the rate of the previous 13 years. We know that actual expenditure on plant and machinery was lower in 1969 than in both the two previous years, 1967 and 1968, although manufacturing investment as a whole was 6 per cent. higher last year and not 11 per cent., as the Financial Secretary said during the Budget debate.

That does not sound much like recapturing the lost dynamic with which the Prime Minister regaled us in 1964. It is one thing to compare what has happened in investment with the Prime Minister's promises. That is altogether too easy. The word has no meaning for him. He might just as well have given a pledge. What is more important is to compare the respective records of the two parties. The Labour Party's is one-tenth as good as ours, and I hope that that goes into its election manifesto.

What is most important is to compare this country's recent performance with that of other countries—what one might call the " seed corn stakes ". As a proportion of G.N.P. gross fixed asset formation is 18. 2 per cent. in the United Kingdom, 22. 9 per cent. in France, 23. 1 per cent. in Germany and 34 per cent. in Japan. So we start from a lower base. It is true that we are getting the usual encouraging noises about investment in- tentions from the Government. We were told recently by the Ministry of Technology that industrial investment is due to increase by 10 per cent. this year, but other bodies, notably the C.B.I. and theFinancial Times,are a great deal more cautious in their prognostications for this year.

The prospects for the machine tool industry—and this is the test—appear to be very uncertain. The Government expect no more to be invested in machine tools than was invested last year—£145 million. What is worse is that the figures for total net new orders have been dropping sharply since last October, both for home and for export. This is very discouraging for the outlook for our investment performance and for future production. When combined with the already low level of investment which we have experienced during the last five years, our international export performance is bound to be affected and will suffer.

All that is in the future, and the Government are not worrying too much about the seed corn right now. But what about the present? What about production? We were promised that there would be no stop-go, and there was not: we had a grinding halt instead. In the last six years of Tory Government, manufacturing production rose by 4. 6 per cent. per annum. In the first six years of Socialist government it rose by 2. 9 per cent. So much for Socialist dynamism, It was by far the worst performance in the last six years of any of the 18 O.E.C.D. countries. The figures from 1963 show that there is not one country in the 18 O.E.C.D. countries which does not have at least a 50 per cent. better record in industrial production than we have. So what price league tables now?

We have had the lowest increase in G.N.P. per head since 1964 of any of the E.E.C. or E.F.T.A. countries. Industrial production has been acutely disappointing, and with a low level of industrial development and a high level of unemployment it is unlikely to get much better. Let us suppose, however, that demand picks up because of increasing consumer expenditure.

Mr. Diamond

The hon. Gentleman keeps on talking only about " investment ". Would he make it clear that all the figures that he has given relate to private sector investment, not to total investment, and certainly not public sector investment?

Mr. Hordern

I am perfectly happy to make that distinction because it is from the private sector that the majority of our export trade must come. Let us suppose, however, that demand picks up because of increasing consumer expenditure. Where will the goods come from? There we have to look at the total stock position. After two years of declining stocks in manufacturing industry, stocks rose last year by £208 million. This compares with an increase of £411 million in 1964, so, if there is a revival of demand, for which we all hope, is not it all too likely that it will have to come from abroad? Are not we up against capacity constraints already? What has happened during the last six years? What has happened to the restructuring of industry which we were to get, and of which the Prime Minister boasted so recently at the Scottish T.U.C. Conference? What is the Ministry of Technology doing about it?

The Prime Minister was very eloquent about this in 1964. In the Budget debate in that year he spoke of the measures necessary to encourage the creation of efficient competitive industries instead of having to rely so much on importing from overseas at a high cost to our balance of payments. He referred to the import of manufactured goods. He said —and this is a strong point—that in 1953 our import of manufactured goods was a total of £650 million, but, he said, 10 years later in 1963 it was £1,568 million, a rise of over £900 million in 10 years. The position now is that from £1,568 million it has risen to £4,137 million—not an increase of £900 million but of over £2,500 million in manufactured goods in only 6 years.

The Prime Minister said that by 1963 imports of manufactured finished goods had risen in 10 years by 234 per cent., a very high figure, but the figure in 1963

was £651 million. It is now £ 1,834 million, so what has he done about restructuring?

The Prime Minister said that he could not believe that this was something this country can do nothing about. So he has done something. He has applied the import surcharge, and the figures have continued to break record levels. What else could the figures have done? Because of the high level of corporation tax and the other difficulties which industries have to face, the level of investment has been relatively and absolutely far too small, and there is no sign that it will be anything like adequate in the future.

The trouble is that, even if investment does pick up by 10 per cent. this year, we shall have to rely on imports for a substantial proportion of our investment expenditure, and this is bound to have a harmful effect on our balance of trade. It is no good thinking that the solution to this problem lies in the system of investment cash grants which are given regardless of whether or not profits are earned. What the industry requires is a higher return on capital employed, and this means earning higher profits.

One of the troubles about this Government is that their whole philosophy is against earning higher profits. They are always talking in terms of a " fair " profit as if there is something evil in earning higher profits. The Government do not seem to understand that it is this attitude which accounts for the lack of confidence in industry which has persisted for so long. One way to restore confidence would be to reduce the rate of corporation tax from 45 to 42. 5 per cent., to show that the Government are not entirely inimical to profits. An even better way would be to get rid of this Government altogether, and for that reason I ask my right hon. and hon. Friends to divide the House.

Question put, That the Amendment be made:—

The House divided: Ayes 152, Noes 221.

Division No. 127.] AYES [8.15 p.m.
Alison, Michael (Barkston Ash) Batsford, Brian Brown, Sir Edward (Bath)
Allason, James (Hemel Hempstead) Bell, Ronald Bryan, Paul
Amery, Rt. Hn. Julian Bessell, Peter Buck, Antony (Colchester)
Archer, Jeffrey (Louth) Biffen, John Burden, F. A.
Astor, John Biggs-Davison, John Campbell, B. (Oldham, W.)
Atkins, Humphrey (M't'n & M'd'n) Blaker, Peter Carlisle, Mark
Awdry, Daniel Brains, Bernard Chataway, Christopher
Baker, Kenneth (Acton) Bromley-Davenport, Lt.-Col. Sir Walter Chichester-Clark, R.
Clark, Henry Hordern, Peter Pike, Miss Mervyn
Clegg, Walter Howell, David (Guildford) Prior, J. M. L.
Craddock, Sir Beresford (Spelthorne) Jenkin, Patrick (Woodford) Pym, Francis
Crouch, David Johnson Smith, C. (E. Grinstead) Ramsden, Rt. Hn. James
Crowder, F. P. Kaberry, Sir Donald Rees-Davies, W. R.
Cunningham, Sir Knox Kershaw, Anthony Renton, Rt. Hn. Sir David
Davidson, James(Aberdeenshire, W.) Kimball, Marcus Rhys Williams, Sir Brandon
Dean, Paul King, Evelyn (Dorset, S.) Ridsdale, Julian
Deedes. Rt. Hn. W. F. (Ashford) King, Tom Scott-Hopkins, James
Dodds-Parker, Douglas Kitson, Timothy Sharples, Richard
Eden, Sir John Knight, Mrs. Jill Shaw, Michael (Sc'b'gh & Whitby)
Elliot, Capt. Walter (Carshalton) Lancaster, Col. C. G. Sinclair, Sir George
Elliott, R.W.(N'c'tle-upon-Tyne, N.) Langford-Holt, Sir John Smith, Dudley (W'wick & L'mington)
Emery, Peter Lawler, Wallace Smith, John (London & W'minster)
Errington, Sir Eric Legge-Bourke, Sir Harry Speed, Keith
Eyre, Reginald Longden, Gilbert Stainton, Keith
Farr, John Lubbock, Eric Stoddart-Scott, Col. Sir M.
Fisher, Nigel McAdden, Sir Stephen Summers, Sir Spencer
Fletcher-Cooke, Charles MacArthur, Ian Tapsell, Peter
Foster, Sir John Maclean, Sir Fitzroy Taylor, Edward M.(G'gow, Cathcart)
Fraser, Rt. Hn. Hugh(St'fford & Stone) Macleod, Rt. Hn. Iain Taylor, Frank (Moss Side)
Fry, Peter McMaster, Stanley Temple, John M.
Gibson-Watt, David Macmillan, Maurice (Farnham) Tilney, John
Gilmour, Sir John (Fife, E.) McNair-Wilson, Patrick (NewForest) Turton, Rt. Hn. R. H.
Glover, Sir Douglas Maginnis, John E. van Straubenzee, W. R.
Glyn, Sir Richard Maude, Angus Vaughan-Morgan, Rt. Hn. Sir John
Godber, Rt. Hn. J. B. Maxwell-Hyslop. R. J, Waddington, David
Goodhart, Philip Maydon, Lt.-Cmdr. S. L. C. Wainwright, Richard (Colne Valley)
Gower, Raymond Mitchell. David (Basingstoke) Walker, peter (Worcester)
Grant-Ferris, Sir Robert Montgomery, Fergus Walker-Smith, Rt. Hn. Sir Derek
Grieve, Percy More, Jasper Ward, Christopher (Swindon)
Griffiths, Eldon (Bury St. Edmunds) Morrison, Charles (Devizes) Wells, John (Maidstone)
Hall, John (Wycombe) Mott-Radclyffe, Sir Charles Whitelaw, Rt. Hn. William
Hall-Davis, A. G. F. Munro-Lucas-Tooth, Sir Hugh Wiggin, Jerry
Hamilton, Michael (Salisbury) Murton, Oscar Williams, Donald (Dudley)
Harrison, Brian (Maldon) Nabarro, Sir Gerald Winstanley, Dr. M. P.
Harrison, Col. Sir Harwood (Eye) Noble, Rt. Hn. Michael Wolrige-Gordon, Patrick
Harvie Anderson, Miss Nott, John Wood, Rt. Hn. Richard
Hawkins, Paul Onslow, Cranley Worsley, Marcus
Heald, Rt. Hn. Sir Lionel Orr-Ewing, Sir lan Wright, Esmand
Heseltine, Michael
Higgins, Terence L. Page, John (Harrow, W.) TELLERS FOR THE AYES:
Hiley, Joseph Peel, John Mr. Bernard Weatherill and
Hogg, Rt. Hn, Quintin Percival, lan Mr. Hector Monro.
Holland, Philip Peyton, John
Abse, Leo Coleman, Donald Gardner, Tony
Albu, Austen Concannon, J. D. Ginsburg, David
Allaun, Frank (Salford, E.) Craddock, George (Bradford, S.) Golding, John
Alldritt, Walter Crawshaw, Richard Gordon Walker, Rt. Hn. P. C.
Allen, Scholefield Dalyell, Tam Gray, Dr. Hugh (Yarmouth)
Anderson, Donald Darling, Rt. Hn. George Greenwood, Rt. Hn. Anthony
Archer, Peter (R'wley Regis & Tipt'n) Davidson, Arthur (Accrington) Grey, Charles (Durham)
Armstrong, Ernest Davies, Dr. Ernest (Stretford) Griffiths, Eddie (Brightside)
Ashley, Jack Davies, S. O. (Merthyr) Griffiths, Will (Exchange)
Ashton, Joe (Bassetlaw) de Freitas, Rt. Hn. Sir Geoffrey Hamilton, William (Fife, W.)
Atkins, Ronald (Preston, N.) Dempsey, James Hamling, William
Atkinson, Norman (Tottenham) Dewar, Donald Hannan, William
Bacon, Rt. Hn. Alice Diamond, Rt. Hn. John Harper, Joseph
Barnes, Michael Dickens, James Harrison, Walter (Wakefield)
Barnett, Joel Doig, Peter Haseldine, Norman
Baxter, William Driberg, Tom Hattersley, Roy
Beaney, Alan Dunn, James A. Henig, Stanley
Bence, Cyril Dunnett, Jack Hilton, W. S.
Bennett, James (G'gow, Bridgeton) Dunwoody, Mrs. Gwyneth (Exeter) Hooley, Frank
Bidwell, Sydney Eadie, Alex Houghton, Rt. Hn. Douglas
Binns, John Edwards, Robert (Bilston) Howarth, Robert (Bol'on, E.)
Bishop, E. S. Ellis, John Hynd, John
Blackburn, F. English, Michael lrvine, Rt. Hn. Sir Arthur
Blenkinsop, Arthur Evans, Albert (lslington, S.W.) Jackson, Peter M. (High Peak)
Boston, Terence Evans, Fred (Caerphilly) Janner, Sir Barnett
Bottomley, Rt. Hn. Arthur Evans, loan L. (Birm'h'm, Yardley) Jay, Rt. Hn. Douglas
Bray, Dr. Jeremy Fernyhough, E. Jeger, George (Goole)
Brooks, Edwin Finch, Harold Jenkins, Hugh (Putney)
Brown, Rt. Hn. George (Belper) Fitch, Alan (Wigan) Jenkins, Rt. Hn. Roy (Stechford)
Buchan, Norman Fletcher, Ted (Darlington) Johnson, James (K'ston-on-Huil, W.)
Buchanan, Richard (G'gow, Sp'burn) Ford, Ben Jones, Dan (Burnley)
Butler, Herbert (Hackney, C.) Forrester, John Jones, Rt. Hn. Sir Elwyn (W. Ham, S.)
Butter, Mrs. Joyce (Wood Green) Fowler, Gerry Jones, J. ldwal (Wrexham)
Callaghan, Rt. Hn. James Fraser, John (Norwood) Jones, T. Alec (Rhondda, West)
Castle, Rt. Hn. Barbara Freeson, Reginald Kelley, Richard
Cos, Denis Galpern, Sir Myer Kenyon, Clifford
Kerr, Mrs. Anne (R'ter & Chatham) Neal, Harold Silkin, Rt. Hn. John (Deptford)
Kerr, Ruesell (Feltham) Newera, Stan Silkin, Hn. S. C. (Dulwich)
Latham, Arthur Norwood, Christopher Sillars, J.
Lawson, George Ogden, Eric Slater, Joseph
Leadbitter, Ted O'Halloran, Michael Small, William
Ledger, Ron Orbach, Maurice Snow, Julian
Lee, Rt. Hn. Frederick (Newton) Orme, Stanley Spriggs, Leslie
Lee, John (Reading) Owen, Dr. David (Plymouth, S'tn) Steele, Thomas (Dunbartonshire, W.)
Lewis, Arthur (W. Ham, N.) Padley, Walter Swain, Thomas
Lewis, Ron (Carlisle) Palmer, Arthur Symonds, J. B.
Lomas, Kenneth Pannell, Rt. Hn. Charles Taverns, Dick
Loughlin, Charles Parker, John (Dagenham) Thomas, Rt. Hn. George
Lyon, Alexander W. (York) Parkyn, Brian (Bedford) Tinn, James
Lyons, Edward (Bradford, E.) Pavitt, Laurence Tommy, Frank
MacDermot, Niail Pearson, Arthur (Pontypridd) Tuck, Raphael
Macdonald, A. H. Pentland, Norman Urwin, T. W.
McElhone, Frank Perry, Ernest G. (Battersea, S.) Walden, Brian (Alt Saints)
Mackenzie, Gregor (Rutherglen) Perry, George H. (Nottingham, S.) Walker, Harold (Doncaster)
Mackie, John Prentice, Rt. Hn. Reg. Wallace, George
McNamara, J. Kevin Price, Christopher (Perry Barr) Watkins, David (Consett)
MacPherson, Malcolm Price, Thomas (Westhoughton) Watkins, Tudor (Brecon & Radnor)
Mahon, Peter (Preston, S.) Price, William (Rugby) Wellbeloved, James
Mahon, Simon (Bootle) Probert, Arthur wells, William (Walsall, N.)
Mallalieu, J. P. W. (Huddersfield, E.) Randall, Harry White, Mrs. Eirene
Marks, Kenneth Rankin, John Whitlock, William
Marquand, David Rees, Merlyn Wilkine, W. A.
Marsh, Rt. Hn. Richard Rhodes, Geoffrey Willey, Rt. Hn. Frederick
Mellish, Rt. Hn. Robert Roberts, Rt. Hn. Goronwy Williams, Alan (Swansea, W.)
Mendelson, John Rodgers, William (Stockton) Williams, Alan Lee (Hornchurch)
Millan, Bruce Roebuck, Roy Williams, Clifford (Abertillery)
Miller, Dr. M. S. Rogers, George (Kensington, N.) Willis, Rt. Hn. George
Mitchell, R. C. (S'th'pton, Test) Rose, Paul Wilson, William (Coventry, S.)
Molloy, William Rowlands, E. Woodburn, Rt. Hn. A.
Morgan, Elystan (Cardiganshire) Ryan, John Woof, Robert
Morris, Alfred (Wythenshawe) Shaw, Arnold (llford, S.) Wyatt, Woodrow
Morris, Charles R. (Openshaw) Sheldon, Robert
Morris, John (Aberavon) Shore, Rt. Hn. Peter (Stepney) TELLERS FOR THE NOES:
Mulley, Rt. Hn. Frederick Short, Rt. Hn. Edward(N'c'tle-u-Tyne) Mr. Neil McBride and
Murray, Albert Short, Mrs. Renée(W'hampton, N.E.) Mr. R. F. H. Dobson.

Clause 13 ordered to stand part of the Bill.

Forward to