INCREASE IN INITIAL ALLOWANCES FOR INDUSTRIAL BUILDINGS (Hansard, 27 May 1970)

§ Mr. Michael Alison (Barkston Ash)
I understand that the background to the Clause is the Chancellor's recognition in his Budget speech that there is some unused capacity in the construction industry, particularly in the less prosperous parts of the country."—[OFFICIAL REPORT, 14th April, 1970; Vol. 799, c. 1245.] That strikes us on this side of the Committee increasingly as the understatement of the year, if not of the decade. When we learn from the housing figures published yesterday by the Ministry of Housing and Local Government that the April, 1970 starts are as much as 7,000 down on the April, 1964 starts and reflect that the Government will leave office on Prorogation with 20,000 fewer houses under construction than when the Tories left office in 1964, the Chancellor's statement seems a pearl of understatement.
We might well wonder why the Chancellor did not lay more emphasis in his Budget speech on this aspect of the 1856 economy, the slack in the construction industry. However, we at least welcome the recognition implied by the Clause that there is a need to try to do something about what really amounts to a recession in the construction industry. I question the effectiveness of the Government's measures to try to deal with the evident setback in the industry.
Will the Minister of State confirm with complete confidence that it is the Government's view that the Clause will be quick-acting? I think that that was the expression the Chancellor used on 14th April. Will industrialists move more quickly in initiating industrial building as a result of the Clause? I instinctively ask this question because we are told that the Revenue cost in the current year is likely to be nil, but that means that the cash flow effect for industry will correspondingly be nil. As far as I can see the whole stimulus for the construction industry now must turn first on an adequate cash flow position in the present financial year and especially in the immediately following months, and in addition it must rest on an assurance about the pattern of future profits.
Cash flow and profits are the underlying reality of any real stimulus to industrial investment outlays by manufacturers. Are the cash flow prospects for the immediate future and profit prospects really so favourable as to permit industrialists to move quickly, as the Chancellor hopes? Are they sufficient to breathe life into the dry bones of the Clause? It is rather difficult to tie up the prospects for business investment against the background of some of the economic circumstances that now seem to prevail. We have had some sort of public confirmation that earnings in industry, which are a basic industrial cost, are likely to go up by 12 per cent. in the current year. Unless prices are to be allowed to increase at least as much, it is hard to see how there will be any very stimulating profit prospects for businessmen, let alone sound cash flow positions to encourage them to turn towards investment. This would be particularly the case in the construction industry. The prospect of higher wage costs might 1857 normally encourage businessmen to invest in plant and machinery, because capital can be substituted for labour in that way. But where it is a question of new industrial buildings the prospect of higher labour costs is the one factor that will deter investment in plant of that sort.
We must add to this the fact that the profit position in industry has been extremely lean since 1964. Looking, for example, at the figure of retained profits, which corporation tax was meant to boost and assist, we find that the trend has been steadily downwards in the volume of retained profits since 1964 even at current prices, and gross profits at current prices have barely moved.
So the profits prospects for the forthcoming year are not good, particularly if the Government do what they did after the 1966 election. We had a similar boom in earnings and wages just before the election and they imposed a squeeze and freeze immediately after it. If that happens again the environment and atmosphere for business investment is about as bleak as it could be. Does he really believe that the Clause on its own will compensate for the difficulties in the cash flow position and in the uncertainty about the future profits which is inherent in our present economic situation, particularly the prospect of high levels of increased labour costs in the coming years?
Secondly, I turn to the narrow application of the Clause. The C.B.I. is anxious to know whether the Government have considered or would further consider the possibility of extending the initial allowance increase to commercial buildings, particularly in development areas. It is right to point out that there is no reason in logic why commercial buildings should be excluded from the whole environment of capital allowances. The old, although respectable, argument is that to extend initial allowances or any sort of capital allowances to them would mean severe cost to the Revenue.
The Treasury estimated an extra £275 million as being the likely cost of extending this sort of concession to commercial buildings. I know that the Minister of State has helpfully and carefully 1858 costed the likely impact of this change on industrial buildings in development areas and perhaps he can tell us whether any estimate has been made of the cost of extending the provisions of Clause 16 to commercial buildings in development areas for these two years.
I believe that the impact of the scheme in development areas for industrial buildings is likely to be nothing this financial year and about £9 million in the next. It would be helpful to know whether the Treasury even considered what the cost would have been of extending the change to commercial buildings in development areas.
This is a reasonable query because many people regard the development of the commercial side of our economic life, which brings in the whole range of commercial buildings such as offices, shops and distributive and servicing facilities, as particularly helpful to the needful development areas. The characteristic of an advanced economy and its growth is the development of this side. It would have been sensible and rational at least to have considered the extension of the initial allowance provisions to commercial buildings in development areas and I cannot believe that the cost would have been very substantial. The whole rationale of the Government at present is deliberately to carve a bit off the Revenue for the sake of the stimulus this would give. We believe that a similar stimulus for commercial building in development areas should be considered in the narrow context of the Clause for the limited period of two years.
Commercial buildings are not only vital for a developing economy and social life of the needful areas but the rate of depreciation in these areas for such buildings is particularly acute and far more hazardous than in the ordinary areas. We want confirmation that the cash flow position in the current financial year will offer something in the way of a stimulus and not just of future prospects of allowances against profits, because there is no certainty that these profits will be to hand. We want an assurance that the Government have looked at the possibility of extending the application of the Clause to commercial buildings, particularly in development areas.

§ Mr. John Smith
This Clause is intended to encourage the erection of industrial buildings and as such it is to be welcomed. But it will fail in its objectives unless the period it covers is extended. As drawn, the initial allowances on such buildings will only be increased if the expenditure is actually incurred by 5th April, 1972. If it is to be an incentive to the erection of new buildings, clearly the decision to erect the building must have been taken after the Chancellor made his Budget speech or after the introduction of the Bill. But the period between then and 5th April, 1972, is shorter than the length of time which often elapses between the conceiving of a project for a new industrial building and getting it up. There are two principal reasons for this.
The first reason is the increasing complexity of the planning legislation—indeed it would be a good idea if the authorities were to consider the effect of planning delays on the earning power of companies and hence on the earning power of the country. In my view, a great deal of money is lost to the country by planning delays. I could in ordinary circumstances give some most dramatic examples, including money lost to the Government on their own projects. However, planning delay is the first cause of delay in getting a project going.
The second cause is the increasing complexity of tender documents. It often takes six or more months to get a set of such documents out and a period after that to get the tenders in.
Therefore, while welcoming the Clause, I feel that, whichever Government are returned to power on 18th June—and both parties wish to have this provision—will have to lengthen the period which the Clause covers if they want to make it effective.

§ Mr. Costain
I want to emphasise a point made by my hon. Friend the Member for the Cities of London and Westminster (Mr. John Smith). It was also made during the Budget debate. The House should realise that to get a building planned often needs 40 different signatures on the plans before it even starts, 1860 while up to eight months can be taken up waiting for planning permissions to be completed. This means that the Clause will have little value unless the period it covers is extended.
Perhaps the Minister of State will make clear what will happen in the case of buildings uncompleted at the end of the two years. Is the initial allowance to be allowed on the amount of expenditure up to that time, or on the basis that the building has been completed? If the building is not completed, is it the case that no allowance will be made? There is some confusion on this matter.

§ Mr. William Rodgers
The expenditure will qualify if it is incurred within the two-year period. It may be on a building which is started during the period or is already in process of erection which will continue after the end of the period. I agree that a balance has to be struck here between determining a length of period which is a real incentive because, obviously, the incentive effects of the proposal would be defeated if it were possible for the increase to be extended for a longer period, and a period which is nevertheless sufficient to induce new building to take place. We take the view that the incentive value of this provision is real and that there will be consequences in new industrial building.
The hon. Member for Barkston Ash (Mr. Alison) raised the question of extending the allowance to commercial buildings. He asked whether we had considered this. He may take it for granted that we did. I take the point and largely share it that the healthy development of commercial premises in development areas is something to which we are all looking. It may well be that the growth of service industries in so far as this is relevant will add to the long-term strength and improved industrial structure of the development areas.
Successive Governments have considered this matter and all have concluded that it would not be desirable to extend the allowance to commercial buildings. The cost would be very high, rising to a figure of £275 million over a period of years. In these circumstances, as we felt that there was an objection of principle and as the revenue consideration was overwhelming, we did not make the calculation, for which the hon. Member 1861 asked, about the precise effect of extending the allowance to commercial buildings in development areas.
We believe that this is a useful provision. I would not take so gloomy a view as the hon. Member for Barkston Ash of the prospects in development areas, or for the construction industry generally, although one must recognise, as the Chancellor did in his Budget Statement, that the construction industry has been going through a difficult period. I am sure that in the next year, despite some possible problems with cash flow, and even if profit prospects are not as favourable as we should like, profit prospects will be favourable enough to encourage those who wish to go forward with building to do so, in the knowledge that this incentive is available.
Only time will show. I would not make an extravagant claim for this provisison, but it is useful and it will be a spur to industrial building, which is precisely our objective, within present overall circumstances.