HC Deb 18 May 1971 vol 817 cc1197-229

Question proposed, That the Clause stand part of the Bill.

10.0 p.m.

Mr. Maurice Macmillan

I trust that I shall be in order in addressing my opening remarks exclusively to the contents of the Clause.

The Clause introduces the new system of capital allowances on plant and machinery. With two exceptions, the new system applies to all capital expenditure under these heads which is incurred on or after 27th October, 1970. The exceptions are expenditure on secondhand plant and machinery and under hire-purchase contracts. I shall have something to say about those exceptions later.

The starting date is provided in subsection (1). That provides for the new system to apply to capital expenditure incurred on or after 27th October. This matches precisely Clause 1 of the Investment and Building Grants Bill which precludes the payment of investment grants on expenditure incurred on or after 27th October last, unless it is incurred under a contract entered into earlier.

As a corollary, subsection (1) also excludes from the old code of allowances expenditure on plant and machinery which qualifies for the new.

The first of the two exceptions is second-hand plant and machinery. Subsection (2) makes the exception for second-hand assets: this is dictated by cost. In fact, the subsection does not disqualify all expenditure on second-hand assets from the new allowances. For example, a trader who, in an arms-length transaction, buys, after 27th October, a machine which was originally bought new before that date will get the new allowance on it.

The subsection is necessary because, apart from the accelerated depreciation offered by the first-year allowances in the new system, the new standard rate writing-down allowance is more favourable to industry than the combination of the three rates of the old system. The average rate of writing-down allowance under the old system was under 17 per cent.; the new standard rate is 25 per cent.

So, if the dealings in second-hand machinery were not prevented, it would be to a firm's interest to engage in an artificial transaction—say, selling all its existing machinery to another company under the same control, simply for the sake of the increased writing-down allowances which the latter would get. Since the written-down value of plant and machinery for tax purposes in the United Kingdom is estimated at £6,500 million, the cost to the Exchequer could be very great.

The remedy for this difficulty, which was set out in the White Paper, is that plant and machinery bought second-hand from a connected person will get the old rates of allowance unless it was originally bought new after 27 October. The same will happen in transactions between unconnected persons if the sole or main benefit of a transaction is to get the new allowances.

Mr. Dalyell

There is some difficulty about the definition of connected and unconnected persons.

Mr. Macmillan

Broadly speaking, individuals are connected if they are closely related directly or by marriage to each other. Companies are connected if they are under common control. This is an important factor. These concepts are a familiar and established part of the taxation code already, and the problem of definition is less difficult than it may appear.

The second exception is hire-purchase transactions which straddle the transfer date of 27th October, 1970. These are covered in subsection (3), which provides that, where plant or machinery is bought on hire purchase, if any capital expenditure has been incurred before 27th October and the asset is already in use, none of the expenditure under the contract will qualify for the new allowances. All of it will get allowances under the old system. This is because the treatment of hire-purchase contracts under the new system is different from their treatment under the old.

The main different is that, under the old system, initial allowances were given on the capital element of each instalment as it was incurred, but writing-down allowances related to the whole capital cost and started from the time that an asset was brought into use, so that, in the second and later years of the hire-purchase period, initial and writing-down allowances were both being given and the amount of the allowances interacted in a complicated way.

But, under the new system, the first-year allowance is intended to replace the initial allowance and the first-year writing-down allowance together on the asset: it must, therefore, be a rule of the new system that the first-year and the new writing-down allowance cannot both be given for the same year in respect of the same expenditure. I hope that that is reasonably clear to the Committee. It is a logical way of handling hire-purchase transactions which straddle the changeover date of 27th October, 1970.

This opportunity has been taken to somewhat simplify the treatment of hire-purchase expenditure by treating it under the new system as being wholly incurred when the asset is brought into use. For determining whether it falls under the old or new system, one need only see when it occurred, and if the expenditure was incurred before 27th October and the asset is then in use, the old system applies, otherwise the new system applies.

The question of expenditure incurred in anticipation of trading is a relatively minor point about the starting-date rules for the new system, and this is covered in a later Clause. However, it may be for the convenience of the Committee if I deal with it now. It reproduces the long-standing rule in the capital allowance system that capital expenditure incurred by a person about to carry on a trade has to be treated as though it were incurred on the first day of trading, otherwise it would not qualify for allowance. This is obvious if one considers the matter.

Hitherto, this rule has not applied for the purpose of deciding what rate of allowance should be given—that is, if the rate has been changed in the interval, when the expenditure has attracted the going rate for the time when it was incurred—but in this case, because we are reforming the whole system of allowances, it would be perverse if expenditure which comes within the system for the first time after 27th October were to have the old arrangements applied to it simply because of the change in the rates of allowance.

The rule as set out in Clause 40(4) has been made to apply so that expenditure incurred on, for example, 1st September, 1970 in preparation for trading which started on, say, 1st November, 1970 will get the new allowances. In case there is some doubt as to what all this means, perhaps I should add that this is all to the advantage of taxpayers.

This is a simple Clause which introduces the new system of capital allowances and sets out the starting dates and the two exemptions I have mentioned. Later we shall come to some of the more detailed considerations applying to this matter, in subsequent Clauses in this Part of the Bill. Meanwhile, I commend the Clause to the Committee.

Mr. Edmund Dell (Birkenhead)

The last time I spoke in Committee on a Finance Bill was in 1965, when, among other points, I was arguing in favour of having an effective investment incentive system. I find myself now arguing against the introduction of an ineffective investment incentive system.

Before I comment on that score, I will put a number of detailed questions to the Chief Secretary. I have grouped them together at the outset of my remarks so that he may have an opportunity to consider the questions and, if necessary, to take advice so that he can answer them.

What will be the result of the introduction of this new system on the provision of information about the operation of these investment incentives? The hon. Gentleman will know that under the investment grant system a great deal of information was made available and published annually. I asked the Chancellor of the Exchequer whether similar information would be available in respect of this system, and he replied that it would not be worth the cost of producing it. I then raised the matter in the House last November and I was given a more hopeful answer from the Financial Secretary, who told me: We shall certainly consider the right hon. Gentleman's suggestion as to how far we should go in producing further statistics on investment allowances. I hope that he will take that as sincerely intended."—[OFFICIAL REPORT, 17th November, 1970 Vol. 806, c. 1112–3.] Of course I took it as sincerely intended. I have been waiting ever since for some indication of what can be done. I wrote to the Financial Secretary a short time ago but I have not yet received an answer. What can the hon. Gentleman tell us tonight about the information available? After all, the information is of importance in assessing the efficacy of this system, as it would have been for the last system.

Secondly, why are the Government discriminating against services in development areas? I thought that it was a great principle of the Government not to discriminate against them. If the reason is that services are likely to grow in development areas with the developing economy in those areas generally, the hon. Gentleman has gone a long way to admit the point of our discrimination in that respect against services. That obviously will not be his answer. I should be glad if he would give us his answer.

My next question is whether the Government seriously regard a 60 per cent. tax allowance as an investment incentive. They included this in their White Paper on investment incentives, but surely they cannot be serious in so regarding it. There has been much discussion during this Finance Bill about what gives rise to investment, and reference has been made to the influence of profitable demand, to the expectation of sales, and to the need to maintain a share of the market. A series of such influences on investment has been argued in the House, all of them quite clearly far more powerful than a 60 per cent. tax allowance. Do the Government regard this as an invest- ment incentive? If they do not—I do not think that they seriously can—why do they not just cut company taxation a little more and get rid of the distortion which investment incentives produce in the economy by their tendency to assist capital intensive investment specifically?

I should like to know the Government's view of the contrast which has developed between the situation of investment incentives in this country and that in the European Economic Community. As is known, countries of the E.E.C., in their equivalents of development areas particularly, are increasingly using a grant system. It is understood that the European Commission, if it has to have an investment incentive system, prefers a grant system to a tax allowance system which, it says, is uncertain in its effects. What account of the situation was taken by the Government in deciding to introduce tax allowances in this country?

It is not just a matter of whether we enter the E.E.C., but a matter of the contrast and competition which will exist between this country and European countries in any case. After all, they have the greatest investment incentive of all, that is, a very much more rapidly growing economy. In addition to that great incentive, they are introducing a grant system. What estimate have the Government made of the effect on investment in British industry, on the competitiveness of our industry as against European industry, which will follow from their decision to introduce tax allowances here when grants are being increasingly used in Europe?

My last question, the hon. Gentleman will be pleased to hear, is one which I am sure will be of importance in future, and it is on a subject which may interest the Public Accounts Committee in the future more than it has in the past in considering tax allowances or the investment allowances which used to exist. It is known that under the investment grant system various abuses were detected which had to be corrected. But certain of these abuses can arise equally under the tax allowance system. For example, there was the abuse of buying a machine in a development area and moving it out, yet claiming the higher rate of grant. That is an abuse which is equally possible under this system.

10.15 p.m.

There was the abuse of people buying ships abroad, without any benefit accruing to the British balance of payments, and getting grants for them. That abuse was dealt with, at any rate in part, by the Industrial Development (Ships) Act passed in the last Session of the previous Parliament.

I believe that a similar problem can arise under this system, admittedly to a slightly less serious degree, because one can only set off a tax allowance against profits. A similar problem might arise of allowances being allowed in cases where ships were being bought and operated in a way which was not beneficial, indeed which might be harmful, to the British balance of payments.

What are the Government doing in this system to prevent that from happening? There is nothing in the Bill to assist me to answer that question.

Mr. Bruce-Gardyne

Was not the greatest abuse of all under the investment grant system the position whereby a company could make a proposal for an investment grant without there being the remotest chance of the investment having a viable future and the Ministry of Technology, as it then was, having no choice: the Ministry was under a direct obligation to make grant if the investment qualified? The right hon. Gentleman must know, as I do, of cases in which the most unviable investments were proposed and obtained grants. This at least is an abuse which is abolished by this system, which is profit-related.

Mr. Dell

The hon. Gentleman obviously has cases in mind and I will leave him to list them. I will come to that argument, because I had it in mind to make some reference to it.

The tax allowance system has been introduced because the Conservative Party was of the opinion immediately the grant system was introduced that it was a bad system, and the Conservatives opposed that system from the beginning.

The system of investment grants is not bad in Europe. Evidently it is not bad in the eyes of the European Commission, if there is to be an investment incentive system. It is not bad in Northern Ireland, although hon. Members from Northern Ireland voted against the investment grant system when we debated it recently, presumably on the basis that the greater the advantages Northern Ireland can have compared with the rest of the United Kingdom, the better.

The system of investment grants certainly would not be bad in Scotland, Wales, northern England and Merseyside, if these development areas had in this respect the good fortune to have their own governments. Any Government of a development area which had any sense would introduce an investment grant system to encourage investment. Northern Ireland has done it, just as it is being done in Europe.

Despite all this, an investment grant system is apparently bad in Great Britain. It is good everywhere else but bad in Great Britain. Everywhere else, apparently, an investment grant system produces good quality investment, otherwise it would not be used, but in Great Britain it will produce bad quality investment.

Here we come to the subtle change in argument of which the hon. Member for South Angus has given us an example. When we discussed the decision to abolish the investment grant system when the announcement was made last October, we were told that the system was being abolished because it had not been effective. The system was supposed to be ineffective; it had not had the expected effect on the level of investment. Now we see, after 11 months of Conservative Government, after all the steps which have been taken by the Chancellor of the Exchequer to reflate the economy, a fall in investment intentions.

If ever there were an indication of how effective the investment grants system was, it is the fact that now we are having a fall in the level of investment intentions, despite the fact that the Chancellor has been able to take his budgetary measures whereas when my right hon. Friend the Member for Birmingham, Stechford (Mr. Roy Jenkins) was having to control home demand to transfer resources into the balance of payments, with the help of an investment grant system, we succeeded in maintaining investment in Britain. Therefore, the argument has changed. It is no longer that the system was ineffective, but that it was too effective, that it produced results that were too capital-intensive, and perhaps even destroyed jobs in the process, that it produced too much investment, some of it of doubtful value.

Mr. Bruce-Gardyne

What did Jeremy Bray say?

Mr. Dell

My friend Jeremy Bray never argued that the investment incentive system was ineffective. He said that it was too effective on behalf of capital-intensive industries. I happen to disagree. These are the arguments the Government are now producing, because they can no longer maintain the argument that the investment grant system was ineffective. They are no better than the old arguments.

As to capital intensiveness, if the tax allowance system has any influence, it is on capital-intensive industries, particularly in development areas, where free depreciation is granted. Surely, the object of that type of incentive is to assist capital-intensive industries? The C.B.I., arguing in favour of investment incentives, instead of a cut in company taxation, which is presumably the alternative, stated that the object of investment incentives is to encourage capital-intensive investment. Capital-intensive industry is more mobile, and consequently is more easily moved to development areas. But whereas we, while having a system with the effect of encouraging capital-intensive industries, also had regional employment premium, the Government are abolishing it and so doing away with its effect as a labour subsidy in encouraging different sorts of investment.

There is also the argument that the system produces too much investment, some of which is of doubtful value. That does not appear to be the attitude of the Chemical Industries Association, which said in its recent report that there has been a serious fall in the level of chemical industry investment in this country, partly as a result of the withdrawal of investment grants.

The shipping industry was expanded as a result of investment grants. The Chamber of Shipping has made perfectly clear how beneficial the investment grant system has been to that industry and how serious has been the effect of the Government's breach of promise in having no transitional arrangements in introducing their system. Paragraph 10 of its brief, which the Chamber has no doubt sent to other hon. Members, says: The Government's Election Manifesto in referring to substitution of tax allowances for grants said: 'These changes will be subject to transitional arrangements and will not in any way be retrospective. Special assistance for particular industries like shipping will be continued'. The Chamber's argument is that the change is retrospective to the extent of some £8 millions worth of investment grant. The Chamber is accusing the Government of a gross breach of faith in breaching their election manifesto by not having any transitional arrangements and denying the shipping industry £8 million worth of investment grants.

It is not the investment grant system but the tax allowance system that is the bad system, as is increasingly realised, for example, in Europe.

May I point out that the Under-Secretary of State for Trade and Industry (Mr. Anthony Grant) is fond of saying that even in the development areas, where free depreciation is granted, the effect will at best be marginal, that the main influence on those areas, as on the rest of the country, is the general level of economic activity. One of the troubles with the system is that its influence is so marginal as to be barely detectable, even in development areas, to whose problems I will come shortly.

On 12th May, the hon. Member for the Cities of London and Westminster (Mr. Tugendhat) said: The real difficulty for a country such as ours, which has had such a poor growth record over many years, is to set the virtuous circle going."—[OFFICIAL REPORT. 12th May, 1971; Vol. 817, c. 432.] He meant by "virtuous circle" high growth producing high investment. I entirely agree with him that that is the problem. I believe that investment grants, the introduction of an effective system of investment incentives plus expanding demand such as we would have been having now, if the Labour Government had been returned, could have helped us into that virtuous circle. Tax allowances are having little effect on investment intentions, as a Financial Times survey recently showed.

Hon. Members opposite have repeated many times how the proportion of national income constituted by profits has fallen over the years. Yet precisely at this moment the Government introduce a system whose influence, if any, depends on the level of profits. The effect has been disastrous on the level of investment—for example, in the machine tool industry—just at the moment at which they have introduced the system. Surely it could have been forecast, whatever the merits or otherwise of an investment incentive system of this type, that its introduction at this moment must have a deleterious effect on the level of investment. There was no other possibility if investment incentive systems have any influence at all. One can only suppose that the Government intended the results which have taken place.

Another reason why the tax allowance system is thoroughly bad is that it is a device which weakens competition—and I suspect that this is one of the reasons why the European Commission does not think much of it. It weakens the weak and strengthens the strong. It weakens new firms in their battles with established firms. A policy of competition should aim not to discriminate against the weak in their battle with the strong. If it does, it weakens competitive forces. It has weakened certain industries in their international competitive battle—for example, shipbuilding, which faces subsidised competition throughout the world and is now deprived not merely of the sort of assistance given as a result of the Geddes Report, but even of investment incentives also, because the industry has a low level of profitability.

The shipbuilding industry in Great Britain has been weakened in competition with Harland & Wolff, which had the advantage of investment grants in Northern Ireland. It weakens the shipping industry in international competition. The Rochdale Report argued against investment grants for the shipping industry, but it said that an adequate and equivalent level of support should be granted. In fact, a reduced level of support for the shipping industry has been granted and this is weakening it in its international competitive efforts.

But the main reason why tax allowances are a thoroughly bad system is that they are disastrously inadequate in development areas. Indeed, the reduction in the number of inquiries regarding development in development areas and the increase in unemployment in those areas is a major responsibility of this change. The Secretary of State for Trade and Industry made a personal statement to the House on 10th May. He informed us that he had made, in good faith—and we accept that—a mis-statement to the House about the number of inquiries by industrialists about investment in the assisted areas. He originally gave the figure of 538, which was not correct. He said that the correct figure for the number of enquiries by industrialists during the first quarter of 1970 was, in fact, 2,400, and that the number had declined to 1,083 during the first quarter of 1971 rather than increased as he had originally suggested. That decline is, I believe, to a substantial degree a result of the abolition of investment grants and the introduction of this system.

10.30 p.m.

To a certain extent the Government were forced to face up to the fact because hardly had they introduced the tax allowance system than they had to engage in the mass creation of special development areas, far more widely than had been done by the previous Government. They even had the cheek to take credit for this although the level of assistance to development areas, even with special development area status, is much lower than it was in ordinary development areas under the previous system.

Curiously enough, the form of assistance given to development areas which have this privilege of being created special development areas is grants, not allowances. Even this Government occasionally have to face facts and to realise that the effective way of dealing with the problem of employment and the creation of employment in development areas is by grants. Even they have had to admit that the changeover and the way they made it in October, 1970, was a mistake. They had to introduce the supplementary assistance shortly afterwards.

They claimed in doing this that the differential was maintained, that is the differential between the assistance given in development areas and assistance given in the rest of the country. I have previously argued that the claim that the differential was maintained was misleading and meaningless. It is misleading because it is a statement about the cash flow to firms which may have investments in development areas, but which may use the money to invest anywhere in the country. It is a statement about investment grants paid to firms in respect of investments made before 27th October, 1970. It is completely meaningless as it providse no measure of the current incentives in development areas.

I question even the statement that the differential has not been reduced. I think it has been. It is not only the differential that matters. What also matters in development areas is the total level of assistance. I asked the Government what, under the new system, will be the total level of assistance. They have been unable to give a reply. I wrote a letter to Treasury Ministers asking for the total level of assistance which will go to the development areas under the new system. I received a reply from the Minister of State, Treasury who said that he could not give me the information.

I may say that when Ministers are dealing with particular areas they say that the level of assistance is being maintained. When they talk about Northern England they say that the level of assistance is being maintained and when the Secretary of State for Scotland talks about Scotland he says the same thing. Yet when we ask the Government for figures to show that the level of assistance is being maintained they are unable to give any. The Minister of State said that he had two reasons for not giving me this information. He said: First, it is impracticable to give a total figure for the benefit to the development areas under the new system. However that does not prevent the Secretary of State for Scotland from making a statement about Scotland, although to make such a statement is "impracticable".

Mr. Dalyell

Is it not a fact that the level of assistance has greatly fallen and that is why we hear tonight that Plessey's at Alexandria is closing, making 400 men unemployed and shutting a modern machine shop?

Mr. Dell

Of course the level of assistance is falling and when Ministers talk about the level of assistance being maintained they are totally wrong and these claims should not be made. The authority for that statement is what the Treasury has told me—that it is "impracticable". Ministers who come to the House and make statements of this sort, in face of which the Treasury says in this letter to me, are grossly misleading the House. The Minister of State gave a second reason for his inability to tell me the level of assistance to development areas under the new system: Secondly, discussion of incentives in the context of regional policy normally centres on the value of the differential arrangements. The extent to which the development areas get benefits which are not available elsewhere is the only meaningful basis for measuring the aid which is given to them. That statement is nonsense. The level of aid, as well as the differential, is important. What we discovered in regional development is that, unless there is a sufficient scale of inducement to industry—not just a differential—we will not get firms to go to the trouble of expanding and going into development districts to achieve their expansion. I will repeat that from its original source. It was said by the right hon. Member for Bexley (Mr. Heath): What we discovered in regional development is that unless there is a sufficient scale of inducement to industry, not just a differential, we will not get firms to go to the trouble of expanding and going into the development districts to achieve their expansion."—[OFFICIAL REPORT, 10th May, 1965; Vol. 712, c. 76.] The Minister of State and current Treasury policy are in direct contradiction to what the right hon. Member for Bexley was saying from this side of the House when he in his turn, during the debates on the 1965 Finance Bill, was arguing in favour of an effective investment incentive system for the benefit of the development areas. He said that what was important was the level; not just the differential. We said—and we acted on it—that what was important was the level and not just the differential. The Government today are saying that what is important is simply the differential, but they have not even maintained the differential. Surely the Prime Minister does not change his mind simply because he won an election and finds it necessary to use this method to cut public expenditure.

There is one way in which he could make up the level of assistance. It is the way used by the right hon. Member for Barnet (Mr. Maudling) when he was Chancellor of the Exchequer. He could add on investment grants to the system of free depreciation which he introduced. At 5 per cent. or 10 per cent. that would cost £32 million or £64 million. That would help to reintroduce an effective system of incentive for development areas.

In discussing this Clause we are trying to recall to the Prime Minister the views which he expressed on that occasion, and to persuade the Government that, if assistance to development areas is to be effective, they must supplement free depreciation far more realistically than they have done. If the Government want investment in this country to increase, as is necessary, they must have an effective system of investment incentives and not this completely worthless system which they have introduced.

Mr. Tugendhat

I apologise to the House, because I realise the hour is late, but I have only one brief point to make. I support the Clause but I would ask the Chief Secretary and the Department of Trade and Industry to think again about the position of companies in connection with the cut-off on 27th October.

A number of companies which were induced to go into development areas by the last Government have now found that they have suffered grievous financial loss. I have one in my constituency which fears for its future. These companies have been misled to the extent that they went in under one set of circumstances and now find themselves operating under another. If it were possible to reconsider the transitional arrangements which will cover their position, this would make a great deal of difference to a number of very small but important companies.

Mr. John Horam (Gateshead, West)

The basic principle behind this change on investment allowances is that they should be profit-related. That simply means that a company obtains only the maximum amount of aid available if it is making good or reasonable profits. In my view that is wrong. It will mean that investment is not undertaken which, in the light of a full consideration, might be considered to be wasteful. It equally means that some investment which will be extremely useful, and indeed significantly important to a strong British competitive position and to a full rate of economic growth, will not now take place. That will be the case if the company making the investment is not necessarily a particularly high performer and does not expect to make a great deal of profit from the investment project it has undertaken.

Rather than theorise about the matter, since a great deal of intellectual and ideological to-ing and fro-ing has taken place, I want to quote two or three hard industrial examples. The first is the textile industry, which is not by any stroke of the imagination a high profit industry, and in particular that area of the textile industry in Lancashire and Yorkshire.

In the textile industry there are a large number of small family companies operating old machinery in old plants. They cannot make very much profit and in fact do not do so, but they carry on in business because they depreciated their machinery years ago and can churn out standard stuff at a relatively low price. The net result is that they retard the progress of the more progressive companies which, inevitably, are forced to compete on price. They maintain in existence old and out-of-date workshops which are bad places for people to work in. Thirdly, they harm our export performance because they have not the money to put out a modern marketing effort. Governments of all descriptions have tried to do something about the situation in the textile industry. There have been a long series of efforts, both by Government on the one hand and by private companies on the other, to buy these companies out of existence. The net result of this situation is that the industry is forced into a low-profit situation.

A third effort was tried to remedy the situation. Courtaulds came along and using the investment grant system of the Labour Government and the grants available in the development areas set up modern machinery, worked it round the clock, and were therefore able to produce a situation which clears out some of these old redundant companies. This would not have been possible but for the existence of the investment grant system, and will not be possible once the grant system disappears. This is an example of how in a low-profit industry it is important to get some investment into an industry to improve our total competitive situation.

Let me take another example, the high technology industry. It has been proved again and again that the fastest growing areas in industry are often precisely those which have a high degree of technical concentration. A "Little Neddy" report showed that one of the reasons that Britain's export performance has been poor is that we are poorly represented in these particular areas of technological sophistication. Obviously it follows that a high degree of new technology can come only from a high level of investment; yet it is precisely these industries which have very considerable profit problems. We have seen this in the spectacular example of Rolls-Royce. Does it make sense, therefore, to relate investment aid exclusively to profits? Clearly in this case, which is an extremely important one, it is the reverse of what is sensible.

10.45 p.m.

My third example is that of the foreign company investing in this country. This sort of investment is extremely important to us. If we go into the Common Market, it will become even more important. It is particularly important in development areas. Roughly one-third of the total new investment going into the development areas has come from foreign companies. Very often, they have little or no taxable income in this country. Therefore, they will not have the same incentive to invest here as they had under the old system. That is one of the reasons why Northern Ireland chose to stick with the old system, despite the fact that hon. Members opposite representing Northern Ireland constituencies voted for the abolition of the investment grant system in this country.

Those examples show that the exclusive pursuit of the god of profit does not necessarily maximise growth. To do this, account has to be taken of far wider strategic and planning considerations. Apparently, this proposition is not recognised by the Government, but, curiously enough, it is recognised by industry. To illustrate that, perhaps I might read some remarks of the hon. Member for Cities of London and Westminster (Mr. Tugendhat), to whose veracity and honesty I can testify, since he is my "pair".

Speaking on our second day's consideration of the Bill, the hon. Gentleman said: I find myself in some disagreement with those hon. Members, some on this side and some opposite, who have suggested that the most important reason why companies invest is the prospect of earning profits. For the very large companies"— this is the important point— numerous surveys conducted on the subject show that the most important single reason out of many is the prospect of increasing sales, the prospect of increasing market share, and the desire to hold market share. I agree. So did the Chief Secretary. Replying to the debate, he said: My hon. Friend the Member for the Cities of London and Westminster … pointed out, reasonably, that in larger companies the seeking of profit was probably a secondary motive to the seeking of a larger share of the market in order to widen their capacity to sell and increase the opportunity for increasing turnover."—[OFICIAL REPORT, 12th May, 1971; Vol. 817, c. 432 and 450.] That is precisely the point. It is even more important when one considers how essential to economic growth are these large international corporations.

Having referred to my "pair", I might perhaps tell hon. Members that he is bringing out a book on the subject. I hope that it will ram home the point even more.

In order to maximise growth, it is wrong exclusively to go for maximised profits. Wider considerations have to be introduced. Only the Government can introduce those wider considerations. The whole paraphernalia of aid introduced by the last Administration, the Industrial Reorganisation Corporation, the creation of the Ministry of Technology, in addition to investment grants, was the result of this central perception.

It is curious to reflect that it is now the Labour Party which is the party of big business, in the sense that it does not exactly get subscriptions from big business and we do not share its philosophies. But the Labour Party appears to understand the needs of big business far more than the party opposite, which, by contrast, seems to be typically concerned with the condition of the small company. This is not surprising, because the small company was typical of the type of company in the nineteenth century from which flow some of their economic ideas. But the world has changed. It is now the I.B.M.s and the General Motors of this world which count. Until the Government recognise that, we shall head in the wrong direction.

Mr. Dalyell

I should like to echo briefly the question put by my right hon. Friend the Member for Birkenhead (Mr. Dell), which was extremely important to the development areas; namely, whether the Clause does not amount to some kind of bias against the service industries in the development areas. I hope that this question will be answered.

There is a matter of even greater moment. I do not apologise for beating the local development area drum. A problem of considerable seriousness has hit Scotland tonight: the announcement of the closure of the Plessey works at Alexandria. I can speak a good deal more freely on this matter, because it does not affect any of my constituents and, therefore, I might be thought to be more objective about it.

Without launching into any attack before all the facts are known, I think that it might be interesting to have some kind of study as to why this decision was made and whether it was in any way related to the development area and, indeed, the financial policy about which we are talking.

There is wide feeling in the electronics industry at the moment that the taking away of investment grants is a serious blow to a nascent industry. Part of my business, as hon. Members know, working for the New Scientist, is to go round this industry and talk to the people engaged in it.

Rifht hon. and hon. Gentleman opposite do not need me to tell them about the situation in which the electronics industry finds itself. Only 18 months ago, under the Labour Government, serious commentators could with some truth describe the central belt of Scotland as a second California. The situation today is very different. It is certainly no laughing matter for the Under-Secretary of State for Trade and Industry, because his Department will have to explain to large numbers of young people, who are trained but unemployed for the first time, how their policies have helped to bring that situation about.

I hope that in the examination which will undoubtedly take place regarding the closure of this factory and other developments within this group there will be an honest look at the extent to which Government policies have contributed to these unhappy events.

In a situation where 8, 9, 10 and 10-plus per cent. of the working population are unemployed, it is time to ask questions. The Under-Secretary of State for Development, Scottish Office, has just come into the Chamber. I should tell him that the subject about which I am talking is the closure of the Plessey factory at Alexandria and the extent to which it can be directly attributed to the policies of the Government. I realise that it is premature, but I should welcome any comment which can be made about this matter. I ask the Scottish Office, the Department of Trade and Industry and the Treasury to have a frank examination of how it is that closures in development areas are taking place at an unprecedented rate—it never happened before—and to what extent these can be attributed to Government policy.

I have always taken the view that politicians would do themselves great credit if from time to time they admitted that they were wrong. I should like a frank admission from the Government that perhaps they made a mistake—we can all make mistakes—in their policy on investment grants and that it ought not to apply to certain areas—for example, Gateshead, the North of England and areas in the West of England. I do not put this simply in terms of Scotland.

This is a great blow to our growing electronics industry at this stage in its development. I have never asked, nor have my hon. Friends, for help for all time. All we are saying is that at this stage, in the circumstances, when a modern company engaged in a modern industry is driven to close a modern works, we must think pretty hard. I hope that the Secretary of State for Scotland in the Cabinet and all those with responsibility in the Cabinet and in the Public Expenditure Sub-Committee of the Cabinet will argue this point. My hon. Friends and I will neither laugh nor jeer if the Government have the courage to change their mind on these matters.

Mr. Maurice Macmillan

As the hon. Member for West Lothian (Mr. Dalyell) suggested, it is perhaps a little premature for me to give any detailed explanation of the closure of Plessey's, but in case he thinks that it is relevant, I have been informed that the firm's judgment of the reasons is that it was exclusively due to cost inflation.

My hon. Friend the Member for the Cities of London and Westminster (Mr. Tugendhat) raised a point which I can answer only in a negative way. Perhaps he would transfer his attention to the Committee stage of the Investment and Building Grants Bill, which begins tomorrow.

The whole of this debate has been repetitive. The change from investment grants to tax allowances was debated in October when the Chancellor announced it, on Second Reading of the Investment and Building Grants Bill on 5th May, on the Budget, on the Finance Bill and on a good many Adjournment Motions. So I do not propose to go over the arguments in detail. But the attacks of the Labour Party on the effectiveness of these allowances in dealing with unemployment and comparing it with the effectiveness of investment grants is almost impertinent, considering that unemployment nearly doubled during their period of office and that four years of stagnation led investment grants to be described so clearly by Dr. Bray as not working.

We are changing it now to encourage profitable investment, which is the only way of getting industry going again successfully. What hon. Members opposite were demanding was not so much investment incentives as straightforward subsidies to enable industries which were either incompetent or insufficiently able to attract investment—either equity or loan—to carry on.

There is a case for Government aid to some forms of high technology, as we have seen in the system of launching aid for aircraft. But no one would suggest that this is an argument for such aid for all forms of investment in the industrial spectrum. The previous Government committed large sums to what in effect were substitutes for both capital and labour. The right hon. Member for Birkenhead (Mr. Dell) said that we should make up our minds whether these were too effective or ineffective. The answer is that they did not achieve results commensurate with the expenditure on them, and this is particularly true of the high rate of investment grants in development areas, which did not seem to us to bring the effect on employment which they:,et out to do.

11.0 p.m.

The new mixture of measures, with their greater emphasis on allowances related to profitability, and assistance under the Local Employment Acts, related to job creation, will give better value for money. Apart from the change from investment grants to capital allowances, we have introduced important measures to help the regions, including building grants, operational grants and additional assistance area coverage. This very much reinforces what my right hon. Friend the Prime Minister has been quoted as saying about the effective range and scope of allowances being directed to the development areas.

The arguments about investment grants versus capital allowances have been adduced frequently enough. They were set out in the first three paragraphs of Cmnd. 4516. The first factor against investment grants was their high cost in relation to their effectiveness. The grants went to firms whether or not they were effective and making a profit, and that could lead, and, in fact, led, to uneconomic investment and a waste of resources. There was also discrimination against service industries.

This brings me to the questions asked by the right hon. Member for Birkenhead, who began by taking the astonishing course of accusing our new arrangements of discriminating against service industries. These new tax allowances remove the distinction which existed nationally under the investment grants system against service industries. Incidentally, the Committee should not forget that we have halved S.E.T., on the way to removing it. The new system gives an additional incentive to manufacturing industry in development areas. This is a 100 per cent. free depreciation allowance which cannot possibly be described as discriminating against services.

Mr. Dell

Manufacturing industry in the development areas gets a 100 per cent. tax allowance while service industries get only 60 per cent. This discrimination—

Mr. Macmillan

The Labour Government gave nothing.

Mr. Dell

I appreciate what the hon. Gentleman is saying. I am merely asking why, as manufacturing gets 100 per cent. and services get 60 per cent., this discrimination against service industries exists?

Mr. Macmillan

I find it odd for the right hon. Gentleman to be accusing us of doing something less than we are doing in another respect when his Government did nothing at all. This is not discriminating against service industries. We have removed the discrimination nationally and given an additional incentive—[Interruption.] The right hon. Gentleman may not like it, but he did nothing.

The right hon. Gentleman asked about the provision of information and statistics under the new system. The Revenue is not able to publish statistics about tax allowances given in the development areas because many firms operate in both development areas and elsewhere. In preparing their accounts for tax purposes they are not required to separate out the allowances which arise in different localities.

I suppose that we could consider forcing people to provide this information, but I am against adding to the administrative burdens on industry. However, statistics relating to tax allowances generally are published in the National Income Blue Book and Inland Revenue statistics.

The right hon. Member for Birkenhead then questioned me about the E.E.C. He mentioned a contrast between the arrangements obtaining in the European Economic Community and those of the United Kingdom. There is a continuing discussion within the E.E.C. about the nature of regional investment incentives. Some members of the Community make use of grants, some do not. The Community has made no decision in favour of grants and against tax allowances, and the discussion within the E.E.C. on this subject does not affect the Government's decision in favour of tax allowances, which in the circumstances are right for this country.

The right hon. Gentleman said that Northern Ireland has not introduced tax allowances as Europe is not doing so. Europe has not yet decided. Northern Ireland has always been a law unto itself and a special case. Northern Ireland had always had grants under the previous system of investment allowances, and we decided to comply with precedent and not to make it revert; in other words, to allow it to continue as it had for some time.

The final question was about abuses. Under the investment grant scheme it was necessary to take action to prevent the benefit of the subsidy—the grant or subsidy, whatever one calls it—from being exported to foreign shipowners, in the example of the right hon. Gentleman, through subsidiaries set up here which qualified for grant. Clearly it is not possible for them to do that with a tax allowance. It was a system by which a subsidiary was set up and the subsidy was paid to the subsidiary and went through to the foreign shipowner, although it was not used for the purposes for which it was paid. However, under the tax allowance system, to benefit from tax allowances there has to be a continuing profit coming forward in this country—not elsewhere—against which the allowances can be set. Also, the other condition is that allowances do not exceed the cost of a ship. Therefore, there is no element of subsidy, and this again is an additional safeguard.

The other side of the question was that of assets being moved out of development areas.

Mr. Dell

This is not merely a question of subsidiaries being set up in this country for the deliberate purpose of exploiting the investment grant system. These can be companies, perhaps foreign owned, operating here and making profits here against which tax allowances can be set but using those allowances, and the free depreciation they might gain, to build ships abroad which bring no benefit to the British balance of payments. What protection will there be against that circumstance?

Mr. Macmillan

The right hon. Gentleman is still thinking in terms of grants. With the allowances given there is nothing to export. There have to be profits against which the allowances can be set, and those allowances have to relate to expenditure which can be identified. There is no problem there. Perhaps we could discuss this in more detail at a later stage. We should discuss the whole question of assets moved out of development areas. This is dealt with in Clause 32(4), and perhaps we can leave this matter until we reach that Clause.

The hour is a little later than when we expected, perhaps, to reach this point of the debate, and I have tried to answer the specific questions. I am grateful to the right hon. Gentleman for putting them early, which made it a great deal easier for me to oheck that as far as possible I was getting my facts right and not in any way misleading him.

Having once more gone briefly through the arguments, I commend to the Committee the system of investment allowances which this Clause will introduce into the Bill. Although this is rather off the point of the Clause, I would say that the Government are fully aware of the long-standing problem of the development areas and of the older industrial areas. It is a very deep rooted problem requiring a long-term effort. If time shows that there is a need to look again at the adequacy and effectiveness of the new measures, we shall be prepared to do so.

In addition, although admittedly this is rather wide of the real question, we seek constantly to lay greater emphasis in our programmes on what is now known as the infrastructure and the environmental side, to making some of the more unattractive areas more attractive to live in and work in, although this is not the immediate problem.

All that I can do is to commend the Clause to the Committee and express the hope that hon. Members will not find it necessary to divide against it.

Mr. Duffy

I will not detain the Committee for long, merely because, as the Chief Secretary has reminded us, there have been several debates on the question of investment grants versus investment allowances since the announcement last October of the impending change.

It is inevitable that some hon. Members should want to take this opportunity in the main debate on the Clause to examine the matter again. It must be plain to some hon. Members, in view of what the Chief Secretary has said, that the case against investment grants has not yet been made out. The Chief Secretary cannot easily wave away the news that my hon. Friend the Member for West Lothian (Mr. Dalyell) gave the Committee tonight, on grounds of cost inflation—not at this early stage. There is a real disquiet on the part of many hon. Members that the continued rise in unemployment will call for much more drastic measures than any that have been introduced so far.

Mr. Macmillan

I should not like in any way to deceive the Committee. It was not my judgment of what the cause at Plessey was. It was that of the firm. The judgment of firms about the effectiveness or otherwise of investment allowances has been quoted. If we are to believe firms which say that they have been discouraged by the present system, we must also believe firms which say tha' it is not the present system but cost inflation which has caused the trouble.

Mr. Duffy

I am surprised that the Chief Secretary should have proffered that explanation quite so easily and in such a facile fashion and at such an early stage. It is not possible that a considered judgment could yet have been arrived at. It is not possible for us yet to reach a considered judgment on the question of investment grants versus investment allowances. I want now to look again at both sides of the argument and advance a new argument to justify the time I am taking up.

Given the escalation in the amount of public money which was being paid out in investment grants from 1967–68 down to the current year, involving a rise from £315 million to the current level of £600 million, it was inevitable that people should ask whether we were getting value for money. It must also be remembered that only six years ago evidence was mounting that financial managers were incapable of including in an investment appraisal incentives in the form of depreciation allowances. This seemed to be borne out by the now famous Richardson N.E.D.C. Report on the machine tool industry.

We all recall the arguments that were advanced in favour of the change. It was said that the grant system was something tangible for the business man and would have a repeating effect on investment, whereas allowances had an effect on investment which was easily obscured by bookkeeping entries; secondly, they could not possibly satisfy the urgent needs of recent years for corporate liquidity; thirdly, a high rate of depreciation was called for to maintain the financial attractiveness of the project to compensate for reductions in the rate at which tax was being relieved; and, finally, that this kind of funding prior to 1966 could be used for other purposes, such as window dressing.

11.15 p.m.

To what extent have these objections of only five years ago been removed? Is there any reason to suppose that British management understands the impact of initial and annual allowances better now than when they were originally introduced?

I recall, as the Chief Secretary did, the major arguments put forward in Cmnd. 4516, and especially the three reasons given in paragraph 2 following the statement: In the Government's view the investment grants scheme has involved a high public expenditure cost without achieving its objectives. Moreover it has serious specific disadvantages. The first argument was this: Investment grants benefit firms whether or not they are making profits and they can therefore result in uneconomic investment leading to waste of resources. My reply to that contention is that it is not existing investment and its profitability but incentive to undertake new investment which matters. What of the stimulus to get out of loss-making positions? There is no evidence that past profitability is positively correlated with future profitability. Therefore, I do not accept that first contention.

What of the second contention, which is: The scheme discriminates unjustifiably against the service industries which make an important contribution to economic growth and to the balance of payments. This statement is equally misleading, and I hope that the Committee will not easily accept it without subjecting it to the greatest scrutiny. It is not the cash grant system which discriminates, but the way in which its provisions were selectively applied. These discriminatory elements could have been removed from the system prior to last October and the cash grants, if need be, retained. Therefore, this is not an argument against cash grants.

The third contention is: The discriminatory nature of the scheme and the detailed information required to support claims for grants have imposed a considerable administrative burden and cost on industry. Moreover, administration of the scheme by Government requires a staff of about 1,000 at an annual cost of over £2 million. Does the Chief Secretary wish us to accept that there is no way of easing or simplifying this administrative burden, that there were no administrative measures which could have been introduced, that a transfer could not have been effected from the Department of Trade and Industry to the Inland Revenue, or that this could not have been treated as a negative tax?

The final sentence of paragraph 10 of Cmnd. 4516 which deals with development areas reads: The cost of the regional differential in this form has been unduly high in relation to the benefit provided. I am sorry that I did not get the chance to speak before the Chief Secretary because I wanted to ask him what his evidence is to support this contention.

Mr. John Wilkinson (Bradford, West)

I want in a few curt, brief sentences—[HON. MEMBERS: "Hear, hear."]—which have been inspired by the interventions of the hon. Members for Gateshead, West (Mr. Horam) and Sheffield, Attercliffe (Mr. Duffy), to say a few blunt things about investment allowances as opposed to grants and the regional incentives which we as a Government are introducing relevant to this Clause.

The hon. Member for Gateshead, West, in his delightful academic way, said that growth was not profit-related. That sort of statement would go down pretty hard in Bradford, where we earned more Queen's Awards for Industry this year than any city in the United Kingdom except London, without a single incentive except the incentive of profit. We are not an intermediate area nor a development area.

The hon. Gentleman also said that it was a jolly good thing that textile concerns should be lured away from the traditional areas to the far reaches of the kingdom, such as Barrow-in-Furness, where Listers in my constituency was lured, and the North-East, where Courtaulds has expanded. This is not a healthy thing. Unemployment among the male work force in my city is now 5.4 per cent. In my city, where we have traditionally earned good profits, we welcome the greatly reduced differential in regional incentive that my hon. Friend the former Member for Halifax, the Chief Secretary, is introducing.

It is not healthy to lure an industry that has been based in a particular area for very good reasons, whore the infrastructure and the training and development of the work force has been such that it is carried on exceedingly efficiently, to more remote parts of the kingdom just because of the grossly over-exaggerated differential preferences in the development areas. I welcome the Clause for that reason.

Until I heard the hon. Member for Gateshead, West I had not heard such nonsense as when the hon. Member for West Lothian (Mr. Dalyell) talked about the high-technology industries. He said that they should not be profit-related. What utter rubbish, a few weeks after the collapse of Rolls-Royce! That sort of thing said by Labour hon. Members is something they should put far down their pipes and smoke.

Mr. Taverne

The hon. Member for Bradford, West (Mr. Wilkinson) has welcomed the fact that there are now reduced differentials in the development areas. The Front Bench he seeks to support has stoutly maintained that, taking into account all the different measures, the differential has not been reduced. In future he should acquaint himself rather more with the Front Bench position he is seeking to support.

The debate has centred around the other side of the coin from the debate on the abolition of investment grants a fortnight ago. Neither then nor now have many of the detailed points from this side been adequately answered.

My first point relates to the need for stability. There have been several changes in the past in investment incentives. While we could not be entirely free from blame, there is no doubt that businessmen found it difficult to plan far ahead. This was recognised by the previous Government, which is why the regional employment premium was announced for a period of seven years. It had to exist for a period to have its full effect. Its abolition has been one of the reasons why the picture in the regions is so much worse than it was.

Now a further change has been introduced. The result has been brought home to everyone by the dismal picture of investment intentions, as was shown in the last Financial Times survey. In the few days that followed the Budget there was an upturn in the expectations of future investment. The expectations for the four-month moving average were optimistic after the Budget. Now, however, the four-month moving average has turned downward pretty sharply. The drop must have been quite serious to lead to that downward trend. If we enter the Common Market, it is extremely likely that we shall have to change back yet again.

In their arguments on corporation tax, hon. Members opposite dismiss the views of the Commission and the support shown by the report of Professor van den Tempel, because they say "Look at the balance of power in the Common Market" The "big boys", France and Germany, have systems incompatible with van den Tempel, but five out of six Community members go for grants rather than allowances. Therefore, if we join the Common Market it means that the whole of the investment scheme will have to be overhauled once again. This would have a disastrous effect on investment and is a monstrous way to proceed.

The Chief Secretary challenged what had been done before and said that it did not achieve results in relation to the amount involved. Measures which at the time are regarded to be of limited effectiveness often prove to be successful after they have come to an end. This was found to be the case with the import surcharge. We have to admit that when the statutory incomes policy came to an end and was phased out, this was a factor which led, before the transition to the voluntary incomes policy, to an increase in wage claims. Exactly the same is happening with investment grants. We see a rapid worsening of the employment situation in the regions, a rapid worsening of investment intentions, and if it had not been for regional incentives the position would have been very much worse.

The whole of the philosophy behind the tax allowance approach is essentially the same as the "lame ducks" philosophy espoused by hon. Members opposite. It is a basic philosophy that those who go to the wall are necessarily the least worthy. This is not the case. This is why Europe has turned in favour of the idea of competition, in favour of those who can provide something new and giving them the same advantage as those who are already established.

Mr. Peter Rees (Dover)

Would the hon. and learned Gentleman explain why his Government, along with a system of investment grants, perpetuated a system of capital allowances?

11.30 p.m.

Mr. Taverne

Because the grant system gave the opportunities to a firm to seek to achieve a level of profitability other than that which it had already reached. What it comes to is that the tax allowance system is less advantageous for new expansion. It is less advantageous for expanding firms which have yet to achieve a new level of prosperity. It is less advantageous for the foreign companies which were attracted in particular to the development areas by the incentives given under the grant system. They had the advantage of an immediate cash grant, which benefited them more than tax allowances when it would be some years before their investment would pay off.

It means that new mineral exploitation, for which great opportunities exist, will be nothing like as advantageously placed as under the old system of investment grants. This is a major factor in the future prosperity of certain regions, and it is a major disadvantage which has now been placed in the way of that kind of expansion. We therefore reject the system which this part of the Finance Bill partly represents. That is why we voted against abolition of investment grants a fortnight ago. If the grants have been abolished, then at any rate some sort of allowance ought to exist, and so, while we oppose the whole of the new system, we will not vote against the allowances represented in this part of the Bill.

Question put and agreed to.

Clause 30 ordered to stand part of the Bill.

To report Progress and ask leave to sit again.—[Mr. Maurice Macmillan.]

Committee report Progress; to sit again tomorrow.