HC Deb 02 December 1974 vol 882 cc1132-97

Motion made, and Question proposed. That this House takes note of the consultative document on the Review of the Price Code (Command Paper No. 5779).—[Mrs. Shirley Williams.]

4.18 p.m.

Mr. Timothy Raison (Aylesbury)

I am reluctant to interrupt this inaugural meeting of the Scottish Assembly, but I welcome the fact we are having this debate on the draft Price Code. We were to have had it last week, but it was lost for understandable reasons. The Government have shown signs of reluctance to debate the code in draft, but we welcome the fact that we now have a chance to debate what is by any standards an important document, and to do so before, one assumes, the Secretary of State has finally made up her mind what changes, if any, she will make in the revised code.

I want to start with one or two general points about the background to the document. The Price Code was the creation of the last Conservative Government, but it is vital to stress that the situation today is radically different to that in April 1973, when the code began. That must be the background to everything that we shall discuss. Earnings were then rising by about 8 per cent. to 10 per cent. per year, and the economy was growing at 4 per cent. to 5 per cent.

In those circumstances, growth in volume could to a fair extent offset the productivity deduction, which is a basic part of our code, and its other ingredients. At least it was true that prices were rising faster than earnings. Now earnings are racing ahead, although costs are still rising sharply. Company profits are falling dramatically. If the effect of inflation is excluded by subtracting stock appreciation, profits in the first half of 1974 were 45 per cent. lower than in the first half of 1973, and 35 per cent. lower than in the second half of 1973. In other words, industry faces a serious situation. There is little wonder that it is so gloomy.

We continue to have a tough prices policy. Indeed, part of that policy was intensified in May of this year. Our incomes policy, however, is fast becoming a sick joke. Growth has slowed down considerably, and all the signs are that it will slow down considerably more. Much of industry suffers a desperate shortage of not just of meaningful profits but of the working cash which it needs if it is to survive. That can be shown by the fact that the amount of bank lending to companies increased by a net figure of £2,480 million in the first half of 1974 compared with a net increase of £590 million in the first half of 1973. That is not basically money to invest but money that is needed to survive.

There is an ominous loss of confidence in industry. Anyone who has seen the survey published in this morning's Financial Times will find that fully confirmed. The income side of the equation is particularly serious. Wages have increased by 22.8 per cent. over the past 12 months. The Economist of 23rd November said: It is optimistic to say that wage inflation is now running at only 23 per cent. a year. Although hourly wage rates in October were up 23 per cent. on a year ago they were up an unbelievable 16 per cent. on the last six months. So over the last half year wages have been rising at a compound annual rate of 35 per cent.". I accept that thresholds have had their effect, but they are far from being the major factor in the escalation.

The truth is that new deals are repeatedly being struck above anything that the social contract could allow. They are repeatedly breaking the 12-month rule. Admittedly, the social contract is a little imprecise—it is not always easy to know when it is being broken and when it is not—but, as the Economist argued in the same article, it cannot possibly allow any increase of over 20 per cent. Of 24 major deals listed only five may have been within its terms, and even some of them are doubtful. Moreover, 13 of the 24 agreements break the 12-month rule. Even that situation does not help industrial peace.

Today we see the Post Office workers apparently asking for the third increase in one year. The Price Code is being used by the Government to fill the vacuum caused by the absence of any effective incomes policy. The threatened use of a penalty mechanism through the productivity deduction only highlights the situation. Earnings or wages are racing ahead while industry is starved of the money it needs to survive, quite apart from the funds it needs to invest and to grow.

We hear a great deal of talk from the Government benches about the need to invest. The Government must realise that industry cannot possibly be expected to invest unless there is some hope of making investment worth while. The threat that the present situation poses is becoming clearer the whole time. It will inexorably mean lost jobs. I have seen some figures recently which show what is happening in the food manufacturing industry. We have already seen jammaking plants close, and bakeries have been forced to close. I believe that one has closed in the Prime Minister's constituency. I gather from the food industry that there is a serious degree of planned reduction of numbers of people employed. From September 1974 to April 1975, in terms of redundancy or wastage not replaced, one company is expected to shed 2,500 employees, another company 1,400, another 3,000 and another 1,800. We are beginning to see intense pressure in some parts of industry. It is inevitable at the present rate that unemployment figures will rise rapidly over the next few months.

The problem is not only that of people losing their jobs, although that is serious. Consumers will also suffer. If manufacturers and retailers go out of business, at worst the consumer will not be able to buy any of the things that he or she wants from an accessible shop, and at best choice will increasingly disappear. More and more we are hearing from the retail industry that the ability to keep a full range and choice of stock is becoming increasingly difficult.

We must ask what the Government propose to do. We have seen in the Budget some sign of awareness of what is happening. We have seen the proposed tax changes and the proposed changes in the Price Code. The Government say that they will provide about £1,600 million of relief for industry. Of that sum, apparently £800 million will be used to help the private sector as a result of the changes in the Price Code.

Obviously, in principle that help represents a step in the right direction. It represents a different and more realistic understanding that the sort of line we heard from the Labour Party during the election campaign. The talk then was designed to show that everything was not so bad after all. It was not just the Chancellor of the Exchequer with his 8.4 per cent. For instance, the Secretary of State for Prices and Consumer Protection on 7th October said Meanwhile, there is no evidence at all of price increases stored up in the pipeline. Had the right hon. Lady no inkling at that time that the October RPI figures, which were announced on 10th November, would show a 2 per cent. leap? Had she no idea that that was going on, or was she talking only in election terms?

It seems that the Budget brought some limited injections of honesty into the situation. The question that we must consider is whether the changes in the Price Code are adequate. More and more I wonder whether the code will for long continue to be the right weapon for dealing with the problems now facing us. We are not advocating scrapping the code now. We made that clear during the election campaign. However, the signs are that before long the job of holding down prices will more and more be done through competition. The factor that will slow down prices will be the difficulty that firms will have of finding buyers in the tougher climate which lies ahead. I believe that will be a more effective way of controlling prices than any mechanism that the code can provide. I recognise that so far wage inflation has insulated us from the position that I have described, but if it continues at the present rate what I have prophesied may be proved to be true.

We must recognise that there are other measures which the Government are taking, such as putting up the prices of the products of nationalised industries. That will undoubtedly lead to a tighter situation. We accept that the code will have to remain in being for some time to come. I have some sympathy with those who say that the right way to control prices now might be through profit margins alone rather than the code.

Given that we have the code, will the proposed changes help industry to any adequate extent? It is hard to know the extent to which they will help. It is hard to know exactly what the proposed changes will do to prices. The Undersecretary of State for Prices and Consumer Protection on 25th November said that the Government did not know what effect they will have on investment.

The impression can be gained that the £800 million has been plucked out of the air. The Secretary of State gave no detail to justify it when she spoke during the Budget debate. I am not aware that she has given any detail to justify it since. We know that it does not include the increases due to the nationalised industries.

We are extremely hazy about what the Government expect to happen to nationalised industry prices. The increases which they are being allowed to make are an important part of the Government's economic strategy. Clearly, they could have a significant effect on our economy in many ways. So far the replies that have been given to any questions touching upon this matter have been singularly uninformative. I ask the right hon. Lady to tell us in some detail what she thinks will happen to prices charged by the nationalised industries and what the real basis is for estimating £800 million as the relief to industry that the code will provide? It is clear to me, from having talked with a variety of organisations and firms in the private sector, that there is no confidence there that the relief will come to anything like £800 million. Indeed, the CBI has affirmed that it regards the figure as very optimistic. We are entitled to know the detailed basis for a calculation which, after all, plays a major part in the Government's economic policy.

What about the substantial changes proposed in this document for the code? Many comments have been made about points which should or should not have been made in the document. I shall not try to take up every one. The right hon. Lady and her colleagues have spent a lot of time listening to representations, and industry has not been slow in making them. I will pick out one or two of the major representations made and say why I believe that some of the proposals in the document should be altered between now and publication of the final code.

First, there is one major omission from the proposed changes. Unlike the Chancellor of the Exchequer, the Secretary of State for Prices and Consumer Protection has made no concession to the problem of inflation accounting. Inflation accounting is accepted under the provisions of the code only if it was in operation within firms before September 1972. This must be wrong in the present circumstances. I know that the Government are waiting for the report of the committee set up by the Conservatives to look into the whole problem, and in normal cirmumstances it would make sense to await such a report. But the circumstances are not normal. The problems of industry and unemployment are pressing hard, and I hope that the right hon. Lady will consider making an immediate change in this respect.

Secondly, I come to the positive proposals. The first is a proposal for investment relief. All of us are agreed on the vital need to encourage investment, so there is no need to stress that. At first sight, the right to recover 17½ per cent. of expenditure for investment looked attractive. Among a lot of people in industry the immediate reaction was favourable. But over the last few weeks, since the draft code was published, people have increasingly begun to doubt whether it is anything very significant. This is partly because it excludes important parts of industry—shops, for example—which will not make for efficiency or help to the consumer. Vehicles and distribution warehouses are also arbitrarily excluded. Most important of all, the 17½ per cent. relief goes to firms only for a year. It is on this factor that the great dispute centres. It is true that it will help to pay for the investment decisions, but it does not help to provide the increased profit which would make investment attractive.

The right hon. Lady should think seriously about whether it would be better to have, if necessary, a lower percentage than the 17½ but to make the price and reference level provisions permanent. This would not merely give industry the chance to recover the cost of the investment but would make the situation attractive enough for industry to have some spur to invest. The Government must realise that there is no point in calling for more investment unless there is some point in investing.

The second positive proposal concerns distribution. Some of my hon. Friends will talk about this aspect with considerable expertise. I have no doubt that, in spite of the proposed improvements, the position of the retail trade today is becoming very difficult. The 10 per cent. cut in gross margins of distributors was a severe measure. There is some alleviation for them now, but it seems to be widely believed in the industry that it will not be enough, and it is interesting that it is not only the Retail Consortium that is bitterly disappointed but the Co-operative Union. According to Co-operative News of 22nd November, the Acting General-Secretary said: We had hoped there would have been greater relief to the retail trade to provide the necessary cash for developments. There is great disappointment that the problems of the retail trade have been persistently underrated by the Government.

Next, there is the question of the safeguard. I will not go into the argument about paragraph 34 in great detail, but I think that it is the Schleswig-Holstein question of the prices policy as a whole. It is the most obscure and difficult part of the argument. There is agreement that broad improvements in the safeguard are of value. There is a strong feeling that to raise from 10 per cent. to 33⅓ per cent. the degree of net profit erosion at which the new safeguard operates will hit some companies very badly.

I hope that the right hon. Lady will consider carefully the argument of the CBI that companies should have a choice between the old paragraph 34 of the Price Code and the new paragraph 34. It seems to me that a measure designed to improve the situation of industry but which can be clearly shown to hurt part of it should be re-shaped so as to give companies the option of these two approaches.

The other major point concerns the proposal to raise the safety net below which an enterprise is not constrained by the rules of the code—first, from a return of 8 per cent. on net assets to 10 per cent. and, second, from a return of 1½ per cent. on turnover to 2 per cent. The right hon. Lady must know that these measures are not adequate.

The 2 per cent. in some industries, again on the retail side in particular, is very far from being an effective figure. The 10 per cent. figure as a basis for return on assets is laughable, particularly when one has to pay 16 per cent. for borrowed money. To say that in the circumstances 10 per cent. is an adequate level of return is nonsensical.

The right hon. Lady should pay attention to the fact that the recent report of the Joint Review Board for Non-Competitive Government Contracts has suggested that the rate of return for such contracts should be raised from 14 per cent. to 20 per cent. I ask her to note that the figure of 20 per cent., regarded as a reasonable figure for non-competitive Government contracts, is exactly double the 10 per cent. she is proposing as a fair figure. One wonders whether the Government are even half-serious about the need to stimulate investment.

I turn now to the very vexed question of the productivity deduction. Everyone will agree that, overall, the productivity deduction has been the most resented feature of the Price Code. Originally, when the Conservative Government brought it in, they were justified in doing so by the fact that prices were rising faster than wages, and wages were then subject to the Pay Code. It was, over that year or so, possible to make some sort of productivity saving, at least in the short run. Now, as the right hon. Lady said on 13th November: It would be unfair to believe that firms which have already moved on productivity can move on it time and time again."—[OFFICIAL REPORT, 13th November 1974; Vol. 881, c. 434.] The truth is that the productivity deduction has become a largely penal measure and should go. It makes it impossible for industry as a whole to manage its own affairs or to plan its own activities over the next year or two, and I hope that the right hon. Lady will, on this perhaps on more than anything else, be prepared to realise the facts of the situation.

Overall, we recognise that the proposals in the new code are by and large an improvement on what has gone before, but it is time to start thinking about what the future of the code should be, and I believe that we must start thinking in terms of when we can phase the code out. In particular, we have to stress that it is quite wrong that the code should be used as a substitute for an effective incomes policy. Frankly, I am very doubtful whether the productivity deduction in any way stiffens industry's resolve to withstand pay claims. As many people have said, it is important to understand that companies which are financially weak because they are not making a worthwhile profit or not getting adequate returns are in no position to withstand outrageous pay claims. They simply will not be able to do the Government's job for them.

I hope that the Secretary of State will reconsider the productivity deduction in particular. At the very least, she must make clear that she has dropped the notorious suggestion implicit in paragraph 13 of the consultative document. This was the passage to which she referred in her speech in the Budget debate, when she said: What we are asking is whether it would be right for the code to impose an additional penalty—I choose the word deliberately—when the increase in salary or wage costs is very high."—[OFFICIAL REPORT, 12th November 1974; Vol. 881, c. 456.] Note that the right hon. Lady chose the word deliberately. She said that, and although it was somewhat watered down in later speeches by Ministers, the fact remains that the Secretary of State stressed that she regarded this, apparently, as a serious possible instrument in Government policy. In doing so she was doing no more than echo the Prime Minister's remarks at Cardiff during the election campaign about "rogue employers".

Fortunately, paragraph 13 indicates that this approach would have to be acceptable to both sides of industry. As we now know, however, the only people to whom this seems to be acceptable are members of the Liberal Party. Given that that is so, and given the clear opposition to this notion which has come from both employers and the trade unions, I hope that the Secretary of State will now confirm that this idea has been dropped. I assure her that if she does so it will produce not merely a cheer from the Opposition but a cheer from the whole of industry. Indeed, the fact that it should ever have been entertained shows the parlous condition into which the Government have been driven by reliance on a social contract which is becoming less and less tenable every day.

The main function of the Price Code is clearly now a desperate attempt to keep the social contract alive at all. I do not grumble about the idea of a voluntary policy, but the Government must realise that the country cannot be expected to give enthusiastic backing to a document which is obtainable only from the TUC, and which was never properly discussed with management, and over which Parliament has had no say.

I believe that the social contract is a constitutional outrage. If the Government want to bind the country in a properly agreed voluntary incomes policy, which they are perfectly entitled to do, they must go for consent on all sides and must bring Parliament into the business. We of the Conservative Party have sat here time and again and listened to Labour spokesmen enunciating the importance of consent. I cannot believe for one moment that the Government would dream of bringing out a document on which only employers were consulted and on which the trade unions were given no say. The Government must recognise that if they really want to persuade people to back up this policy, everyone in the country must have a chance, either through organisations such as the CBI or through Parliament, of having some say in shaping it.

In conclusion, I believe that the case for substantial further amendment of the Price Code is powerful, for industry is facing more serious trouble than it has known for years. I want to quote a few lines from a very telling letter from Mr. I. J. Fraser, the Chairman of City Capital Markets Committee, which appeared in The Times on 26th November: What seems to British investment managers to be unique is that private enterprise in this country is beset by so many adverse factors at once These are (a) rampant inflation (b) growing recession (c) price controls (d) dividend restriction (e) exceptional fiscal penalties on dividend distribution (f) the threat of outright or creeping nationalisations and above all (g) public hostility towards the very concept of profits. Abviously, the Secretary of State cannot deal with all these things off her own bat, but I think she has enough sense to realise the truth of what Mr. Fraser was saying. At least the right hon. Lady has the power to see that if we have to have a Price Code it must be based on realism rather than on the vindictiveness which we see so often on the Left-wing of the Labour Party, and which came out at last week's Labour Party conference. That comment, I regret to say, includes some of the right hon. Lady's senior colleagues. I hope that this afternoon, if the right hon. Lady cannot tell us exactly what she proposes to do when the final code is published, she will at least give some assurance on the very important points I have sought to raise.

4.45 p.m.

The Secretary of State for Prices and Consumer Protection (Mrs. Shirley Williams)

I shall try to deal with a number of the points which the hon. Member for Aylesbury (Mr. Raison) has raised. Before I do so, however, I should like to take issue with him on one or two of them.

First, the hon. Gentleman endeavoured, I thought rather enthusiastically, to throw out the baby along with the bath water. But we on the Government side of the House have been quite clear that this was a legitimately begotten baby of the previous Government and that it will not be quite so easily lost as the hon. Gentleman was seeking to lose it.

The Opposition have lost all enthusiasm for the Price Code ever since they became the Opposition. They now argue that they have done so because of a change-over to a voluntary incomes policy. But during the election campaign they repeatedly said that they did not favour a return to a statutory incomes policy. They will be placed in exactly the same situation in which they accuse us of being placed. Furthermore, they said that they would not get rid of the Price Code either. I cannot see that they have found any way out of the dilemma.

Mr. Raison

I apologise for interrupting the right hon. Lady so soon, but when we talked of a voluntary incomes policy we did not talk of anything remotely resembling the present "phoney" social contract which the Government are trying to implement.

Mrs. Williams

That is not an answer to the point I have made. Abusing the name of the social contract does not allow one to escape from the consequences of the voluntary incomes policy, which the Opposition have said would be their policy as well.

The hon. Gentleman said that the situation was vastly different from that of April 1973. It is not so vastly different. He quoted a figure of 7 per cent. to 1½ per cent., I think, for the increase in earnings at that time. I have looked up the official figure. It was 13.4 per cent. for that month, and for the whole of 1973 it was 14.2 per cent. Therefore, the situation is not as different as the hon. Gentleman suggested. Indeed, the figure is twice the figure that he gave.

I also quarrel with the figures on which the hon. Gentleman was arguing as to the effect of the Price Code, which are estimated to be about £800 million net, and, with other Budget measures, in a full year £1,600 million net. Unless I misheard the hon. Gentleman, I think he gave a figure of £600 million.

Mr. Raison

The right hon. Lady misheard me.

Mrs. Williams

I apologise to the hon. Gentleman.

The hon. Gentleman also pointed to possible increases in unemployment. He will recognise that preventing this was one of our main motives for moving an amendment to the code. He will recognise that this is now a universal problem throughout Europe and North America and not one which is special to this country. In response to what he said about increases in prices stored up in the pipeline—a phrase used by his right hon. Friend the Member for Penrith and The Border (Mr. Whitelaw) in referring directly to applications before the Price Commission—I must say that it was untrue. As the Price Commission pointed out in its annual report, published shortly after the end of the previous Parliament, it was facing a smaller number of price increase applications for a lower level of prices than at any time in the previous 12 months. The Price Commission went on to say that there was a very good chance of lowering the consequences of inflation subject to the level of income settlements. I have never made the slightest bones about this, either during the election campaign or since then. It is clear that to a greater extent than in the past the level of inflation has been in our own hands.

With regard to the position on commodity price increases, the right hon. Member for Penrith and The Border was referring to the period during the election campaign, and he was wrong. There are not two ways about that. He referred to applications before the Price Commission. I shall, if necessary, quote his words to the House, but it will take a long time. He was quite wrong in what he said.

Mr. Tom King (Bridgwater)

Will the right hon. Lady tell the House the date of the Price Commission's report and the period to which it was referring?

Mrs. Williams

The report referred to the period up to the end of August. The right hon. Member for Penrith and The Border was referring to the same period in his remarks. If he was not, he was misleading the populace, because he knows perfectly well that the Price Commission does not keep a record of price increase applications which are proposed for the ensuing two months. I did the right hon. Member for Penrith and The Border the honour of supposing that he was basing his remarks upon evidence which could be substantiated.

Finally with regard to the position on inflationary pressures generally, it would be wrong not to mention that there has been in the past two months a turn-up in wholesale prices. Earlier, wholesale prices were falling steadily. In the past two months they have hardened and increased again, largely in consequence of the harvest position, and this is more true of food manufacturing inputs than of general inputs.

The point made by the hon. Member for Aylesbury about safeguards was not well taken. His own Government's safeguard on turnover was 1½ per cent. Their safeguard on capital return was 8 per cent. Both were minimum safeguards and were not intended to be related to the return on investment to be expected. Our proposals in the amended code are in line with the original approach and not with what could be expected to be the return on interest to normally provided commercial capital.

I turn now to some of the presentations which have been made to me, including those made by the hon. Member for Aylesbury, and our response to them. I am grateful for the opportunity that the Opposition have taken to provide time for this debate. We were seeking to find time, and there will be a further debate on the affirmative resolution—

Mr. Raison

This is coming out of Government time. It is important to understand that it is not coming out of one of the Opposition's Supply Days. It will be repaid to us.

Mrs. Williams

My point is that the Opposition asked for this debate in their time, and I am grateful to them. Originally, we had sought to provide a debate last week. There will be a further debate on the affirmative resolution, and we wish to keep to a timetable in which the final document will be laid by the middle of December. This is according to the wishes of industry as well as those of the House, and I hope that that will be possible.

We have had two weeks of intensive consultations in which my Department has met some 30 organisations and receiverd about 100 written representations. The Ministry of Agriculture, the Department of Trade and the Department of Industry have also had consultations. We have been able to see all those who wished to present points to us on the code in detail, and we have taken them into consideration.

I shall deal with the major submissions made to us and, as far as I can, with any steps that we feel able to make.

I turn first to the productivity deduction. The House should be clear that the removal of the productivity deduction which has been pressed in some quarters of industry would be tantamount effectively to the removal of any kind of price control. We cannot accept the removal of virtually all price control. Without any form of productivity deduction, cost increases would pass straight across to prices with no form of investigation. Furthermore, it would be a situation in which we encouraged the pass-through rapidly into prices in a way which would have devastating effects in a short period on the RPI.

The gentleman who wrote to the hon. Member for Aylesbury said that the two things that most worried industry were rampant inflation and the Price Code. But the gentleman must have been aware that there was a certain contradiction in the situation that he presented, and this House should be aware of it as well.

One of the Government's jobs is to try to limit the effect of inflation on the RPI and on the public. To remove the productivity deduction would be an irresponsible way of attempting to counter inflation. We have tried to meet a genuine difficulty. It is a difficulty which, unless there had been a change, would have involved very substantial additional unemployment in consequence. We have tried to strike a balance between the effect on prices and the effect on what industry can afford in respect of the cost of labour. This is why we intend to keep to the proposals we put in the consultative document, having received representations in different directions on this matter.

We also indicated that there would be a sliding scale. I want to say a word or two about that because there has been some misunderstanding. Some of those who will be subject to paying the higher rate have represented to us that, although they are not capital-intensive firms, their raw material costs are a substantial part of their overall costs. But they do not appreciate fully that the main reason for tapering the productivity deduction upwards as well as downwards is to take account of the effect of labour costs on a firm's overall costs. There will be an advantage even to the capital-intensive and the material-intensive in the proposals that we have made because at the worst there will be reduction to 35 per cent., and I am informed that for most of industry the reduction will be greater than that, leaving out of account those on the average or below the average figure.

The House will know that I made it clear in my remarks that this would be submitted to both sides of industry. It was part of a general review in considering what steps could be taken to strengthen the effectiveness of the social contract.

The CBI does not like paragraph 13 and feels unable to accept it largely on technical and administrative grounds. Because of that, although I intend to review with my colleagues the general position, this paragraph will not be implemented further. We made it clear at the beginning that it was a matter for industry to agree upon but that other possibilities broadly along these kinds of lines were firmly under consideration.

With regard to investment relief, I take on board what the hon. Member for Aylesbury said about the need to establish that investment relief is an on-going process. But if the hon. Gentleman is being fair-minded, he will at least appreciate that we are in difficulty because of the lapsing of the Counter-Inflation Act in the spring of 1976. If we endeavour to keep to the kind of timetable that we have promised both sides of industry, we must explore ways in which we can build in the investment relief beyond the Counter-Inflation Act.

We recognise that it is important for both sides of industry that this is done, and for that reason we intend to guarantee as far as we are able the investment relief. But I ask the hon. Member for Aylesbury not to press me on the matter at the moment because it involves what ought to succeed the Counter-Inflation Act, and I do not think that industry would be very happy if I were to announce that the Government intended to move the indefinite extension of the Counter-Inflation Act from March 1976 onwards. I recognise this. We are con- sidering the matter at the moment, and we shall inform the House when a decision has been reached.

Meanwhile, we have been able to make one more minor relief. Where a firm wishes to embark upon an investment year for the purposes of relief, it will be for the firm to decide what the date of that investment year should be. It can put it back to when the Price Code is laid in its final form, and it does not have to wait for the 56 days' notification before it announces the beginning of its investment relief year.

We propose to allow the investment relief to extend to the point where the Counter-Inflation Act ceases to be in operation. Therefore, we shall offer investment relief until the end of the period of operation of the Act, and we shall permit industry to back-date for the 56 days in which it has to ask for notification. After careful investigation, we have established that there is no real prospect of limiting the 56 days.

The Price Commission will take on a fairly major taks because the investment relief applies to category one, two and three firms, and we are anxious that the investment relief shall be properly accounted for. It would be irresponsible to suggest that we could cut down the notification period if we want the Price Commission to ensure that monitoring for investment relief really takes place. I have said that we are anxious that that position should be guaranteed.

The position on plant and machinery is as defined in the taxation code. We understand that under that code it is possible to take a fairly generous view on warehouses under the term "industrial buildings". But I am looking into the position which has been urged by distributors, that distributive warehouses should be included. If that can be done we would like to do it. The problem is the definition by the Inland Revenue. That presents a difficulty because, perhaps not very flexibly from the point of view of the House, the division comes clearly between distribution, on the one side, and manufacturing, on the other, although the type of plant is much the same.

We have looked into the point about commercial vehicles which has been urged upon us by some quarters of industry. We are considering the matter, but I must point out that it will be difficult to give way on this point because of the present situation in which commercial vehicle order books are heavily booked up for export purposes. We would not want to take steps which might divert commercial vehicles from export, but there would be room to come back on that if the investment relief figures fall below what the Government have estimated.

Mrs. Sally Oppenheim (Gloucester)

In considering the whole position relating to commercial vehicles, may I ask whether the Minister is giving special consideration, for example, to fork-lift trucks, which are not vehicles in the sense intended in the code revision?

Mrs. Williams

I thank the hon. Lady for that suggestion. I will look into it. Again, it is largely a matter of definition. Some kinds of machinery of this type come into the definition of machinery for the purposes of plant and machinery. I will see whether fork-lift trucks come into that category as well.

I want to make some brief remarks about shortages. While the Government have written into the draft code a provision that would enable a reserve power to be used in exceptional circumstances for shortages, I should point out that this is intended to be an extremely limited exception. It has been used in a different form on sugar. The purpose is to act in the interests of consumers where a shortage of supplies might be made worse by the operation of the Price Code. However, it would be unfair to suggest that this is in any way a general exemption. It is not.

On the three-months' rule, the definition is now to include materials. That will cover the point that has been made in various parts of the House about, for example, the rapid increase in price of some materials which are not defined as raw materials, but it will still be limited to the overall figure of 75 per cent. of total costs. Therefore, again it will be a limited concession, but a concession which in certain instances, particularly the food industry, can be useful, especially where the use of fuel and energy is exceptionally high. Beyond that the three-months' rule will stay in place.

On safeguards, which the hon. Member for Aylesbury mentioned, three points have been made to me. One is that while industry is grateful for the clarity of the new safeguard, it does not in the least like the level at which it has been placed. The CBI has informed me in no uncertain terms that it regards it as being very mean. The CBI and other parts of industry have urged strongly that there might be an option between the old and the new safeguard. This would be administratively very difficult. I should make it clear that it would not satisfy industry, which regards neither the old safeguard as being comprehensible nor the new one as being adequate. I am looking into the position and will take careful cognisance of the points that have been made to me.

It has also been urged upon me that the level at which the safeguard is placed under the new terminology, which is based on products and on a general erosion, should go up to 75 per cent. or 80 per cent. I must make it clear that I see no possibility of moving as far as that. It would mean a substantial impact on the RPI. However, I am looking to see whether any lesser concessions might be made here. It is only fair to point out that I have no intention of moving back to the 90 per cent. safeguard on the product basis. It would, in my estimation, be far too expensive for us to sustain at the moment.

On distribution, again strong representations have been made that there should be a much higher safeguard. The figure of 90 per cent. of net has been suggested and also figures running up to 110 per cent. of gross to meet that safeguard. Again, while I recognise that there are considerable problems in distribution—it is probably true that it is the hardest hit by the old and the new code—I do not think that there is any possibility of reaching those suggested figures. Indeed, it would not be right to do so. But, again, I am considering carefully the representations that have been made to me. It is no part of our intention to prevent firms reaching the safeguard laid all, in trying to make sure that they are down to protect them, and it is, most of at least able to get a safeguard that Parliament agreed to that. I am looking at the matter in these terms rather than in terms of large changes in the level of safeguard.

I hope that, even though I may not carry the Opposition with me, I shall carry my right hon. and hon. Friends with me in believing that a Price Code which has very high safeguards is a recipe for stagnation and for people, as it were, making profits without working for them, and I cannot support it.

The Government intend to bring nationalised industries gradually under the same regime as for the private sector. That is why the safeguards relating to return on capital and turnover have been brought into line for the nationalised industries. The hon. Member for Aylesbury will appreciate, however, that the regime for nationalised industries under the Price Code is necessarily different from that for the private sector, or it has been in the past, because the nationalised industries were constantly kept below what their allowable costs would have brought them by the decisions of the last Conservative administration. It is for my right hon. and hon. Friends to decide over what period and in what way the nationalised industries can recover their viability.

My right hon. Friend the Chancellor of the Exchequer, in his Budget speech, said: One of our policy objectives must be the elimination of subsidies to the use of energy through artificial prices for the products of the nationalised industries … I have set it as my objective to phase out these subsidies completely as fast as possible."—[OFFICIAL REPORT, 12th November 1974; Vol. 881, c. 255–68.] The Opposition have every right to ask: how fast is "as fast as possible"? The Price Code permits nationalised industries to recover allowable costs, but anything that goes beyond allowable costs and the safeguard returns on capital and turnover—I assure the hon. Member for Aylesbury that it is quite a large space—is still subject to the decisions of Ministers. It is for Ministers, if they wish, to intervene and to decide where in that very wide area the level of prices shall be set.

We are considering these matters. I am afraid that I cannot give the hon. Gentleman a final reply on them. The Price Code would make it possible for nationalised industries to move towards viability, but the rate at which they do so depends upon ministerial decision as distinct from the allowable costs figure.

The Government are taking steps in the course of their review of the whole of nationalised industry prices to see what can be done to minimise the cost of those industry price increases on small or poor users. When we came into office we found that, although subsidies to nationalised industries were colossal, the structure of tariffs allowed very little for the poor or small consumers and, to some extent, militated against them.

Mr. Raison

I appreciate what the right hon. Lady has said. However, may I ask her to give us some figure for the nationalised industries comparable with the £800 million that she claims will apply as relief to private industry? At the moment we have no idea of the scale of operation that the Government have in mind.

Mrs. Williams

I understand that if no price increases were permitted in the 1975–76 financial year the present deficit, which is running at about £1,000 million a year, would at least double. In terms of the public sector, borrowing requirement, that is unacceptably high. But precisely over what period of time—one, two or three years—the return to viability will take place in the nationalised industries I am not in a position to tell the hon. Gentleman, not because I am holding out on the House, but because the basic consultations with chairmen of the nationalised industries have not taken place. They do not arise in my Department, but I understand they are going forward, and the House will be informed at the earliest possible date.

Finally, as I have indicated to the hon. Gentleman, we are still considering a number of submissions that have been made to us. I have tried as far as I am able, subject to continuing those consultations as I promised to do and to considering some matters that were put to me late in the day—as late as the end of last week, when the official consultation period ended—to indicate to the House where I feel unable to go further and where I am still carefully considering the position.

I end by saying that the Government, at least, regard the Price Code as still having an important job to do with regard to counter-inflation policy, and, although we are willing to go a considerable way towards trying to guarantee employment and investment in so far as we are able over the coming couple of years, I believe that we have struck a difficult balance at about the right place.

5.11 p.m.

Mr. Richard Wainwright (Colne Valley)

The draft Price Code represents the third attempt by the Secretary of State in a Labour Government to tinker with a Price Code that is essentially the product of a Conservative Government. Liberals were inclined to be merciful in their verdict on the earlier tinkering, having regard to the minority position of the Labour Government in the summer Parliament, but we say now that this third attempt at tinkering is more than enough. It is incumbent on the Government, if they intend to continue the counter-inflation legislation, to produce a more dynamic code embodying their own ideas and not go on patching up a code that was described by the right hon. Member for Bristol, South-East (Mr. Benn), now the Secretary of State for Industry, when it was first introduced by the Conservative Government as the most complex and bureaucratic structure of controls ever imposed upon the British economy in peace or war".—[OFFICIAL REPORT. 7th November 1973; Vol. 863, c. 1015.] The bureaucratic complexities that arise from three separate attempts by the Secretary of State to patch up the Conservative Price Code is not, in our view, the main evil, but it is an evil, and I hope the House will bear with me if I give one or two examples.

I deal first with the procedure for gross percentage margins allowed to non-food distributors. This was originally allowed at 100 per cent. of the reference level. Earlier in the summer the right hon. Lady reduced that to 90 per cent., accompanied by a safeguard that was to protect up to 75 per cent. of the distributor's gross profit. But now we have the third tinkering which introduces in paragraph 74(b) the most extraordinarily complex proposal that the distributor's margin can go up to 105 per cent. but only—and literally only—to the extent that that enables his total gross margin to reach 75 per cent. of the reference level. The moment 75 per cent. is exceeded, any further increase is chopped off.

This is a game of snakes and ladders which I am assured by a number of nonfood distributors whom I have consulted will be very difficult for them to try to administer. It will involve their looking into a many-sided crystal ball and almost certainly getting the answer wrong. The thing could not have been made more elaborate by the late Heath Robinson himself. However, it is not the additional bureaucratic complexities that result from continuing to tinker with what is now an ancient document but the effect of making companies look backwards all the time that seems to Liberals to be the most unfortunate result of this procedure.

Everything is to bear a reference to what was happening way back before September 1972, or at the latest April 1973. I am sure that the right hon. Lady meets enough young, thrusting, dynamic executives, in both the nationalised and the private sectors of industry, to realise that to young men and women who are looking to the future in industry September 1972 is an aeon away. In fact, to politicians it is also a long time away because it takes us back to a period of a very different régime. Why must we in this House, time and again in debate after debate, sanctify this reference back to 1972?

This proposal also puts a wholly unjustified premium on companies that have stuck in a rut and have retained old-fashioned accounting principles at a time when everybody in the accountancy profession is trying to experiment with new devices to account for inflation. To be respectable under the Conservative Government's Price Code as amended by the right hon. Lady, one has to say that one has been consistent in years past in one's accounting treatment.

That comes out in paragraph 28, under which it is binding upon anybody appealing to the Price Commission to show that over the years he has been consistent in his treatment of depreciation. Under paragraph 35 he has to be consistent—the word is used with monotonous emphasis— in his allocation of overhead costs. Under paragraphs 36 and 77 he has to show that he has been consistent in his treatment of stocks, and it is an accountant who is as dead as mutton who has been consistent in his treatment of stocks in view of inflation in recent years.

Mr. Ian Lloyd (Havant and Waterloo)

Does the hon. Gentleman agree that the standard of consistency is the consistency with which the Government have controlled the money supply?

Mr. Wainwright

That is off my point. I am concerned about what both Governments have called consistency, but what I call being stuck in a rut. It is a badge of shame amongst enterprising accountants to have to confess that their methods have not altered during the past three or four years, but it is of the essence of the prices document to show that their methods have not altered. Even under paragraph 75 the calculation of gross margins, of all things, has to be shown to have been consistent during the reference period and since.

The value of assets is the essence of concerns that are capital intensive. I must say in passing that the present Government do not show very much concern for businesses that are capital intensive. They are much more interested in those that are highly labour intensive. But with concerns that are capital intensive no revaluation of assets ranks for consideration under the Price Code unless it was done before September 1972. The value of properties and industrial plant of all kinds has undergone revolutionary changes in different ways according to the nature of the industry since September 1972, but this document always harks back to that date, and nothing since can be considered by the Price Commission except perhaps under one of the clauses that allow special exceptions.

When we come to the right hon. Lady's in many ways splendid provision for allowing for new investment to earn its keep—which by and large we welcome from this bench—here again we find a reward for the staffs of businesses who prove bad at their budgeting. What is the penalty for companies that budget for large capital expenditure and then fail to keep up with their budget when it comes to installing those capital items? The penalty is not that they should have to pay back the excess prices which they have been charging wrongly, but merely that in a time of rapid inflation, when money received yesterday is far more valuable than money that will be received next week, they are required to stand still with their price until other costs have caught up with them and overtaken the price which had previously been allowed. This is a reward for bad accounting, or in certain cases for companies which chance their arm by deliberately over-budgeting their capital expenditure and then put on an innocent face when eventually bureaucracy catches up with them, if indeed it ever does.

The Price Code is still as it was when it left the breast of its Conservative progenitor because it does not get down to the real dynamics of cheap production and cheap marketing. There is no adequate check in any part of the Price Code on the many forms of industrial extravagance. A great many types of spending on what are, in present circumstances, frivolities and a great deal of bad industrial housekeeping are sanctified in the Price Code under the respectable heading of "allowable costs".

We on this bench want to see every encouragement given to those who will not simply rely on ancient cost formulae but will apply their minds and take commercial risks in producing drastically reduced costs of production and distribution.

This is essentially a Conservative document which is not fundamentally radicalised by the frequent attentions of the right hon. Lady. When the document comes before the House in the form of an affirmative resolution, as the right hon. Lady promised, in a matter of days or at the most weeks, she must not assume that we on the Liberal bench will allow it to go unchallenged.

5.22 p.m.

Mr. Mike Thomas (Newcastle-upon-Tyne, East)

I rise to refer briefly to two topics. I raise the first on behalf of the Co-operative movement, the interests of which I represent in the House, and the second on behalf of myself regarding my concern, which I know my right hon. Friend the Secretary of State shares, on the topic of nationalised industries' prices.

With regard to the Co-operative movement the hon. Member for Aylesbury (Mr. Raison) secured my agreement when he said that he regarded my right hon. Friend as by and large making an improvement on the Price Code. But I must disagree with him, from impeccable sources, when I say that it is wrong and inaccurate to describe the Co-operative movement as having been "bitterly disappointed" over the review. That is not so. We in the Co-operative movement—perhaps in this respect we are rather more privileged than the hon. Gentleman—were not brought up to believe that in matters of public policy everyone should win and have a prize. We welcome the document and we are in the main satisfied, but there are three points arising which I would like to mention a little later, and I would like my right hon. Friend to give more attention to these.

We take a balanced view of the document. We do not want to see an end of the Price Code just yet. While inflation is running at its present level, and while we have the social contract, as well as the problems of managing and dealing with the pay situation, it would be irresponsible of any Government to tear up the Price Code. We are prepared to live with it and take a balanced view of the review which the Department has undertaken.

For the benefit of hon. Members on the Opposition benches, I compare that attitude with the view of some companies in the distributive sector which go public on mouth-watering terms and then appear to wish their representatives on the other side of the House to come here and say that the suppliers must provide the working capital and that the customers must provide the finance to expand and increase the value of their investments, and to ask that the Government kindly arrange this. They also have the effrontery to tell us that the Government must preside over the situation with a Price Code which will not only allow such an arrangement but actively encourage it—

Mr. Tim Sainsbury (Hove)

I would like the hon. Gentleman to clarify this matter and say that he was not referring to a company with which I am associated. But if he is, would he please give the context to which he is referring?

Mr. Thomas

I was dealing with a number of companies with which it might be the misfortune or fortune for British consumers to deal. The hon. Gentleman's company may be one of those companies to which I refer. The only reply I can give him is that if the cap fits he should wear it.

A document such as the Price Code— here I agree with the hon. Member for Colne Valley (Mr. Wainwright)—inevitably goes out of date, and it is in the main with that that we are especially concerned. But in the Co-operative movement we are also concerned with what may seem a relatively small point—the question of gross margin reference levels. To take the best two of the past five years is not necessarily the best way to deal with the matter. There might be merit in having a 12-monthly review, perhaps on a sector basis, and I would like my right hon. Friend to look at this suggestion in detail.

My colleagues would be glad to hear my right hon. Friend say that she is looking again at the question of distributors' profits. We welcome the relaxation in this area but we support the Retail Consortium suggestion that there might be a sliding scale for the relationship of gross and net profit in this respect. Indeed, there is a good precedent for that in the productivity deduction. I hope that my right hon. Friend will give further attention to this point.

I am on common ground with the hon. Member for Aylesbury in regard to investment relief. We are extremely unhappy about the question of investment relief on shops and distribution warehouses. I was glad to hear my right hon. Friend say that she is looking into this matter, although it is an Inland Revenue problem. I hope that my right hon. Friend will regard her own view of the matter as being infinitely superior to that which will emanate from the Inland Revenue.

I turn now to nationalised industries' prices. I think that all hon. Members on this side of the House will recognise that these prices must go up. We must not get into a situation in which nationalised industries are running at a £2,000 million deficit. That is a prospect that we cannot countenance in any way. It was irresponsible of the Conservative Government to get us into this situation. But it would be equally irresponsible of the present Government not to take the opportunity to make the price structure of the nationalised industries more socially responsible. I believe that many of my hon. Friends would think that that was the precise reason that these industries were brought into public ownership.

I was pleased to hear my right hon. Friend say that she wants to minimise the impact of nationalised industries' prices on small and poor users. I know that she is concerned about this, and that my right hon. Friend the Secretary of State for Energy is looking at the whole question of the problems of small consumers. I draw attention to the fact that we have had a good precedent. My right hon. Friend, in her voluntary agreement with the retailers, has been able to keep prices of key products down. This is of vital importance to old-age pensioners and other small and poor consumers. If it is possible to apply this arrangement to private industry it would be ludicrous if we were unable to do so with publicly owned industries, and I shall certainly be pressurising my right hon. Friend on that point.

I had my breath taken away by my right hon. Friend's reference to the tariffs in the nationalised industries. She said that to some extent the tariffs militate against small and poor consumers. I would like to give one or two examples of the extent to which nationalised industries' tariffs militate against small and poor consumers. I take for example 12,000 old-age pensioners in my constituency. I am not talking here about abstract statistical groups. These people sit in their homes in fear of switching on even one bar of their electric fires because of what they will be charged when the quarterly bill arrives.

Let us look at some comparisons on this. An electricity bill for a small consumer contains, in effect, a charge of 4p per unit, but for the large consumer the charge is only 1½p per unit. The position is the same regarding gas. A person using 100 therms of gas in the North Thames area pays 16p per therm, while the person who uses 800 therms—he may have a large house, with perhaps an extension to it, as well as an outhouse— pays only 8p per therm, half as much.

Although the telephone and telecommunications systems are slightly different because different aspects of capital investment are involved—a phone has to be installed—the differences there are staggering, too. If one makes phone calls amounting to 100 dialled units in a year, one pays 28p a unit—in other words, nearly six bob for a short local call—whereas if one uses 500 units, the cost comes down to 7p per unit, a quarter of that amount, because the rental is such a high proportion of the expenditure.

Mr. Bryan Gould (Southampton, Test)

I entirely support the powerful case which my hon. Friend is making. Would he also agree that as night storage heaters are a form of heating much favoured by small consumers like pensioners, his case is also a case for concessionary rates for off-peak electricity?

Mr. Thomas

Yes, I think it is. My hon. Friend is right, save that I would enter one caveat—that when we are supposed to be trying to conserve energy— to encourage people to consume it profligately at low prices is insane. Yes, let us have cheap off-peak electricity, but let us have a ceiling at the point at which a three-bedroomed house is comfortably heated, and above that make gas and electricity tariffs penal, make it much more expensive for people to waste heat once they have heated an adequate space, and also make it cheaper to double glaze and so on.

I do not know, and a reading of this wonderfully elegant and literary document has not, I am afraid, enlightened me, whether or not it is possible to include this sort of social consideration in the Price Code. I suspect that it might not be, but I wish it were, and I shall be seeking with other hon. Members to find ways in which some Minister can give this kind of consideration. I hope the Minister can say that there is some way in which his Department's control of the price system through the Price Code could make this kind of impact on nationalised industry prices instead of just allowing them to proceed higher and higher, as I suspect they inevitably will over the next few years.

5.32 p.m.

Mr. Giles Shaw (Pudsey)

This debate has rightly centred on two different considerations—the budgetary aspect and the detailed provisions of the code. Taking the budgetary aspect first, this is an important arm of what the Chancellor was seeking to do in his Budget. About £800 million was due to go back into industrial liquidity through the improvements made in the code. So it is an important part of the Government's economic and, indeed, social policy because, as the right hon. Lady confirmed today, she regards the Price Code as the strong arm of the social contract.

Essentially, however, this is a hybrid measure. On the one hand, the right hon. Lady seeks to restrain prices to fulfil her obligations to the social contract, but, on the other, she seeks to free prices to ease industrial liquidity. So this measure is a house divided against itself, and must surely fall short of both criteria.

I cannot see how the relaxations embodied in this review will improve industrial liquidity to the level of £800 million claimed by the Chancellor. The Government are operating here on different time scales. There is the tax time scale for the £800 million from tax changes, and the commercial year time scale for the improvements in the Price Code. The Price Code is also operated in different years according to different companies. We are dealing also with current costs—such as the costs of wages and materials—alongside historical costs.

As for the productivity deduction, I do not accept the right hon. Lady's claim that to remove it altogether would result in a complete consumer disaster in terms of pricing. When this was introduced by the previous administration, in addition to the fact that it was accompanied by the pay restraint provisions, it was also introduced at a time of economic growth and development and when markets were increasing in value.

If we relate the productivity deduction to an average wage claim of, say, £2 a week in 1972 or 1973, that 50 per cent. deduction—namely, £1—would have had to come off the employer's margin. Today's average claims are nearer 17 per cent., involving wages of £7 or £8 a week. The average productivity deduction at the 20 per cent. level will now involve the employer in absorbing £1.40. That is a substantial absorption of profitability.

Removing the productivity allowances would not provide the disaster that the right hon. Lady suggests. The market is contracting. We have growth of 2 per cent. at best, as the Chancellor says. There are real prospects of no increases in consumption or living standards. Against that background, the impost of the productivity deduction has to be seen in a different light. The right hon. Lady could have gone substantially further.

The other claim made in the Budget was that these adjustments of the Price Code would not have a significant effect on the retail prices index. The Chancellor was quoted as saying that the effect would be under 1½ points by the middle of next year. Yet he went on to announce the possibility of a reduction in nationalised industry subsidies, worth some £1,000 million, and said that a number of other things would happen which will substantially increase costs. We have also seen the continuing decline in the value of the pound and the upward swing of commodity prices. Given that the background of the economy will be virtually static, therefore, I cannot see that we can expect the retail price effects of the code adjustments to be as low as the Chancellor suggested.

Nowhere will this become more obvious than in the area of food prices. When we study the fine print of the Minister of Agriculture's agreements on sugar supply—we do not yet know what price will be involved—I am certain that we shall be in for a major increase in the food price index. The food industries have estimated that the sugar price alone must be, in manufacturers' terms, £250 to £260 a ton next year, which by itself will increase the food price index by 4 per cent. This index alone will probably significantly increase the total level of retail prices beyond the Government's projection.

Therefore, on the budgetary level, I doubt whether the contribution of £800 million to industrial liquidity will be produced. The restraint on the RPI seems likely to be beaten by events.

Turning to the details of the code, I should like to see greater flexibility in the operation of this instrument. In paragraph 34, the enterprise should be reinserted as a cost consideration, as well as the product or range of products. This would give a number of companies a welcome flexibility. Second, the three-months rule should be reduced to 28 days. I am disappointed that the right hon. Lady has not made that reduction. Surely, with the onward rush of material prices, some rapid review of prices is essential.

Third, on investment allowances, I welcome the commitment to review the problems of warehousing and distribution costs. I do not welcome the Government's somewhat negative way of viewing investments in commercial vehicles and cars for sales use, and so on. This side of the coin should be given adequate treatment. I welcome the fact that the 12-months rule may possibly be expanded but the whole question of investment must be considered in terms of the returns to the companies investing.

When we come to the extraordinary lifting of the returns level from 8 per cent. to 10 per cent., I do not accept that the right hon. Lady should compare that with the previous code and say that it is a step in the right direction. That would be all very well if we had a bouyant economy in which to invest, but we require additional encouragement in order to invest. The level of 10 per cent. is quite inadequate, surely, with this growth rate, as a return on investment. The Government must review the figure sooner or later.

Fourth, I would like to see depreciation based on replacement costs of assets. If necessary, the Government could consider tying these replacement costs to investment intentions. That would be helpful. Fifth, when the Secretary of State sees fit to grant exceptions to the Price Code, I must emphasise the importance of these exceptions being carried through to all users of the product or service. I quote the recent example of sugar, when refiners were able to obtain exemption from the Government for certain reasons but all those who subsequently used sugar had to pay higher prices and abide by the full restraints of the code. I regard that as grossly unfair. If exemptions are made under the statutory instrument they should be available to all users of the material.

There is another aspect which I regard as important and which has not so far been referred to. I believe that the Government should consider introducing some appeals procedure in relation to the decisions of the Price Commission. We saw the recent judgment given in the case of GEC which highlighted the powers given to the Chairman of the Price Commission, Sir Arthur Cockfield, as being quite Draconian. This move towards an appeals mechanism is only right, if the Government seek to continue to use this code and wish it to be an important arm of their economic policy. Some appeals procedure from decisions of the chairman of the commission should be introduced. That is essential if the Government are seriously considering some kind of penalty provisions being attached to those who make so-called exceptional wage agreements.

As a general point it must be emphasised that the House is reluctant to give Governments excessive powers over individuals. The same should be equally true when we set up commissions which seem to ride roughshod over British industry in the way that the Price Commission has previously been prepared to do. I should like to see an appellate procedure included in the Government's review.

Industry requires to be encouraged to invest. Above all, it needs the confidence of knowing that investments will be well made and that an adequate return will be forthcoming. The burdens of this code, even in revised form, are extremely heavy in terms of private and public industry. When the code was introduced there was some merit in the fact that it was to be reviewed over short periods. The phases of the prices and incomes policy were reviewed regularly. I commend to the Government the view that they should review the workings of the code as frequently as possible.

I very much regret that we have not seen nearly as many revisions to the code as industry has pressed upon the Government. I am sorry that the Government have not given way on some of the more important points concerning productivity deductions. When industry looks to the future it asks how confidently should it be planning its investment policy, what are its chances of improving its return on capital, what will the climate be for industrial costs and wages, and what is Government policy likely to be as it affects industry in getting on with its job? When industry asks these questions and looks at the Price Code revisions proposed here industry will be profoundly disappointed.

4.45 p.m.

Mr. Leslie Huckfield (Nuneaton)

Labour Members have marvelled today at the miraculous conversion in attitude towards the Price Code that has taken place among Conservative Members since we last debated this issue. We can almost be forgiven if we forget that it was the Conservative Party which introduced the code. It was the Conservative Party which introduced the counter-inflation legislation. Further, it was the Tories who insisted that the Price Commission should select its own devices and that the rules under which it should operate must be stringent and strict. Lastly, it was the Conservative Party that insisted that individual references to the commission could not be debated in the House.

To hear the hon. Member for Pudsey (Mr. Shaw)—I mean him no personal disrespect—arguing that we ought to have more flexibility and an appeals mechanism makes me wonder whether he realises how many additional civil servants would be required to operate such a mechanism, particularly with reference to the sliding scale of productivity deductions. Where does he think we shall house these civil servants? I suggest that if we went through with this sort of thing it would not be new parliamentary accommodation we would need; we should need a new Whitehall to take up the Civil Service machinery necessary to deal with appeals against decisions of the Price Commission.

I have been rather impressed by my right hon. Friend the Secretary of State for Prices and Consumer Protection. Although I cannot agree with everything she does and says, I believe that, overall, the impression she has given in her Department is one of activity. She has been a busy Secretary of State. It was she who introduced the scheme of food subsidies—an integral part of the social contract. Likewise, she introduced the voluntary price restrictions inherent in the so-called "shopping basket" scheme. It was she who introduced the 10 per cent. reductions in distributors' margins and who produced the saving to pensioner couples of about 60p a week and, to the average family, if I can so define it, of more than 40p a week.

Mr. Mike Thomas

No. Over 80p.

Mr. Huckfield

I am glad that my hon. Friend corrects me. He remembers the figures we were using during the election much more accurately. I hope that his interjection will be faithfully recorded. We on the Government side of the House realise the contribution that my right hon. Friend has made to keeping down the cost of living for the average working family.

Tory hon. Members, particularly the hon. Member for Aylesbury (Mr. Raison), complain about the market being depressed and about demand being inflated, but at the same time they loathe wage increases. I am not sure which school of economics the hon. Member for Aylesbury follows at the moment. I know that there have been some changes of fortune among hon. Members opposite, but it has to be said that they cannot logically complain about the market being depressed and wages being increased in the same breath.

If there are wage increases it stands to reason, since those receiving them will have a fairly high marginal propensity to consume, that those increases will be spent on pushing up demand in precisely the sectors where the hon. Gentleman says demand is deflated.

In their constant harping and carping references to the social contract I cannot help wondering what Tory Members would put in its place. We have reached the state when they use every chance they can—whether it be in "The World This Weekend" or the correspondence columns of The Times, which is the latest method—to decry the social contract. Never have I heard any constructive alternative being put forward, except perhaps by one or two hon. Members like the hon. Member for Oswestry (Mr. Biffen) who, I know, has never agreed with any kind of restrictions.

The hon. Member knows as well as I do that certain hon. Members on both sides of the House would take that line. The hon. Member for Aylesbury knows that in his alleged 35 per cent. compound increase in wages, which he says has taken place in the past year, are included not only threshold increases but the special case increases like railwaymen, miners, postmen and nurses, of which my right hon. Friend the Secretary of State for Employment has never made any secret.

We have always conceded that the difficulty with a prices and incomes policy, whether voluntary or otherwise, is that there have to be special cases. The hon. Gentleman should not overlook the fact that within some of the larger settlements which have been made over the past six months there are, justifiably, bigger than average increases in special deserving cases.

The hon. Gentleman referred to his desire for the complete abolition of the Price Code. No doubt we shall hear that desire repeatedly expressed from the Conservative benches. The Conservative Party's policy now seems to be the abolition of the Price Code. I hope the Conservative Party will say that in much more precise terms, so that working people, particularly my constituents, will understand that the Conservatives do not want any price controls. If the Conservatives are honest—I know that until the leadership struggle is concluded they may be disinclined to be completely so—they will tell the people that they do not want any price controls, and they will see the effect that has on wage claims.

Much of the relaxation of the Price Code has been demanded by the CBI because we are, above all, in a low-growth economy. Anyone who has studied the effects of higher investment, higher rates of growth and higher rates of growth of productivity will accept that had we been able to maintain a higher rate of net investment, a higher rate of growth of gross domestic product and a higher rate of growth of productivity, many of the concessions which have of late been demanded by the CBI would not have been necessary.

Despite the relaxation in the Price Code, which makes some concession in the direction of new investment, I am still not content that the concession will push up the rate of investment to push up the rate of growth. So long as we have a low-growth economy and a low rate of growth of productivity we shall get more demands from the CBI and the Conservatives for concessions in the Price Code.

I have always taken the Price Code in conjunction with the rate of new investment. Since the war we have tried almost every carrot—every incentive—that Government can try to push up the rate of net investment. Yet in 1973 private manufacturing industry did not invest more than 3.5 per cent. of the gross domestic product in new investment. Some of my hon. Friends and I are so sick and tired of giving carrots to private industry that we think it is about time we took over the carrot patch. We keep on dangling concessions in the hope that in the distant future, after a nebulous gestation period, there will be investment in new machinery which should produce a higher rate of growth and a higher rate of growth of productivity, but I am extremely dubious whether this generalised approach will succeed in the way my right hon. Friend hopes.

The National Enterprise Board should have been inaugurated much sooner. With its inauguration my hon. Friends and I foresee the establishment of an instrument of counter-cyclical investment policy. At present, with a depressed market, with industry not being able to get much new money from the Stock Exchange and perhaps being cajoled towards the new consortium called Finance for Industry, I remain unconvinced that we shall get anything like the rate of net investment increase which my right hon. Friend hopes to see.

What checks and examinations does the Department intend to make on the way in which the 17½ per cent. allowance is spent by firms? When I examine past concessions on investment allowances, free depreciation and initial allowances, I am far from happy about the way in which firms have done what they told Government Departments they would do in using the concessions.

Mrs. Sally Oppenheim

Is the hon. Gentleman trying to maintain that low investment in industry is the only cause of low productivity? Does he not recognise that a network of restrictive practices, over-manning and poor incentives is equally responsible?

Mr. Huckfield

I do not know what discourses on this subject the hon. Lady has studied, but almost every OECD and independent study of this subject has shown that the chronic difficulty in the British economy ever since the end of the Second World War has been the failure to invest a sufficient percentage of the gross domestic product in new investment—not replacement investment, but new investment. I am not talking about "like with like." I am not talking about 1920 and 1860 "spinning jennies," but about pushing investment to the frontiers of modern technology. That, I suspect, is the real fault in the British economy.

What examination has been made of the rôle of multi-national corporations in the concessions which are studied in the consultative document before us? I am sure that my right hon. Friend knows that about 100 major corporations control about half our gross domestic product. I am sure she knows that about six multi-national corporations control the top half of our 20 main manufacturing industries. I am sure that even Conservatives no longer believe in that old Marshallian world of perfect competition, free competition or imperfect competition. I am sure that Conservatives realise that the typical firm in the British economy does not employ only 50 people and that the conditions which are far more appropriate for further study are the conditions of oligopoly, duopoly and complete monopoly. Those are the subjects for further research to which I hope my right hon. Friend will apply herself.

If we are suggesting putting a ring fence around oil companies exploring the North Sea for profits purposes, why cannot we examine the possibility of putting a ring fence round some multi-national corporations which are trading in this country for prices purposes?

It is gradually seeping through, although the Conservatives do not have the guts to tell the people the truth, that their policy is to get rid of the Price Code. The concessions which were being asked for by the CBI before the Budget were about 20 per cent. of the gross domestic capital formation of the country. Under the heading of the £3,000 million concession the CBI was asking for a concession which would have equalled one-third of the gross trading profits of the private sector in any one year. I am fairly sure that Opposition Members who have spoken are not asking for that kind of concession.

I am not enamoured of some of the overall hypergeneralised figures of overall profits last year produced by the hon. Member for Aylesbury. Mr. Melville King, in the Department of Applied Economics at Cambridge, produced figures to show that after stock depreciation and taxation the overall returns of private manufacturing industry last year were more than 14½ per cent. I wonder whether the description of the liquidity crisis in British industry by some hon. Members opposite is quite so accurate as they would have us believe.

Mr. Geoffrey Dodsworth (Hertfordshire, South-West)

Does the hon. Gentleman recall that the average investment per person employed in manufacturing industry is about £10,000, and of that sum between 45 per cent. and 55 per cent. is produced from retained profits and 30 per cent. is produced from loan capital? The figure of 17½ per cent. in the Price Code review is quite inadequate. It should be increased in order to measure up to the cash requirements of British industry.

Mr. Huckfield

I am grateful to the hon. Gentleman for reinforcing my point about the crucial need to increase the rate of investment.

The other question I want to ask is this: what kind of distinction has been made, for the purpose of the code, between category 1 and non-category 1 firms? I should have thought that there were bound to be substantial liquidity differences between firms in the various categories. I have always thought that the kind of concessions that we ought to be giving to category 1 firms ought to be given only in conjunction with planning agreements. I am not at all convinced that the reserve position of category 1 firms is exactly analogous to that of category 3 firms, for example. There ought to be many more differentiations between the firms in the various categories before we give these very generalised relaxations about which my right hon. Friend is talking.

According to the Sixth Report of the Price Commission the commission found that in category 3 about one-quarter of the firms examined were already exceeding the reference level. When we have such differences not only in the success of enforcement between the various categories but in the need between the various categories and the spread of those needs, I should have thought my right hon. Friend ought to have been far more cautious in her approach to the generalised concessions which she announced this afternoon.

If the Price Commission found such a degree of difficulty in enforcing the Price Code under the old régime, where the rules were complex, and they had a degree of enforceability in them, how will the Price Commission enforce this sliding scale of productivity directions? I am rather sceptical about the possibility of my right hon. Friend's enforcing all that she set out in the code.

I should have liked to say more about nationalised industries, but other hon. Members wish to speak. I support what has already been said from the Government benches about the concessions which are necessary at the smaller end of the consumer range. I should also like to ask about the possibility of excluding transport industries from the nationalised price increases which are envisaged. I am sure that my hon. Friend the Undersecretary recognises that in the main it is the public sector that is energy-conserving. I am talking about buses and trains. I should have thought that to reinforce the market mechanism and to keep transport industries prices down would have had a very substantial reinforcing effect.

Mr. Speaker

I remind the hon. Member that this is only a half-day debate. It began rather late, and the hon. Gentleman has already spoken for over 20 minutes.

Mr. Huckfield

Finally, Mr. Speaker, I appreciate the kind of difficulties in which my right hon. Friend finds herself in view of the pressures to which she is subject, but I hope that in the further and final document on the Price Code which will be produced we shall see far more specific references and far more detailed consideration of different categories of firms, and, above all, a really determined approach against multinational corporations.

6.4 p.m.

Mr. Tim Sainsbury (Hove)

I first declare that I am a director and a substantial shareholder in a well-known distribution company. Having declared that interest, I am sure it will not surprise the House when I say that I wish to speak mainly about distribution.

Before doing so, however, I should like to make one or two other brief remarks. I do not intend to follow the hon. Member for Nuneaton (Mr. Huckfield) across the whole field of economics, but I should like to remind him of what my hon. Friend the Member for Aylesbury (Mr. Raison) said. The Conservative Party is not opposed at this stage to having a Price Code, and it is not proposed that it should be removed, but I do not share the hon. Gentleman's conservative belief that because something was introduced in a certain form it should for ever be kept in that form, however much circumstances change.

I think we are indebted to my hon. Friend the Member for Pudsey (Mr. Shaw), who said that what we want is flexibility. In our discussion what has emerged is that the longer we go on with this sort of Price Code, the more all-embracing and rigid it is and the greater the confusion and complexity, the greater the distortion. If we have had one preeminent example, it is in its peculiarity about a distributive warehouse and whether it constitutes an industrial building. A building for exactly the same function can be put up by a manufacturer at the end of his production line. It can be put up by a wholesaler as part of a distribution chain. It can be put up by a retailer as part of a shop. Some of the most efficient shops are so designed that they can take the product off the end of the production line to save handling costs, to the benefit of the consumer. It is when one tries to differentiate between these different aspects of the same thing that the problem becomes impossibly complex.

In the matter of distribution it is helpful if we first consider how we come to be at the stage where the proposals which are before us for distributive trades have been arrived at. The difference between the distributive trades and manufacturing industry is that the control for distributive trades has been based upon margins and not upon products. This recognises the multiplicity of lines, the variation in range and the differences in styles in retailing which would make it impracticable to try to control every line.

There is a further difference. The control operates on both the gross and the net margins. If we have goods costing, to the customer, 100 and the product price is 75, the operating cost 20 and the profit 5, we have a gross margin of 25 and a net margin of 5. If the goods go up by 15, the costs by 4 and the profit by 1, we have a cost to the consumer of 120. There has been no change in the margin at all. If the goods go up again by 15 and the costs by only 3, there is a possibility, if there is no net margin control and if competition allows for the profit to rise by 2, to bring the total profit to 5.8 per cent. instead of the previous 5 per cent.

This was the situation perhaps when the celebrated—or perhaps "notorious" would be more accurate—10 per cent. cut was first made. It was also regarded as the distributive trades' contribution to the fight against inflation. But it is not the situation now. We now have a situation, which nobody denies, where expenses for the distributive trades as well as for manufacturing industry are rising faster than the cost of goods. We are likely to find goods up by 15 and costs up by 5, and no extra profit. The profit, being 5 on 120, is now 4.2 per cent., which is a 16 per cent. reduction in the profit margin.

The other change—this is the most important, I think—is that it has been recognised in the document before us that there should be an alleviation of the productivity deduction, which did not affect distribution and, again therefore, was a background factor to the idea of the 10 per cent. reduction in the gross margin of retailers. There is also a welcome emphasis on investment throughout industry. The hon. Member for Nuneaton has made frequent reference to that.

What, then, do we have for distribution against that background? We have but one proposal of any significance; namely, that it is permissible to increase one's gross margin to 105 per cent. of one's reference level to get to one's 75 per cent. reference level for net margin, where—I quote these words—"market conditions allow".

That 75 per cent. has been referred to as a safety net. One has a nasty feeling, however, that by inference from that sole concession to the distributive trades the 75 per cent. permitted level at which one can go to 105 per cent. of the gross has become not a safety net but a maximum.

What are the implications of that sole concession for consumers and for investment? Again, I use an example. A retailer is operating at the permitted 90 per cent. reference margin and getting only 60 per cent. net. That is 90 per cent. gross and 60 per cent. net. But he is now able to move to 105 per cent. of his gross reference margin to get 75 per cent. net. If, however, he suddenly sees a way of reducing total costs by five points, not one point can go through to his net. He must go back to 90 and 61.

It is no wonder that the Retail Consortium has referred to this system as snakes and ladders. It provides absolutely no incentive at the 105 and 75 level to improve one's efficiency, for it one does improve efficiency no part of that improvement can be taken through to net profit. Indeed, it could be said that a system so devised is a positive incentive to inefficiency. Perhaps it is a disguised way of ensuring that not only are staff kept on but extra staff are employed to keep up costs.

That is illogical enough, but I take the example further. Perhaps a retailer is at 102 per cent. of his permitted gross margin and, say, 72 per cent. of his net margin. In that situation, he will find it preferable to operate at 90 and 71, for what one has to remember is that for the retailer it is the net margin that matters because that is his profit, whereas for the customer it is the gross margin that matters because that is what affects his price.

Thus, we now have a system which provides an encouragement to keep one's gross margin up in certain circumstances. The proposal, such as it is, is of help only to the less efficient retailers who cannot get to their 75 per cent. net margin level when they operate at 90 per cent. of their gross margin. They may be the majority. It has been pointed out—the right hon. Lady is aware of this—that at present no less than two-thirds of all retailers are operating below 75 per cent. of their net margin reference level.

But there are others who are operating at 90 per cent. and 75 per cent., and because they are so doing it becomes doubtful whether this single concession will help even the less efficient, because the others, the most efficient, will have their prices held down to a level which does not provide them with the possibility of investment, and because their prices are held down so will the others by competition have to be held down.

It is unfortunate, though perhaps to some extent inevitable, that those responsible for drafting and implementing these documents lack practical experience of the working of a competitive market, and perhaps because they lack that experience they lack understanding, and again, because they lack understanding they in turn tend to mistrust the operation of the competitive market. But we have to recognise the reality of the situation of competition, that the most efficient held at 90 per cent. of their gross margin and 75 per cent. of their net margin will limit the opportunity of the less efficient to benefit from the proposals before us now. Thus, we have the most efficient held at a level which is too low, and is recognised by all, I think, to be too low, for investment, and the less efficient held on that account at a level which is likely to be too low for survival. In consequence, investment in distribution will inevitably suffer, which will quickly bring disbenefits to consumers and to others.

There will be closures. At one end of the market the large retailing groups will tend to close their less efficient or less satisfactory outlets, and some of the less efficient units operating less profitably will eventually go to the wall altogether. Again, the consumer will suffer, as my hon. Friend the Member for Aylesbury so clearly pointed out earlier.

We must improve on what is in the code now if the consumer is not to suffer increasingly. It is illogical. It is of only dubious help to the less efficient, and it is no incentive to investment. The only logical improvement, I suggest, is to move back to permitting 100 per cent. of both gross and net reference level at the margin. That would be both logical and fair.

6.16 p.m.

Mr. Ian Lloyd (Havant and Waterloo)

I am glad that the hon. Member for Nuneaton (Mr. Huckfield) is still in his place, because by his interesting arguments he often tempts me to take up points which he makes. However, I shall resist that temptation this evening and content myself with responding to only one, that one being of considerable importance.

When challenged, the hon. Gentleman drew a comparison between the United Kingdom and our major competitors in areas of high technology, namely, Germany, the United States and Japan, and asked why there had not been suffi- cient investment by the United Kingdom at the fringes of modern technology.

The answer is simple. Certainly, there has not been sufficient investment, on any reasonable basis of comparison, at the fringes of modern technology, but, as the hon. Gentleman will be the first to admit, I am sure, the fringes of modern technology are areas of very high risk. If one wants people to invest their capital in such high-risk areas, they for their part are entitled to ask for a return proportionate to that risk.

That is where we fall down every time. The moment the question of return is raised, we rear back and say that it is unearned income, let us put ring fences round it, let us tax it, let us make sure that, whatever else happens, the final reward to the investor on the capital which we seek does not acrue to that investor. All sort of pejorative terms are used, many of them well thumbed in the Socialist vocabulary, to destroy the investors' incentive to invest in this country in that way. But that is not the position in Germany, Japan or the United States. That is the answer to the hon. Gentleman's question why we do not have sufficient investment in the United Kingdom in the areas of high technology.

Mr. Mike Thomas

Is it not conceivable that it has something to do with low wages in high technology here in comparison with Germany, and with some comparison with Germany, and with worse management here than in Germany?

Mr. Lloyd

We may criticise our industrial performance on various grounds, but if the hon. Gentleman is concerned about low wages I take him back to another point. One of his hon. Friends commented earlier that it was deplorable that old-age pensioners are finding it hard to pay the cost of running a one-kilowatt electric fire. I suggest that such an old-age pensioner should be asked to direct his or her attention to Mr. Scargill, whose coal miners have put up the price of coal so that 50 per cent. of the increased cost of electricity is accounted for by the wages paid to miners. Does the hon. Gentleman dispute that? I give him another example. I was told over the weekend that right here in London in the printing industry—that is, in the printing of our national daily newspapers—some members of the printing unions are earning £5,000 a year, and in some cases as much as £10,000 a year. Is that under-payment? Certainly not. I shall leave that point now, tempted through I am to take it further.

I am glad that the Secretary of State is in her place, because she challenged us earlier to declare ourselves if we had lost our enthusiasm, as she put it, for price control since the election. I have no difficulty in declaring myself. I have never been an enthusiast for price control. Far from it. The right hon. Lady referred to it as a legitimate child. For my part—I believe that some of my hon. Friends would say the same—I have always regarded it as an ill-begotten monster which should have been strangled at birth.

It is a classical illustration of the macro-economic illusion. The illusion is shared not only by the Government and their predecessors but by virtually most Governments in modern complex economics. They believe that when they sit at the controls in the Treasury they are at something resembling the panel of a Boeing 747. They feel they have only to move a lever and the controls will alter so that the economy swings into the pattern or shape they desire. This is far from being close to reality. The reality is that the modern industrial economy is about as complex as the weather system—and it is impossible to predict the weather. From time to time attempts are made to seed the clouds with iodine, and modern Governments are increasingly trying to seed the economy with the iodine of modern prejudice, thereby assuring their supporters that they are doing what their supporters think they should be doing to provide an increase in incomes which can be produced only by increasing productivity and investment.

Only today I came across a relevant quotation from "The Wealth of Nations", by Adam Smith. I have no hesitation in saying that many of the things which the great Alfred Marshall wrote are as relevant today as when he wrote them. Adam Smith said: People of the same trade seldom meet together, even for merriment and diversion, but the conversation ends in a conspiracy against the public, or on some contrivance to raise prices". There is a fine allusion here to all Governments today. I believe the quotation should read something like this, "Politicians seldom meet together even for merriment and diversion but the conversation ends in conspiracy against private industry or in some contrivance to control prices."

This extraordinary document, the Review of the Price Code, has been produced virtually in complete ignorance and with a complete unwillingness to reflect or to use the vast experience which modern economies have acquired whenever they have tried to control prices in detail. We can go back to the Second World War when Britain and the United States, in far more justifiable circumstances, produced the most labyrinthine apparatus of control, and that was unsuccessful.

If one looks at the figures in the IMF publication "International Financial Statistics", and if one plots against the trends in most modern economies those occasions when price controls were introduced and withdrawn—it can be done for this country, for the United States, France Germany and Japan—one can draw the conclusion, in the correlation between inflation and the implementation and abandonment of price control, that price control has no effect on inflation. Across the chart the result is explicitly clear, but for political reasons that we all understand Governments must pretend that they can control these situations when we know that they cannot.

We therefore come back to the most fundamental factor, namely, whether there are other things which Governments can do besides producing this type of macro-illusion. Governments feel that by sitting on top of the thermometer they can control the illness in the body. They are under increasing and continuous pressure to increase public expenditure for all kinds of reasons, some good some bad. The pressure is there and it is relentless, and it is the one phenomenon of which the politicians must take notice, or else.

Almost without exception, therefore, the Governments of modern industrial economies overspend their public resources massively and continually. As a result, they generate inflation, and because of that they have to say, "Of course, we must now control this dreadful thing for which we, as the Government, are only partially responsible". That is a plausible, a far-reaching and a much-used argument.

I have but a few minutes left and I should like to deal with one or two of the irrelevancies in the code. Where in any recorded economic history has price control ever had any serious effect on hyperinflation except to restrict supply and aggravate the whole process? On page 34, paragraph 92 of the Code there is an excellent example of the utterly impractical attempt to control the non-interest charges of banks, finance houses and similar enterprises. What could be more far-ranging? How many thousands of different prices and charges are there which are employed by the financial enterprises other than banks and finance houses and what if any serious practical signs are there of controlling them?

There is another example in paragraph 101. It deals with vehicle sales and servicing. Here the charges for repair, maintenance and servicing of vehicles are subject to the provisions. Is there any serious possibility of charges of this kind being effectively covered by the most well-staffed, well-informed far-reaching car repair Gestapo imaginable? The answer is that there is none, because the man who controls car repairs and who decides what goes into the work he does is the mechanic. The only charge which can be controlled is the charge that he makes for his labour. Virtually all the other great complex of charges for jobs both complicated and simple are charges which will not show up.

If any hon. Member here, faced with what he regarded as an excessive charge for a repair, went to a garage and asked for an explanation, the man at the garage would probably attempt to explain, but the simple fact is that the next time the hon. Member concerned took his car there for servicing it would be done in a way of which he would not approve. That proves the futility of this type of economic illusion.

6.27 p.m.

Mrs. Sally Oppenheim (Gloucester)

We have made it abundantly clear during the debate on the consultative document that we accept that there is an urgent need to redraft the Price Code. We have expressed our fears that what is proposed will be too little and too late, that the Secretary of State has come to recognise now what she might have recognised sooner—that a healthy and prosperous business sector is advantageous to consumers.

Perhaps it was not so much that the right hon. Lady failed to recognise this as that she succumbed to the political priorities of a six months' election campaign waged by her Government throughout the last Parliament. It would be doing less than justice to the right hon. Lady's considerable perception and that of the Chancellor to imply that they did not entirely accept, long before the election, the inevitability of having to revise the Price Code. Yet they both managed, as my hon. Friend the Member for Aylesbury (Mr. Raison) pointed out, to get through the election campaign without anything more than a glancing reference to this. They did not spell out in detail that within weeks of an election they would be putting proposals before the House to relax the code to allow higher prices, and significantly higher prices in the nationalised industries, with the consequential effect of a sudden leap in the cost of living.

Earlier, the right hon. Lady denied the significance of her remarks that there was no evidence of price increases being stored up in the pipeline. However, on the BBC in an interview on 20th September she said: All one can say about inflation is that it is beginning to move down wind. She said that at a time when it was clear from business surveys in the Financial Times and elsewhere that costs and prices would continue to rise. This morning's Financial Times Business Review said: Bigger price rises to come. The underlying trend for costs and prices continues to deteriorate. All three sectors were more pessimistic than in July. That indicates a certain degree of pessimism in July, which I am sure the right hon. Lady would have known about.

These bland assurances were all part of the syrupy stream of assurances that came from the Labour Party during the election that things were getting better, largely due to six months of Labour Government, in which the bandying about of figures about the rate of increase in inflation figured very large. The famous figure of 8.4 per cent. which was misleading, contrived, irrelevant and thoroughly dishonest, played a prominent part.

In the debate on the Budget on 13th November, when she was discussing the revision to the Price Code in the consultative document, the right hon. Lady was asked what was the current rate of inflation. She replied that on the basis of the past three months it was 8.75 per cent. adding triumphantly, much below the rate in the last year in which the Conservative Party was in office."— [OFFICIAL REPORT, 13th November 1974; Vol. 881, c. 447.] I ask the House, is it relevant to compare an annual rate projected on an entirely unrepresentative three-months period with an actual 12-months period? Was the right hon. Lady implying that in the first 12 months of the present Labour Government, if they survive so long, the rate of inflation will be lower than during the last 12 months. of Conservative Government, when it was 13.2 per cent.? If not, her reference was highly irrelevant.

I hope that the right hon. Lady will not think it presumptuous of me if I tell her that she is regarded as a politician of great integrity. She is widely admired and regarded on both sides of the House, and outside the House, and quite rightly so, but she does less than justice to herself by bandying about statistics in this silly way. I hope that we shall have no more of it.

I entirely appreciate the magnitude of the task that must have confronted the right hon. Lady in trying to redraft the existing Price Code, and in attempting to reconcile what are possibly, in the present economic climate, the conflicting objectives of protecting consumers and safeguarding jobs and protecting investment. The great stumbling block to the achievement of those entirely admirable objectives is that there is no effective wage restraint. A price code, redrafted or otherwise, which is deprived of its natural partner—a pay code, or some form of effective pay restraint—is a blunt weapon to wave in the face of the kind of inflation we have now. The two are as comple- mentary as bricks and mortar. To try to operate a price code without effective pay restraint is like locking the front door to keep burglars out while leaving the bathroom window wide open.

The hon. Member for Nuneaton (Mr. Huckfield) was passionate in his defence of the social contract. I entirely accept that many Labour Members attach some spiritual, almost mystical, significance to the social contract, and of course it is true that, equally, there is little evidence of any earthly significance to it. The figures quoted by my hon. Friend the Member for Aylesbury bear witness to that. On top of that, it is said that of 30 major settlements between July and October, 27 have broken the only known criteria of the social contract.

On the point that the hon. Gentleman specifically raised about the composition of wage inflation, he might like to know that the Department of Employment Gazette, reviewed in The Times on 27th November, made the point very cogently that threshold pay is not a major factor in recent wage inflation.

Mr. Leslie Huckfield

I put this question to the hon. Lady, as I would to all the people who appeared on "The World This Weekend", "P.M.", and "Today". and who have written in The Times: with all the caustic, carping comments they keep making about the social contract, what is the Conservative Party's alternative?

Mrs. Oppenheim

The hon. Gentleman can read in our election manifesto what the Conservative Party's alternative is. The manifesto made it clear that we would attempt to have a voluntary pay code and that if we did not succeed it would have to be backed up by statute law or, alternatively and regrettably, we should have to impose the very economic sanctions that the Prime Minister proposed at the Labour Party conference last week. He must have taken them from our manifesto. Conservative spokesmen do not have to carp about the social contract, because it stands condemned by itself. It is certainly high noon in terms of judgment day on the social contract. The results over the past six months prove that. And I am afraid that the effect of the record rate of wage costs on profitability has made it more urgent than ever to revise the existing Price Code. Therefore, we are discussing the consultative document against a sombre background of economic recession and accelerating inflation, which is whittling away living standards at a frightening rate. As a result, by the end of this winter many people will have to do without things which they took for granted only last winter.

It is impossible to over-emphasis the effect of the present rate of inflation or the anxiety and hardship that it creates among many people. It is no longer confined to the social priority group, but pervades the entire middle income group as well. It is to these people, worried to death as they are about the cost of living—as well they might be—that the right hon. Lady offers a price code crippled in its effectiveness by the absence of any effective pay restraint.

I return to the proposals in the document. The point has been made by a number of my hon. Friends that the proposed revision to the code will make it considerably less rigorous than was the original code, but that the original code was introduced in the context of a pay code and very different economic circumstances. What we have before us in the White Paper is a tangled nightmare of bureaucracy. I accept that the right hon. Lady has tried to introduce a maximum amount of flexibility. Some of my hon. Friends have called for more. But her flexibility has been achieved at the cost of immense complexity. It has been represented to me by some firms that they will have to employ a full-time Price Code consultant to help them deploy reliefs as advantageously as possible.

A number of my hon. Friends have pointed out that the reliefs and safeguards in the document are inadequate and discriminatory. My hon. Friend the Member for Hove (Mr. Sainsbury), who has specialised expertise, has pointed out in particular the discriminatory effect of the 17½ per cent. investment relief on the distributive trades. We are grateful that the right hon. Lady has given some consideration to the fact that this needs to be amended. The new investment relief will be of far less use to the distributive trades, which is a matter for considerable concern at a time when profit margins on turnover are so eroded, and when a company as internationally admired as Marks & Spencer annonunced in its recent annual report that although turnover had risen by over 20 per cent. profits had substantially declined.

A number of my hon. Friends have complained, as has the CBI, that the productivity deduction has not been entirely phased out. I should like the Under-Secretary to tell the House what proportion of all the companies which are subject to the restrictions of the Price Code will fall into each of the new productivity deduction categories. The House should be given this information so that we can judge the inflationary effect of what the General Secretary of the TUC described on television a couple of weeks ago as "variations in the social contract".

When we come to the reliefs and safeguards, which have been the subject of a good deal of discussion in the debate by my hon. Friends and the hon. Member for Newcastle-upon-Tyne, East (Mr. Thomas), we see that, because they provide new alternatives in some respects, they tend to overlap, so that the overall effect of the reliefs and safeguards is much less than they would at first appear to be.

I should like to return to a point made by my hon. Friend the Member for Aylesbury about the new raised level for the saefguard in paragraph 68, in that the terms of reference are net assets. This is not a new definition. But net assets are very different from the total capital employed by a company, which, at a time of such inflation, would have provided a fairer basis on which to calculate the total percentage return in establishing new reference levels.

Equally, in paragraph 69 there is the safeguard level of 2 per cent. on turnover, which is derisory in any industry but the high-turnover industries. In the first case, far from encouraging more hard work to be realised in profits, some companies, because of the relatively small sum of money which could be earned on the total capital employed, would be better off to liquidate their assets, put them on deposit in the bank and not employ a single person. In the second case, 2 per cent. on turnover for a capital intensive engineering company would be the equivalent of bankruptcy.

I accept that I have dealt with lower level limits. They are safeguards, and they are the bottom limits. However, I am sure that the right hon. Lady will acknowledge that the longer the Price Code exists the more it becomes institutionalised in the profit structure of companies, until there is nothing left but the structure in the code. It seems that she recognised that point in the remarks that she made on the debate on the Budget, as did her right hon. Friend the Chancellor of the Exchequer. So the return at which reference levels have been set is not adequate in terms of any increased liquidity for the companies, or as safeguards themselves.

It has been said that the restriction in cash flow, even after the revision of the code, will be so great, as a result of the combination of circumstances of inflation, wage costs and the operation of the code, that standards will not be maintained let alone any capacity released for additional investment. It should be noted in this context, with regard to the relief that may have been given in the Budget through FFI, that most companies have already reached their overdraft limits. Therefore, that may be of no help. Indeed, it has been represented to us—this is borne out in the Financial Times survey this morning—that the position of business and industry is grave.

We do not want the Price Code abolished, but the right hon. Lady may be forced to remove it within six months. Even that may be too late to prevent a number of bankruptcies not only among small firms but among firms which are household names. The House is entitled to know that that is the economic background against which we are discussing the consultative document.

It would be churlish not to acknowledge that there are points in the proposed consultative document which are welcome and imaginative, I welcome particularly the new entitlement in paragraph 34(ii)(a) to gross profit of 2 per cent. on the total cost per unit of output of individual products and product ranges. That will make the application of the code simpler in the case of by no means all but of some companies. Further, I hope that it will make communications with some consumers a little easier, where applicable.

Like the right hon. Lady, I never felt it was helpful to reply to housewives anxious about what seemed to be a sudden and unexplained leap in the price of a carrycot or a packet of lentils that all was well because the overall gross profit margin had not exceeded the permitted level. I hope that in some cases more specific information can be provided to consumers as a result of the new concession.

There still remain a number of matters which I hope the Under-Secretary of State for Prices and Consumer Protection will clarify. For example, Category III firms now have to register for the first time. Does that mean that there will be large increases in the staff employed by the Price Commission? What will be the cost of the staff? I am sure that the hon. Gentleman will wish to clarify the points that have been made regarding the inflationary effect on the retail price index of the code.

There seem to be a number of contrived and confusing arguments about the code's inflationary effect. The right hon. Lady has said that its revision will release some £800 million worth of liquidity in respect of the private sector. But in a BBC interview on the night of the Budget the right hon. Lady said: the code now makes much less distinction between private or public so what we've given back, we've given back to the public sector as well as the private sector … the net effect of this is about £800 million, or in other words … a penny in the pound on the retail price index. The right hon. Lady seemed to indicate that she was including the nationalised industry sector in the £800 million, which I understand now is not the case. Calculations were made on the basis of about 1½ per cent. by the right hon. Lady in the debate on 13th November. Is that 1 per cent. plus 1½ per cent? I am sure that the Under-Secretary of State will be pleased to clarify that point.

Reference has been made to pensioners and the cost of small units of energy. Obviously pensioners are in the worst position. Those who are council tenants cannot opt for the most economic form of energy. Very often they have to subsidise council property with their own additional forms of heating which are costly.

Finally, overshadowing the debate have been threats, referred to by my hon. Friend the Member for Aylesbury, which were made by the Prime Minister and the right hon. Lady, namely, that penalties will be imposed upon industry if it gives in to excessive wage claims. I am glad that to some extent the right hon. Lady has withdrawn those threats. However, I am afraid that her withdrawal was of a highly qualified nature. No doubt she is likely to argue that there is no point in giving increased liquidity to industry if the money will be used to subsidise excessive pay claims rather than investment. That is a simplistic argument that assumes that employers have sole responsibility for giving excessive pay claims. It seems to imply that they go around tapping trade union leaders on the shoulder and begging them to accept excessive pay increases.

That is monstrously unfair, and a highly dangerous concept. It would mean that a company faced with an excessive pay claim from a militant trade union would have the choice of going bankrupt either as a result of a long strike or as a result of having to absorb greatly increased costs. That is not a recipe for a three-day week, it is a recipe for a no-day week! The House and the country should know that that is what the present Labour Government propose. Worst of all it is a fundamental example of the unfair and biased attitude of the Government in making a whipping boy of business and industry in imposing statutory sanctions and penalties on industry.

The Government appear to assume that they are not to be trusted, while the other side of industry has no responsibility whatever, and is allowed to go scot free.

I submit that this attitude is no way to safeguard jobs, to encourage investment and to increase prosperity in business and industry essential to the provision of the goods and services that consumers want and need. And in the end, indeed, in the near future, it will be the consumers who will have to pay the price in terms of extra inflation and in a reduction of choice as a result of this Government's complacency over the past six months about their futile social contract.

6.47 p.m.

The Under-Secretary of State for Prices and Consumer Protection (Mr. Robert Maclennan)

This has been a valuable debate. It comes at the end of an intensive period of consultation with industry on the proposals contained in the consultative document on the revision of the Price Code. The shortness of time stems very much from the Government's view, which I believe industry fully shares, that it was necessary to effect the changes as quickly as possible.

In this short debate hon. Members from both sides of the House have made a number of specific suggestions. Some of the suggestions had already been made to us by industry in the consultations that took place for amendment of the code. I give the House the fullest assurance that within the scope of the overall Budget judgment, of which the Price Code changes form part, the Government will consider carefully all the points that right hon. and hon. Members have made before bringing forward the code.

Before I turn to some of the broader issues I shall try to answer a number of questions which have been raised about particular points contained in our proposals. I shall try to deal with as many as possible, but I recognise that in the time available it may be difficult to cover them all. The House will have a further opportunity to probe during the debate on the order embodying the amendment to the code.

The hon. Member for Gloucester (Mrs. Oppenheim) spoke in combative tones which reflected more the atmosphere of six weeks ago than the considered discussion which we have been having since the General Election. She made one or two accusations which deserve to be answered. She said that nothing had been said about this exercise before the election took place. We had not only made it clear to the public that we were proposing to relax the provisions of the Price Code—

Mrs. Sally Oppenheim rose

Mr. Maclennan

The hon. Lady made the point and I must answer it. I remind her and other hon. Members, even though they need no reminding, that the proposal to review the Price Code fundamentally was announced as early as July and that consultations began long before the election.

Mrs. Sally Oppenheim

I did not say that no reference had taken place. I said that there had been nothing more than a glancing reference.

Mr. Maclennan

That is simply wrong. We have had a number of major consultations with industry, of which the hon. Lady must be aware. Furthermore, the hon. Lady made accusations about the impact of the proposed changes in the nationalised industry subsidies not having been made clear before the General Election. She is again wholly wrong. In his April Budget my right hon. Friend the Chancellor of the Exchequer spelt out in clear terms the need to change the situation we had inherited from our Conservative predecessors.

Mrs. Shirley Williams

Quite true.

Mr. Maclennan

The hon. Lady also spoke about my right hon. Friend the Secretary of State being misleading about the nature of price increases in the pipeline in the period before the General Election. I remind her that on 20th September my right hon. Friend quoted from the August quarterly report of the Price Commission, which had drawn attention to the fact that the rate of price increases within the Commission's direct control had fallen significantly since the turn of the year.

The hon. Lady also accused my right hon. Friend the Chancellor of the Exchequer of not having made the position clear during the General Election. On the contrary, he spoke twice on the subject—once at a Press conference and once in a party political broadcast. On both occasions my right hon. Friend made it plain that the level of inflation would depend significantly on income settlements which were under discussion. The hon. Member for Gloucester, in her attempts to continue the General Election campaign, has been most misleading and extremely unfair to the Government.

I turn from these more partisan questions to some of the points of substance raised by the hon. Lady. I hope that I shall give her some pleasure at least in response to her question about fork-lift trucks. We understand that the investment relief will cover all forms of plant and machinery except road vehicles. It will be for the Price Commission to work out the detailed refinements and definiti-tions in operating the relief, but I expect that, by and large, fork-lift trucks are not road vehicles and will, therefore, be included within the relief.

My hon. Friend the Member for New-castle-upon-Tyne, East (Mr. Thomas) made an interesting contribution. I understand the point he made about firms which may find that the nature of their business has changed significantly since the period in which their gross margin ceiling was assessed. It is difficult to avoid such a problem in any system of control which measures the present profits against the firm's own performance in some past period. I have had similar representations from parts of the Cooperative movement and other organisations representing retailers, and I am considering them most carefully, although I cannot make any promises now.

The hon. Member for Pudsey (Mr. Shaw) raised the question of the possibility of instituting an appeals procedure from decisions of the Price Commission. We are stuck with the counter-inflation legislation of the Conservative Government and there is no scope within it for an appeals procedure. That legislation comes to an end in March 1976, and if there is further legislation we can look at this point again.

The hon. Member, speaking of paragraph 34, took issue on the question of the substitution of the product test for the enterprise test. It is true that one test would suit one firm and the other test would suit another. If industry had to choose a single test, however, I think it is clear that it would opt for the product-based safeguard rather than the enterprise-based safeguard.

Mr. Giles Shaw

Does not the hon. Gentleman accept that, in seeking this modest change, one is merely pursuing the principle of flexibility within the code, a flexibility which the hon. Member for Newcastle-upon-Tyne, East (Mr. Thomas) also urged?

Mr. Maclennan

It is true that we need the maximum flexibility possible, but when we provide these safeguards it is essential that firms should know where they stand. We should not allow any element of confusion to creep in.

My hon. Friend the Member for Nun-eaton (Mr. Huckfield) raised the question of multinational corporations. The code gives the Price Commission considerable flexibility to disallow transfer prices where it is considered that these are artificial, and to substitute its estimate of fair arm's-length prices. The power is contained in paragraph 37. During our consultations my right hon. Friend has been urged by some firms to water down this provision, but I promise my hon. Friend the Member for Nuneaton that it is extremely unlikely that my right hon. Friend will see her way to doing so.

My hon. Friend made the interesting suggestion that we should distinguish in our treatment between firms in Categories I and II, relating the treatment to their co-operation in a planning agreement. This is an interesting suggestion, and it will doubtless be considered with industry as we move towards legislation covering planning agreements. My hon. Friend recognises that the Price Code has to deal with the present situation and that we are bound to operate with the instrument we have to hand.

The hon. Member for Aylesbury (Mr. Raison) and the hon. Member for Colne Valley (Mr. Wainwright) spoke of the desirability of recognising within the Price Code amendments new accounting procedures. The hon. Member for Colne Valley in particular was critical of what he described as the consistency in accounting procedures. But predictability is one of the most important aspects of the code as far as industry is concerned. It wants to know where it stands. If we adopted a whole range of different accounting techniques it would greatly confuse the issue.

The general question of inflation accounting raises wide issues. The CBI has pressed us for an allowance to be included for stock appreciation in net profit margin by analogy with the tax relief given in the Budget. But it is more difficult to allow price increases "on account" in the interim period than to allow deferment of tax. The Government are considering this point, but we think that it will be necessary to await the outcome of the Sandilands Committee on inflation accounting.

The hon. Member for Aylesbury and the hon. Member for Gloucester both criticised provisions in paragraphs 68 and 69 for relief for low profits. Industry has criticised our proposals to improve this relief. We propose to raise the safeguard levels available to everybody, whether manufacturers, providers of services or distributors, from 8 per cent. to 10 per cent. return on capital, and from 1½ per cent. to 2 per cent. margin on turnover. I emphasise that this is a basic safeguard. It is a minimum. It is not a measure of what average firms would like to earn or should earn. It is a safety net and not a high wire. Below these levels the Price Code does not apply, and it is not appropriate, therefore, that these levels should be set above the actual returns of a large segment of industry. Hon. Members of the Opposition who have complained that these levels are too low would do well to remember that they are twice the levels which were set by the Conservative administration in April 1973.

One matter not raised in the debate but which was raised on an earlier occasion in the House is the extension that we have made to the list of allowable costs. We see this as a useful change in the regime. The cost control is based on the principle that certain costs—for example, advertising and promotion—are non-allowable. Increases in such costs cannot be invoked to justify increasing prices. It is clear from the White Paper that the Government are prepared to give sympathetic consideration to sensible suggestions for extending the list of allowable costs. We propose to add a number of items: royalties, fees for professional services and the cost of a wide range of bought-in services. This will help industries such as publishing and the newspaper industry, which have special problems and have made representations to us. Further suggestions for additions to the list are being considered on their merits, but I think that on balance we have got it just about right.

I now turn to a point which figured largely in a number of speeches today, including that of the hon. Member for Colne Valley, my hon. Friend the Member for Newcastle-upon-Tyne, East, and the hon. Member for Hove (Mr. Sainsbury). It related to the representations that have been made to us by the Retail Consortium, among others, that the safeguard of net profit margins in the Price Code would have an anomalous effect in relation to distributors whose net profits rise about the 75 per cent. safety net whilst gross profits are over 90 per cent. of reference levels.

The consortium has suggested that a company allowed to go up to its full gross profits reference level, disregarding the 10 per cent. reduction, in order to achieve the safety net level, would, on going above 75 per cent., need immediately to apply the 10 per cent. reduction and so revert to a gross profit reference level of 90 per cent. The consortium accordingly suggested that the permitted gross and net profits as a proportion of reference levels should vary inversely between the upper and the safety net levels in accordance with a sliding scale.

I should explain that there has been some misunderstanding of the way in which the Price Commission operates the code in relation to distributors whose net profits rise above the 75 per cent. safety net at a time when their gross profits are between 90 and 100 per cent. of their reference levels. Companies in these circumstances would not automatically be asked to reduce their gross profits to 90 per cent. of their reference level. The commission would instead seek from the company an undertaking that profits would be reduced—preferably by reduced prices—by an amount representing the difference between their achieved net profit and the 75 per cent. level. To take an example, if a retailer had net and gross profits of 75.8 per cent. and 95.8 per cent. of the respective reference levels, he would be asked so to arrange his affairs that 0.8 per cent. of net profit would be eliminated. In this way he would finish effectively with 75 per cent. net and 95 per cent. gross. This is, of course, very much more favourable to the company than the consortium had feared. Of course, he would not need to reduce profits in this way if he were able to keep his gross margin below 90 per cent. of reference level.

So the so-called problem of the "snakes and ladders" is not something which would require the introduction of a sliding scale along the lines suggested by the consortium. I recognise, however, that a suitably devised sliding scale could have other merits. It could, for example, provide an incentive in terms of increased net return for efficient operations reflected in lower gross margins. The proposal is not without its difficulties, since it would effectively require each company's reference levels to be recalculated. We are nevertheless giving it very careful consideration in the light of the representations which the Retail Consortium has made, in order to see whether there is anything that could usefully be done to provide an incentive to companies operating within lower gross margins.

I turn briefly to the anticipated effect of the proposed changes to the code of prices. My hon. Friend the Member for Newcastle-upon-Tyne, East, the hon. Member for Pudsey and my hon. Friend the Member for Nuneaton spoke with some concern about the possible impact of the new treatment of the nationalised industries under the code. In particular, I think this anxiety may stem from some misunderstanding of the purpose of the code proposals. It is intended to put in place of the existing deficit containment provisions of the code new provisions to enable the nationalised industries to raise prices sufficiently to make a modest surplus, defined either as 2 per cent. on turnover or 10 per cent. on net assets. This is seen as a move towards treating the nationalised industries equivalently to the private sector. It does not, however, imply anything about the timing of the moves towards the Government's objective of phasing out the subsidies to the nationalised industries. Equally, under the new provisions Ministers will retain the power they have at present to restrict price increases to those justified by allowable costs.

As my right hon. Friend the Secretary of State said, the Government are further examining what might be done to minimise the impact of nationalised industry prices on the small or poor users. My hon. Friend the Member for Newcastle-upon-Tyne, East forcefully argued the case for restructured tariffs, and his argument will be given very careful consideration.

I have also been asked about the effect on prices of the changes in other parts of the code, particularly by the hon. Member for Gloucester. This matter was dealt with by my right hon. Friend the Chancellor of the Exchequer in his Budget Statement. The hon. Lady asked me to explain what he has said. It is a somewhat complicated matter.

I start with the figure of 1½ per cent. increase on the retail price index. The Chancellor was saying that if one starts from the hypothesis that the stage 3 Price Code was to continue unamended, the retail price index would be perhaps 1½ per cent. higher by the middle of 1975 than we now estimate it will be if the code is amended on the lines proposed in the White Paper. This is a purely hypothetical case. A better comparison would start not from the present Price Code but from the state of company profits as they stand today.

It is on this basis that my right hon. Friend the Chancellor of the Exchequer has judged that it will be necessary to restore £800 million to company profits through changes in the Price Code. The various changes we propose are calculated to produce this result. The effect on retail prices by the middle of 1975 will be something under 1 per cent. on the retail price index, or an extra 1p in the pound. I am obviously not saying that prices next year will increase by only 1p in the pound. I wish that I could say that. What I am saying is that the additional element, to which I have drawn attention, is that which can be directly attributed to changes in the Price Code.

The hon. Member for Gloucester also asked about the position of Category III firms. We expect a further improvement in administering the controls by the Price Commission as a result of the main change, to which she referred. We are blocking a gap here which was left by the previous Government's structure of control. The Price Code applies to all firms, whatever their size, and all are expected to be guided by it. For the smallest firms there are no further requirements. For the larger firms—Category III—there is an obligation to keep records but not to make regular reports to the Commission.

The Price Commission has pointed out in a recent report that it is hampered by the fact that it has no means of knowing which firms these are or where they are. We hope that the change will be very useful.

My right hon. Friend the Secretary of State made it clear today that her proposed amending of the Price Code was done with the primary object of safeguarding investment and jobs. It has been said that, notwithstanding the Government's proposals in the Budget and the code, there is anxiety about the level of investment in the United Kingdom today. There is anxiety about investment not only in the United Kingdom but in other advanced industrial countries, and the events of the past year have caused uncertainties for the future of world trade on which we are so dependent. Other industrial countries are among our best customers for exports, and, naturally, this affects the outlook here.

What is certain is that the action which the Government have taken to assist investment means undoubtedly that investment and, therefore, employment will both be higher than they would have been had the Government not acted.

It may be said that the Government have not gone far enough, and a number of Opposition Members have said as much. But these are very difficult matters of judgment. There must be a limit to the assistance to industry which can be afforded by rising prices, and inflation itself poses a substantial threat to employment.

My right hon. Friend has said already that she does not want there to be any misconceptions about the date from which the investment relief operates. I stress this. Because large companies have to wait 56 days before they can take their relief, we do not want to hold up investment for this period. Therefore, firms will be able to include in their relief year investment undertaken from about now.

To those who suggest that the Government's measures are inadequate, I say that the total package of the Chancellor of the Exchequer, taking account of the Price Code, the tax deferment and the finance to be provided by Finance for Industry, adds up to about £1½5 billion for industry and commerce. This is substantial help, by any standards.

In a speech of great thoughtfulness and importance my hon. Friend the Member for Nuneaton took the view, which a number of people take, that the Government have been deceived by industrialists who claim that their liquidity position is critical. There are differences about this, as there are about the effect of the code proposals. The latest Financial Times Monthly Survey of Business Opinion makes it clear that some companies say that the changes proposed in the Budget and the code will not help, and others see little benefit.

There are a number of indicators which the Government must look at carefully—

Mrs. Elaine Kellett-Bowman (Lancaster)

On a point of order, Mr. Deputy Speaker. Is it in order for the hon. Gentleman to take up so much of the time allocated to the debate on the National Health Service?

Mr. Maclennan

I am going a little beyond the time at which it was agreed the debate should end because I started my speech later than was expected. This was to allow two Opposition Members to intervene at an earlier stage.

Mr. Leslie Huckfield

The hon. Lady should have been here.

Mr. Maclennan

We have used a combination of remedies to deal with the problems that we see. We take the view that not all the finance needed for industry can be provided by demolishing the Price Code. Even more price rises would only fuel the inflation which lies at the back of many of industry's problems.

The action of my right hon. Friend the Chancellor of the Exchequer to defer some tax on the element of stock appreciation in profits is intended to provide immediate relief for companies this winter. His proposals to expand the medium-term lending finance for industry provide a facility which industry has not enjoyed to date, and there is a limit to what industry is ready or able to borrow.

My right hon. Friend will consider all the comments that have been made in this debate, but when hon. Members see the new Price Code Order I hope that they will consider it carefully as a genuine attempt to reach the right balance between encouraging new investment and assuring the public that profits are not inflated and that prices are not increased without justification.

Question put and agreed to.


That this House takes note of the consultative document on the Review of the Price Code (Command Paper No. 5779).