§ For some months my right hon. Friend the Secretary of State for Prices and Consumer Protection has been conducting a thorough review of the Price Code. She will be publishing later today a consultative document which will set out the conclusions she has reached and the proposals she wishes to make for amending the code. The House will, therefore, be able to discuss these proposals in the course of the economic debate of the next few days in the context of the other proposals I am making in this Budget. There will also be a further period of consultation on these proposals with representatives of industry and others before they are put into effect, and both Houses will have an opportunity to discuss them again in their final form on motions for affirmative resolutions.
§ Representations were made both to me and to my right hon. Friend that the present price control should be completely abolished or radically narrowed in scope. We do not believe that that is either necessary or right, or that it would be consistent with the social contract in present circumstances. But we do believe that there is room for some changes in the present Price Code providing they are designed to meet the real problems of specific sectors of industry and are compatible with a strict control of price increases.
§ My right hon. Friend's most important proposals on the code are tailored to the situations which make amendment necessary and justified. First, the present level of the productivity deduction, which has to be made from the labour cost increases of manufacturing firms when settling price increases, does not take sufficient account of the rate of inflation since it was first established. It was introduced by the previous Government at 50 per cent. when pay increases were smaller and output could grow faster for the home market.
§ We therefore propose to set the new level of productivity deduction for firms with about the average proportion of labour costs in their total costs at 20 262 per cent. But we also propose to relate the amount of deduction more closely than hitherto to the proportions of labour costs incurred by specific firms. For example, firms where labour costs are between 15 per cent. and 35 per cent. of total costs will be subject to the 20 per cent. rate, but a firm with 80 per cent. labour costs will be subject only to a 9 per cent. rate, while for one with 5 per cent. labour costs the rate will be 35 per cent.
§ Next, my right hon. Friend is proposing a new relief in the price control related directly to firms' investment plans. Companies will be permitted to recoup in increased prices over a period of a year up to 17½ per cent. of the cost of their programmes of investment for that year in plant and machinery and in industrial buildings. There will be arrangements for ensuring that anything added to prices under this relief is in fact spent on investment, including a review of the position after six months with arrangements for refusing further price increases if the programme is underspent. There is here a real incentive to companies to maintain and increase their investment.
§ My right hon. Friend will also be making proposals to clarify, and within strict limits to improve, the safeguards in the code in cases where the profit margins of manufacturers have been reduced well below the levels of April 1973. There will also be improved safeguards for distributors.
§ This group of measures on the Price Code will allow some rebuilding of margins to firms which maintain substantial investment programmes, and for others will limit or halt erosion of profit margins. All this will, however, be within the framework of a continuing firm price control.
§ The effect on the Index of Retail Prices is difficult to estimate. It depends on the effects of competition, the interaction of the reliefs, and so on, and it will develop gradually as the months pass by.
§ The House should realise that if the Secretary of State had not proposed to make these changes in the Price Code now, most firms would probably have been free to pass on all their cost increases in prices by the middle of next year, because they would have reached the point at which they could take advantage of the existing profit safe 263 guards. In the meantime, however, prices would have been held down, but at the cost of further pressure on their profit margins.
§ If we compare the effect of the changes in the Price Code with what might have happened otherwise, the effect on the Index of Retail prices should be something under 1½ per cent., all by the middle of next year. However, if we compare the effect with the situation under present profit margins—which is what most people do—it should be under 1 per cent.