'Where any person has obtained relief under section 52 of this Act, the value of his trading stock at the beginning of the period of account which begins on the day following that as at which the closing stock value for the purposes of the said section 52 was determined shall be increased by the amount claimed in the case of—
§ Brought up, and read the First time.1622
§ Mr. Hordern
I beg to move, That the clause be read a Second time.
The purpose of the clause is to extend stock appreciation relief for a further year. I recognise that the Government have acted to relieve companies from the effects of inflation on their stocks. Admittedly they have done so rather late in the day, but there is no doubt that the assistance has been of great benefit to companies and has been much appreciated by them.
We understand that the cost of the relief contained within Clause 52 and Schedule 9 is approximately £3,895 million over two years. The cost will be approximately £1,300 million this year, part of that amount covering 1973–74 but the greater part of it—namely, £1,125 million—covering 1974–75. The cost of the relief next year will be about £2,600 million. Of course, that depends on whether the companies will claim the full amount next year or whether some of it will be transferred for later on.
We need to know from the Government—I hope that the Chief Secretary will answer this point—what progress the Sandilands Committee is making. Have the Government received its report? If not, when do they expect to receive it? When do the Government expect the consultations to be concluded which will follow consideration of the report? When can we expect to know the Government's proposals following the report? It is very important that the House should know what is happening as regards the Sandilands Report.
With all due respect to the Chief Secretary, it is not enough for him to leave the matter in the way in which it was left on Second Reading, when he said.I give the assurance that it is extremely unlikely, now that the basis of stock valuation for tax purposes has been altered, that it will ever be possible to go back to cost or market value."—[Official Report, 8th May 1975; Vol. 891, c. 1747.]It is unlikely but it is not, unfortunately, a bankable assurance or an accountable assurance, as the Chief Secretary will recognise. Nor can firms make any real calculations about future cash flow with only an assurance that some form of stock relief will be available. Companies' 1623 accountants and auditors will continue to insist that a tax equalisation account is provided. That will mean that funds which might have been used for investment or plain survival will be frozen.
The greatest indictment of all is that so much money has to be returned to companies in this way. The return of this money is not the result of any sudden generosity on the part of the Government; it is merely the result of inflation. The vast sum of neatly £3,800 million represents the Government's failure to control inflation. It represents in a real way the cost of the social contract and the Government's total failure to curtail their own expenditure. In fact we are confronted by increased expenditure as a result of the additional subsidies which were introduced last July and at the same time the reduction in the rate of VAT to win the last election. The price of inflation that industry was expected to pay is now being borne by the taxpayer.
There is another consequence to be considered. The greater part of the relief, amounting to £2,600 million, will come next year and may be offset against this year's profits. This seems to show how much the Government expect inflation to rise next year. The level of profits on which stock appreciation is based will be very low. We can see how the Government view the expected rise in inflation.
It is becoming increasingly difficult this year for companies to earn real profits as opposed to stock profits. The evidence is there for all to see. The Financial Times this morning contains an article by Sam Brittan, prominently placed on the front page, to the effect that it is now official thinking in the Treasury that unemployment will rise to 1½ million by the middle of next year. I hope that the Chief Secretary will say something about the present situation. In a week's time we shall have the June unemployment figures, and they may be over 1 million. That shows the state of confidence in industry. If there were confidence in industry, there would not now be so many unemployed, nor would the prospects ahead for employment be so much worse than they are now.
The latest monthly economic assessment shows a fall of 8 per cent. in manu- 1624 facturing investment in the first quarter of the year. The Department of Trade's Investment Intentions Survey carried out in May showed a forecast fall in the volume of manufacturing investment of 15 per cent. I do not recall such a marked loss of confidence in manufacturing investment. The Chief Secretary may be able to correct my impression—I hope he will be able to do so—that I recall no time when the prospects for manufacturing investment were so poor. The situation appears to be rapidly deteriorating. The survey appeared only recently, but the Financial Statement, in April, forecast a fall in manufacturing investment of about 10 per cent. That is a further sign of deterioration.
Let us take another indicator, which is the best growth record the Government can boast—namely, the record of bankruptcies. In 1974 there were 5,716 bankruptcies, 45 per cent. more than in 1973. In the first quarter of this year there were 1,938 bankruptcies, nearly 50 per cent. more than in the same quarter last year. How much longer can this go on? One has only to talk to any businessman to see how much firms are cutting back, wherever they can, on investment, stocks and employment. The limit of £6, regarded by the TUC as a minimum, will make things worse.
The Chief Secretary recognises that it is not much use killing the golden goose of industry, which his hon. Friends below the Gangway would like to do. But the goose has long since lost its glitter. It has become lean and scrawny, increasingly dependent on the Government for handouts, for these stock appreciations provisions and all the rest. Meanwhile, in another part of the farmyard lurks the fat, prognathous hog of Government expenditure, seizing all resources that it can get and producing nothing in return. That is the position. We can see it from the financial flow statistics and also horn empirical evidence that already exists.
If we work on the principle that nobody can borrow unless somebody is prepared to lend, it means that the financial deficit in the public sector of £7,571 million for this year has to be met by a surplus in the private sector from persons and companies and from the surplus arising overseas from our balance of payments deficit. Recently that balance of payments deficit has been 1625 improving, and that is an encouraging sign. We may now be running a current balance of payments deficit of about £1,200 million a year, or even less. That in turn means that there has to be a correspondingly large surplus in the private sector for individuals and companies to finance the deficit in the public sector.
If there is an anticipated deficit in the public sector for this year of about £7,500 million—this must be the very minimum estimate, because the Supplementary Estimates we saw last week were just short of £2,000 million—and if the balance of payments deficit for this year is a great improvement on that of last year and amounts only to approximately £1,200 million, apart from any residual items that there might be, this must mean that a surplus has to be earned by the private sector of some £6,300 million to balance the equation. Therefore, the private sector—whether individouals or companies—would have to save, rather than spend on consumption or on physical assets, on a scale which has not been dreamt of before. It means that individuals will have to accept less in real terms and that there will be very little room for any form of investment in industry.
This is a most lop-sided and ludicrous position. One end of the seesaw is permanently occupied by the oppressive dead weight of Government expenditure while the other end, the private sector, is up in the air desperately trying to make contact with the ground. This is what is so depressing about the White Paper which adds to public expenditure this year but does nothing to ease the position of industry.
Let us suppose that there is a recovery of world trade next year. How will industry take advantage of that unless it is able to invest at that time, and preferably able to invest before? However, when we get to that stage industry will perforce have to be competing for resources with the Government. The consequence will be that interest rates will be forced up or, as we have seen in times past, there will be an increase in the money supply which will start the whole weary cycle once more. That is how I foresee the situation developing.
1626 There is only one way to put the situation right, and that is to cut public expenditure now.
§ Mr. Ken Weetch (Ipswich)
The hon. Gentleman was talking about the level of unemployment a few moments ago. Now he is talking about recession and public expenditure. Does he agree that if there are substantial cuts in public expenditure, the recession in the level of unemployment will increase?
§ Mr. Hordern
The hon. Member for Ipswich (Mr. Weetch) is absolutely wrong. When I spoke about the level of unemployment I was referring to it as a sign of the lack of confidence of business and industry. Indeed, I think that the growth of unemployment is inevitable in any case. I do not shrink from the proposition—I never have done—that a cut in public expenditure necessarily means an increase in the level of unemployment. If public expenditure is not cut now, the resulting increase in unemployment will inevitably be far higher than it is at present. That is the point that must be grasped.
§ Mr. Dempsey
The Secretary of State for Defence recently announced that we shall cut defence expenditure by £2,150 million by 1980. I understand that the Conservative Party opposed that cut in public expenditure. What public expenditure does the hon. Gentleman want to cut? Will he spell out in detail every service that he would cut in the interests of pursuing this policy?
§ Mr. Hordern
I am grateful to the hon. Member, and I shall respond immediately to what he has said. For a start, I would not have continued the element of food subsidies that the Government propose. I would not have kept down the otherwise inevitable increase in council rents that would have occurred. Equally, I would have made quite sure that there would have been no proposals for nationalisation of North Sea oil or the Community Land Bill. The Community Land Bill involves 14,000 civil servants. These are totally unnecessary forms of expenditure which are bound to increase demand on the money supply.
Those elements alone will cause great difficulty for the Government, who are already far exceeding any possibility of 1627 their public expenditure being met by revenue or genuine borrowing. The dilemma in which the Government will find themselves in the next few months is worse than anything that can be appreciated now.
It is all very well to talk about a balance, which the Government try to portray, as if next year's public expenditure can be cut by £1,100 million quite easily and rationally. But there will be a strain on industry and business for at least another year of a kind which has not been experienced at any stage since the war. This is inevitable because of the increase in public expenditure which has occurred already and which is proposed far in advance of anything we have so far experienced.
The Supplementary Estimates were an indication, but there are other ways in which public expenditure will inevitably grow far beyond the present forecasts of the Government. It can grow only at the expense of the private sector and of any prospect of the private sector to recover.
I commend the new clause to my right hon. and hon. Friends. I hope that after listening to the Chief Secretary they will feel able to support me, possibly in a Division.
§ Mr. Joel Barnett
I hope that you, Mr. Deputy Speaker, will not mind if I deal with the new clause. The hon. Member for Horsham and Crawley (Mr. Hordern) seemed to go a little wide of the subject. I hope that he has not prejudiced his chance of speaking on these matters on Monday or Tuesday of next week.
In case the hon. Gentleman had not appreciated it, the new clause turns stock relief, which at present is a deferral of the tax relief, into a permanent relief. The hon. Gentleman did not pay too much attention to that. Therefore, perhaps I should say at the outset that I find that proposition unacceptable. I hope that the House will also find it unacceptable.
I should explain that the new clause is unacceptable on the interim or any other form of stock relief because of the rough and ready nature of the relief. Stock appreciation need not necessarily be due to inflation. It could be due to 1628 a substantial increase in the volume of stock. Nevertheless, this stock relief would still be available. I find it unacceptable to allow that as a permanent relief.
For example, if a company had £100,000 worth of relief, a year or two years later went out of business or went into a different form of business, sold off and took the profit on stock for which it had received stock relief, under the new clause that profit would be wholly tax-free. I cannot believe that would be considered right as a form of stock relief.
The hon. Gentleman began by paying not too churlish a tribute—I will take it as a tribute—to the stock relief which gives a substantial amount of tax relief to individual traders, partnerships and small companies with stocks below £25,000 which previously did not get the relief in the first year. I think he recognises, as most people in industry do, that this is a very substantial form of tax relief. He made the point, perfectly reasonably, that what tends to happen in accountancy terms is that in the balance sheet of the firm concerned the relief appears in the tax equalisation account. There is nothing unusual about that. It happens in exactly the same way in the case of capital allowances, where the first year allowance is now 100 per cent. Most companies do not write off 100 per cent. in the first year, and the difference is usually put to a tax equalisation account. That is the normal procedure and the recommendation of the Institute of Chartered Accountants. That is what happens.
The hon. Gentleman said that that means that the funds are frozen, but he completely overlooked the fact that all that is frozen is the account on the balance sheet and that the cash flow is helped, which is what this measure of relief is intended to do. The fact that it was in a tax equalisation account would not alter anything, unless—and here one comes to the nub of the argument—the form of tax relief given in this interim measure were to be removed while inflation was continuing.
§ Mr. Hordern
That is the point. What is important is not the fact that the money is in a tax equalisation account but that no company can know with 1629 certainty what the future position will be. Therefore the point of the new clause is to establish some form of permanency, though not particularly in this form. I appreciate the Chief Secretary's difficulty in relation to the Sandilands Report, but all companies considering their future investment are in great difficulties when they do not know what form of further provision there is to be.
§ Mr. Barnett
I was coming to that point exactly, because I am very much aware of the concern on the part of accountants and their advisers. What the hon. Gentleman did not tell the House is that the only way his new clause deals with it is by giving the relief as a permanent fact. As I have indicated, I hope that he would not be prepared to go that far, and that he is putting forward a form of probing new clause to try to ascertain what would happen afterwards.
As the hon. Gentleman fairly pointed out, I have on at least two occasions indicated to the House that clearly one could not claw back that relief at the present time—it would not be acceptable—or in the foreseeable future while inflation continues. He quoted me quite fairly as saying that one cannot get back to the basis of stock valuation that has always previously applied for tax purposes, and, indeed, for accountancy purposes—that is to say, the lower of cost or market value. If one went back to that, clearly the tax relief would be clawed back, and that would be disastrous. On a number of occasions I gave the best assurance that was possible until we got to a form of more permanent stock appreciation relief. I said that it is extremely unlikely that the system will be altered or that we could possibly go back to the old system of the lower of cost or market value, and that, so long as inflation persists, it is inevitable that some form of stock relief will be permanent.
That is nothing like the same thing as the hon. Gentleman is proposing in his new clause. As I have indicated, what he is proposing is not just a form of stock relief. It is that the relief itself would be permanent, and would be given to companies even though they had realised the stock and made a profit on it. Under his proposed new clause that profit—perhaps a very substantial profit— 1630 would be made wholly tax-free. I do not think that that can be acceptable.
We are now considering the Sandilands Committee's Report, and I give the hon. Gentleman the assurance that we hope to come back in the Finance Bill next year with a permanent form of stock appreciation relief based on what the Sandilands Committee recommends. I cannot say whether it will be precisely like that, because at present we are considering the report. But we have given a commitment previously that we shall take account of Sandilands in devising a new and more permanent form of stock appreciation relief. I hope that the hon. Gentleman accepts that that is the way to deal with the matter rather than the way that he proposes.
I hope that I shall be forgiven if I do not take up any of the wider matters which the hon. Gentleman raised about the balance of payments, employment and the rest of it.
As for manufacturing investment, I share the hon. Gentleman's concern. Certainly it is not as I would like it. As he said and, indeed, as I said in answer to Question last Thursday, the reason for the decline in manufacturing investment is not the shortage of availability of finance. The reason is the confidence factor and all the other factors which we are trying to deal with now. However, this clause would not be the answer to the problem. I hope that the hon. Gentleman will feel able to withdraw it.
§ 9.15 p.m.
§ Mr. Cope
The Chief Secretary said that the effect of this clause would be to turn the stock appreciation relief based on Clause 52 and Schedule 9 into a permanent relief. I believe that I know what he means. But he does not mean permanent in the sense that this relief would go on for years and years and would apply next year as it has this year or as it did last year. It is not permanent in that sense. What the right hon. Gentleman means is that the clause would ensure that the relief was not clawed back under any circumstances.
In the past the right hon. Gentleman has given—and he has repeated today—the terms of the undertaking which he gave that, in general this relief would not be clawed back. However, we know from the terms of his undertaking and 1631 we understand generally that not everyone is protected by that undertaking. Unless this clause or something like it is passed, some companies, individuals or partnerships are likely to find their relief clawed back, at least in part. At the moment, we do not know and they do not know who these individuals are. That is one reason why everyone is having to put the money into tax equalisation accounts. Another reason why they are having to do it is that, unless this clause is passed, no one can rely on the fact that they will not have to pay it back in due course and that it will not be collected on some subsequent occasion. It is this uncertainty which the clause seeks to end.
I do not care much for the drafting of the clause, but I have no wish to criticise it on that score. I understand some of the reasons which lie behind the way in which it has been drafted.
Being a member of the same profession as the Chief Secretary, I understand what he means when he talks about the balance sheet and the tax equalisation account and the fact that in at least a cash flow sense the money is not frozen in the sense that it cannot be used. But it remains a potential debt on every company's balance sheet, and it will turn into an actual debt in some balance sheets. This is where the uncertainty lies for all companies, and it is an even greater uncertainty for some companies, we know not which. But, as the Chief Secretary has been prepared to give and to repeat his undertaking, it is logical at least to accept the principle of the clause, even though I do not expect the right hon. Gentleman to accept it as it is drafted.
The Chief Secretary referred to the Sandilands Report. I understand that it is not easy to implement whatever the Sandilands Committee has reported and to frame it in legislation for insertion into this Bill.
However, the Chief Secretary has said that there will be legislation next year in the Finance Bill on this score. I do not suppose anyone knows exactly what form that legislation will take, but it will somehow continue this kind of relief—this was in the Chief Secretary's undertaking—although not necessarily in the sense of being applied to stock alone 1632 or even to stock at all. It may be in a more general form—perhaps on the lines of inflation accounting generally rather than being related to any specific asset or assets. Nevertheless, this sort of relief will continue.
I do not understand how it can possibly go on to cover anyone, who has been covered by this relief to precisely the same extent. However, as it is drafted some people will benefit mote than others from any recommendations the Sandilands Committee may make. It is important that this relief, rough and ready as it is which is being given for the second year by the Bill, should remain permanent.
§ Mr. Hordern
Will my hon. Friend not agree that if there is no continuation of this relief and in so far as there is no continuation of it or, indeed, any alteration of it, the impact of such a change is bound to be very severe on industry and on business? If there is any reduction in the flow of funds towards the private sector because of the size of the public sector, the strain upon the private sector will be even greater than it was before. That is the sense which lies behind the new clause.
§ Mr. Cope
I accept what my hon. Friend says but I do not accept that it is at all likely that there will be no extension of this relief in any form. I hope that this relief, as such, will not have to continue for a third year. I hope that we shall have a more permanent arrangement. I should like this relief to be settled so that we can say "That is it. You have had the relief for this year. We shall not try to claw it back." The Government have more or less said this. They have said to most companies "We shall not try to claw it back. We shall draw the line on this relief and then we shall start afresh with the new Sandilands relief, whatever it may be".
For that reason I support the principle behind the new clause.
§ Mr. Powell
There was what I think was an important ambiguity in a phrase used by the Chief Secretary which goes to the heart of this debate and which leads me to conclude that whatever may be its deficiencies, the new clause before the House is correct in principle. The 1633 phrase used by the Chief Secretary was "as long as inflation persists". The right hon. Gentleman said that as long as inflation persists some such relief in this form or some other form must go on.
There is embodied in that expression, if he will forgive me saying so, a common misconception about inflation, namely, the notion of inflation as some thing which is static and not dynamic. If the Chief Secretary means as long as each year there is a continuing depreciation in the value of money, it goes without saying that some such relief as this must be carried forward.
However, if there is a cut-off and no further inflation from a given point of time, something still has to be done about the régime which was introduced by the concession last year and in the current year, because that régime was based upon the acceptance that the stock appreciation was not a real appreciation but a fictitious one. It remains a fictitious appreciation as a matter of fact, whether or not dynamic inflation continues in 1976–77 and in subsequent years.
I take it that the new clause fixes in the statute—we can come back to this, and we must come back to this, next year—the fact that this House recognises as fictitious and not as real the stock appreciation which has taken place in this and in the previous financial year. I believe that that ought to be recognised.
§ Mr. Joel Barnett
The right hon. Gentleman may be under a misapprehension. As I indicated, in the case of a company that is either in business only for a year or stops stocking a particular product or any products at all and its stock declines to nil, under this clause and those new clauses now before the House any profit realised on that stock would then not be liable to tax.
§ Mr. Powell
Of course the same implication is present in principle in the concession itself, in the whole nature of the concession, because it is an acceptance that the monetary enhancement in valuation is fictitious and not real. That cannot be conceded generally and denied in a specific case.
Of course, the object of valuing stock at the beginning and the end of an accounting period is to ascertain whether real appreciation has taken place, whether 1634 that stock has become relatively more valuable during that period in comparison with everything else, and therefore, whether a real profit has been made, a real enhancement of wealth, by the owners of the stock. But that is the interpretation which is rejected by the régime which was introduced last year, and I believe it is the Chief Secretary who has not appreciated what is the necessity for some such declaration as is embodied in the new clause.
§ Mr. Cecil Parkinson (Hertfordshire, South)
We have had debates on this subject or on variations of this theme on a number of occasions. The Chief Secretary's reply is almost always the same. It is that the relief is rough and ready. We accept that. He has convinced us of that. The reply is that if anything is done of the kind that we suggest, anyone who runs his business down or goes out of business will get a benefit and that the relief was never intended to benefit such people. I am glad to see the Chief Secretary nodding, because I am not parodying his remarks. But we see that the essence of this relief was that it was meant to help continuing businesses.
§ Mr. Parkinson
In that case, perhaps I may give the Chief Secretary an example of the ludicrous distortions that this particular relief will cause for continuing businesses.
There is one way in which continuing businesses can continue to obtain and hold the relief. That is to make sure that their stock at the end of the year is the same as their stock at the beginning. If it is, they are preserving the relief they have had. Any run-down of stock will result in claw-back. That is precisely the sort of nonsensical by-product that the continuation of current policy will produce.
I declare an interest in that I am connected with companies which have obtained a benefit. When one goes to meetings one finds that the discussion is "Now we must make sure that at the end of the year we are well stocked up so that we do not lose the relief." That is very sensible on the part of the companies but it is commercial nonsense, because what the companies are saying is "We must continue to have a lot of 1635 money tied up in stock, because if we do not we shall lose the tax relief."
That is a further example of the sort of ever more involved situation that the Government have achieved by their various measures since they came to power. First they boosted the rate of corporation tax. They said "There are too many profits. Companies are making too much money. That is where the money will come from to finance our activities." Then the Chief Secretary, once he had got used to the glories of office, suddenly started to remember his commercial background and to realise that a lot of those profits which the Chancellor said would be available to finance his gross overspending were stock profits which needed to be retained in the companies to finance stock.
What we see in the July measures is an attempt by the Chancellor to reverse a bad decision. The history of this Chancellor's term of office is that he does something in one Budget which is wrong, he refuses to admit it and then he introduces a very complicated measure in the next Budget to try to compensate for the damage which his earlier mistake has caused. He is never prepared to admit a mistake or reverse it. We therefore have nonsensical ideas. The Government put up taxes too high, they overspend, inflation is generated as a result of what the Government do and damage starts to be done. The Government then introduce a paraphernalia of measures—stock appreciation relief, Industry Acts, and capital allowances which are fantastically generous—to encourage people once again to do things that the other part of Government policies are encouraging them not to do.
In an unguarded moment tonight, the Chief Secretary said that that was absolutely right, that companies were being held back not by shortage of money but by lack of confidence. I am glad to see the right hon. Gentleman nodding his head in agreement. He and his colleagues have done more to destroy confidence than any other group of Treasury Ministers for many years.
The Government have dished out several thousands of millions of pounds by way of relief for companies which have stocks. They have said that com- 1636 panies which are overstocked deserve relief. But overstocked companies are not always the most efficient. The taxes have been taken from the profitable companies and relief has been given to the overstocked companies. But the only way in which the companies which are given the relief can keep it is to remain overstocked. The Government tell them "If you once start to run down your stocks, if you want to start to go liquid, to put yourselves in a position to invest, we shall claw back the relief." Companies have the money, but they cannot invest it because they know that it is not theirs long-term.
The Chief Secretary said that the Government would tackle the problem on a long-term basis, but companies have cash at present. They are saying that they dare not tie it up in machinery. It is silly for them to tie it up in stock, but they receive tax relief for doing the nonsensical thing and therefore they find it better to continue to be overstocked and not realise their cash. So we go on and on.
The Chief Secretary says that if the clause were accepted companies that went out of business would benefit. But what the clause would do is to help continuing businesses, which are the ones we are concerned about. If a company goes out of business it keeps the relief on its stock, but if the assets are distributed it picks up the tab in additional capital gains tax. Nobody will close down his business and walk away with the relief in his pocket, because at the end of the day if the assets are distributed—certainly in the case of companies—the shareholder will receive more than he would otherwise have received and he will pay capital gains tax on that additional sum.
Therefore, it is not true that in a business which is closing down the relief would be lost for ever and the Revenue would lose a great deal of money. There would be additional capital gains tax, and quite a large measure of the additional cash retained would be clawed back.
We say to the Chief Secretary "Please stop thinking about blocking loopholes and people going out of business to make money. Please think about the effect of the clause on continuing businesses." We think that stock appreciation was a 1637 rough-and-ready, profligate measure. It had to be overdone, because the Chancellor went in for over-kill in his first Budget and has been trying to make it up to industry ever since. The small benefits that might become available to people running down their businesses or going out of business are nothing compared with the injection of confidence that acceptance of the clause would give to business.
§ Mr. David Howell
This is not the first time this year we have discussed stock relief. Many of us who are involved in these debates are beginning to feel that we have been over this ground almost too often, but we still lack the clarity and reassurance that the new clause seeks from the Chief Secretary. Each time we have debated stock relief over the last six months it has been against a background of the situation in industry getting progressively worse. Each time the situation slides a bit more while the Chief Secretary is reassuring us in an almost paternal way. It is rather like holding an umbrella over a man who is drowning and reassuring him that at least it is not raining on his head.
We have the forecast from the Treasury of unemployment reaching between 1½ and 2 million. This is the gloomiest official forecast we have had so far, but since our last debate on stock relief we have also had forecasts from the Department of Industry showing some of the most disastrous falls in industrial investment trends ever recorded. There is a 15 per cent. fall for manufacturing investment and a 10 per cent. fall for the distribution industry's investment. These figures are far worse than even the gloomiest pessimist had predicted.
All this time the Chief Secretary is telling us that everything is all right and that stock appreciation measures have produced massive relief and assured the cash position of firms. In one way that is true, but it is a falsely-based truth, if that is not too Irish an expression.
Has the Chief Secretary received the Sandilands Report? How long is he going to keep it? The whole House is getting a little worried about the tendency of the Government to sit on reports. It seems from earlier events this afternoon that they tend to sit on them for a rather long time. If the report is very big, the Chief Secretary will look a little taller 1638 by sitting on it, but this is a serious matter about which industry is deeply concerned and we want to know how long the Chief Secretary is going to keep the report.
Will this relief be clawed back or not? What will happen afterwards? We have had assurances from the Chief Secretary that it is unlikely that the situation will go back to what it was before, and the Minister of State, though in a way that slightly unnerved me, said earlier that it was merely temporary. We have had queries from people in industry who want to know whether it is temporary or permanent and how they can regard funds put aside that might be clawed back.
One example of the problems that are caused is given in a letter from a major company which says:The November Budget first introduced tax relief on stock appreciation. At that time, we calculated our relief at approximately £686,000. We assumed on the basis of the Chancellor's statement that we could plan on utilising the tax relief for at least a few years, and make our investment plans accordingly. On 15th April, we received quite a shock. Tax relief on stock appreciation was to continue, but the relief will be based on the difference in stocks over a two-year period and the cumulative profits over that same period … our stocks rose during 1974 by £1,707,000. During 1975 we exerted a great deal of management time and energy in controlling the levels of our stocks and succeeded in reducing them by approximately £1 million. At the end of 1975, after two years, our stocks therefore were only £714,000 above the base, and it is on this figure that our tax relief for 1975 is computed. As 10 per cent. of our cumulative trading profits exceeds the increase in our stocks (£714,000), we get no tax relief in 1975. … Thus, when we pay our tax bill next January, we will have to give back all the relief we received last year, and get no additional relief this year.That is an example of what happened over the two-year period. However, it is also an example of what many firms fear will happen in the future.
Perhaps these funds can be held in cash flow for the time being, but who will invest that kind of money until he is sure where the future lies? Can the money be tied up in real fixed investment now with such a doubt as to whether it will be clawed back in the future? That is the thinking behind the new clause. The wording may not be perfect but it is essential that we get this matter clear, because until it is made clear money will remain available in cash 1639 but it will not be available for investment. That is the missing element in the present situation.
It is all very well for the Chief Secretary to say that because of the stock appreciation relief the financial position of industry is improving, and that is literally so in money terms.
§ Mr. Joel Barnett
The hon. Member has made an important point. He said that the money would not be available for investment if the companies reduced their stock. If a company makes a £700,000 reduction in stock and then buys £700,000 worth of investment, it will enjoy £700,000 worth of tax relief on the investment.
§ Mr. Howell
Certainly it would, and I have described how such companies have managed to cut down stocks. I was just coming on to one of the reasons why firms are cutting down stocks and striving desperately to find new ways of making do on less. That is a reflection of the present financial position of companies. It may look better, but it does so only because they have cut back on investment and have dismissed employees, which explains the rising trend of unemployment. They have cut down on stocks, even with the appreciation tax relief. There is some evidence that firms are using their substantial rights issues to pay off debts and that they are using internal cash more efficiently in order to try and make do in the present tight situation.
That is the position now. It is not as though firms have been put in a stronger position in which they can weather the storm. As soon as investment opportunities pick up again, they will immediately run into further difficulties. The corporate sector will run into a deficit and it will need further funds and savings. That is where the relief, which was an essential element of the argument advanced by my hon. Friend the Member for Horsham and Crawley (Mr. Hordern), comes in. As the corporate sector recovers, as we hope it will in due course, it will immediately need an enormous increase in cash, and there are nothing like the necessary resources available at present.
The corporate sector will look for that cash and for savings from the private sector, but I fear that those savings and 1640 that cash will have been gulped up by the enormous and still increasing public sector borrowing requirement. That is our fear about public spending. One Labour Member asked why we were so worried about public spending and why we believed that it should be cut now. We are worried because when the recovery comes and the corporate sector begins to look for funds, it will find that it has been crowded out by the public sector which is gulping up private savings.
The Chief Secretary may say that if it is financing its deficit and raising the savings, that will not be very inflationary. I believe that it will be inflationary but for other reasons. But whether it is or not, the effect on the private and corporate sector will be to crowd out investment that is needed to re-create job opportunities and to restore investment and employment. That is why we believe that the present rate of inflation is the main cause of unemployment. Accelerating inflation causes unemployment.
Unless the Chief Secretary and the Chancellor are able to reduce this year's public sector borrowing requirement—they have shown no signs in any of their measures that they intend to operate in that direction—the position will arise in which British companies will be starved of funds because those funds will have been absorbed by the public sector.
§ 9.45 p.m.
§ Mr. Lawson
Does my hon. Friend accept that if it should happen that the corporate sector is able to put some of those funds into an expanding corporate sector, it will mean that the Government are no longer able to sell gilt-edged in the way They have done, so that the problem of financing the vast financial borowing requirement in a non-inflationary manner will be totally impossible?
§ Mr. Howell
My hon. Friend puts it very clearly. It is Hobson's choice. Either the Government succeed in financing it, in which case the corporate sector will be starved and unemployment will rise, or they do not succeed in doing so, in which case there will be accelerated inflation, the extension of the corporate sector will be prevented and unemployment will rise. Therefore, unless the Government can get a grip on public sector borrowing by other means, they will be in a desperate situation.
1641 Although it is not immediately apparent, unless we are able to cut public expenditure this year and reduce the public sector borrowing requirement long before the £6 limit begins to have any effect on pay settlements in the public sector, the Chief Secretary and the Chancellor will be moving to the position that whichever way they turn and whatever they do will greatly increase the level of unemployment. I suspect that that is the rationale behind the latest Treasury prediction that unemployment will rise to 1½ million next year. That may be far from the point of stock appreciation, but it is not all that far because here we are concerned with getting something back into industry, and these are funds which can be used for investment.
We have had words, semi-words, ambiguities and every other kind of reassurance from the Chief Secretary but we have not yet had a firm undertaking or an indication that stock appreciation relief will remain on the statute book, that there will be no clawing back and that the funds can be used to create jobs for tomorrow. Unless we have that assurance, I advise my hon. Friends to press the new clause to a Division.
§ Mr. Hordern
I thought the Chief Secretary's reply was very disappointing. I and my hon. Friends who intervened have pressed him for the date of the Government's announcement. All he has said is that the report is to be produced for the Budget next year. I do not know whether there is to be an earlier Budget, in November, but if we are to wait until next April, that is an exceedingly long time, far too long for companies to wait for the Government's announcement. Here funds are to be frozen in a tax equalisation account, and no one will know whether all of them, or what part of them will be available or for what purpose in succeeding years. This is an intolerable position.
As I tried to point out to the House earlier and as my hon. Friend the Member for Guildford (Mr. Howell) has said, there is an enormous strain on the companies sector at the moment which is being exacerbated the whole time by the increase in public expenditure. Goodness knows, we have doubts enough about the reality of the Government's own estimates on the future growth of public 1642 expenditure, and those doubts have been confirmed by the Supplementary Estimates which appeared only a few days ago for a further £2,000 million. We are increasingly in doubt about the growing size of the borrowing requirement. Therefore, every penny that companies are able to save in stock appreciation relief measures is absolutely essential.
§ Mr. Parkinson
Would my hon. Friend not agree that a measure from which one can obtain benefit only by doing something which is uncommercial, keeping one's stocks higher than they need be for any commercial purpose, which means that one can have money available only if one continues to be overstocked, must have a large question mark over it even in the minds of Treasury Ministers?
§ Mr. Hordern
It is extraordinary—and this applies to other forms of taxation, as well; but we are concentrating on stock appreciation. Of course, companies more and more regulate their activities by trying to save tax—and not at all in their own commercial interests—for themselves or their shareholders. That is going on the whole time.
If the new clause is not passed, companies which are unable to keep the relief will have difficulty in expanding when world trade expands. Companies will face difficulties as a result of the increase in public expenditure. Although the trade balance has improved as a result of the efforts of traders, companies will be prevented from expanding later. These are important considerations. However, I hope that the position will improve. Unless the Government announce further measures to reduce public expenditure before the end of the year, companies will not be able to expand.
We are all concerned about the size of of the borrowing requirement. There will be a revival of world trade about next April which will result in considerable competition for funds. That will affect the rate of interest and will result in a vast expansion of the money supply. The Government will cave in. More money will be produced. The Government will be concerned about unemployment. Forecasts suggest that unemployment might rise to between 1½ million and 2 million. In that case the Government will be faced with a difficult situation. As a result of the competition for 1643 resources there will be a further large expansion of the money supply, which will lead once more to another cycle of inflation in 18 months.
§ Mr. R. B. Cant (Stoke-on-Trent, Central)
I should like to assist the hon. Gentleman in his minor filibuster. I agree with what he says about the dangers of the enlarged public sector borrowing requirement. Is he possibly trying to persuade the Chancellor—we know that he will not succeed—to do something disastrous for British business? With a great deal of financial dexterity the Chancellor is financing the public sector borrowing requirement. He is under strain as the balance of payments comes nearer in equilibrium. At least we are attracting foreign money. We are showing great skill in selling gilt-edged securities. We can enlarge the money supply, for example, only by the sale of Treasury bills. As the hon. Gentleman referred to factors stretching into 1976, including the recovery of world trade, will he not encourage the Chancellor to extend the public borrowing requirement?
§ Mr. Speaker
Order. The hon. Member for Stoke-on-Trent, Central (Mr. Cant) began his intervention by referring to a minor filibuster.
§ Mr. Hordern
I am not quite clear what the hon. Gentleman is inviting me to do. If he would like me to comment further on the public sector borrowing requirement, I will do so. Had he been here earlier he would have heard that the problem arose from the size of the public sector deficit in the current year, which is about £8,000 million. The fact that our trade balance is improving, as the hon. Gentleman said, produces an enormous strain on the personal and private sectors, both on individuals and on companies.
The position is that unless individuals are prepared to curb their spending habits
§ to a degree not experienced since the war, unless they are prepared to take account of the new measures, there is no way by which the Government's public expenditure can be financed except through the expansion of the money supply. The position will be even more serious for companies, unless they save to the same extent and do not make the necessary manufacturing investment.
§ That brings me back to the importance of the stock appreciation provisions and of their continuance for at least a further year. We should not have to wait until next April for being told the Government's proposals for stock appreciation. No doubt they will be very complicated proposals which we shall have to study carefully in Committee. Whatever the provisions are, and to the extent that they are less good than the stock appreciation provisions in the Bill, there will be a considerable continuing strain on the financing of industry.
§ I have referred shortly to the position of the private sector and the difficulties which will arise because of the great increase in public sector expenditure. That will remain with us for a long time to come. It will be extremely difficult to cut down public sector expenditure, but the difficulty will be for companies. Companies will be in a position of continuing doubt. They will not know how much they have to invest—and we are told by the Chief Secretary that this uncertainty will continue until next April. That is not good enough. Companies should know with more certainty where they stand. They will be under considerable pressure from the ever-increasing expenditure in the public sector.
§ For these reasons, I hope that my hon. Friends will join me in voting for the clause.
§ Question put, That the clause be read a Second time:—
§ The House divided: Ayes 190, Noes 215.1647
|Division No. 285.]
|Bennett, Sir Frederic (Torbay)
|Boyson, Dr Rhodes (Brent)
|Bennett, Dr Reginald (Fareham)
|Amery, Rt Hon Julian
|Bryan, Sir Paul
|Berry, Hon Anthony
|Atkins, Rt Hon H. (Spelthorne)
|Boscawen, Hon Robert
|Bain, Mrs Margaret
|Butler, Adam (Bosworth)
|Bowden, A. (Brighton, Kemptown)
|Hutchison, Michael Clark
|Page, Rt Hon R. Graham (Crosby)
|Chalker, Mrs Lynda
|Irvine, Bryant Godman (Rye)
|Churchill, W. S.
|Johnson Smith, G. (E Grinstead)
|Powell, Rt Hon J. Enoch
|Clark, Alan (Plymouth, Sutton)
|Jones, Arthur (Daventry)
|Clark, William (Croydon S)
|Clarke, Kenneth (Rushcliffe)
|Kellett-Bowman, Mrs Elaine
|Rawlinson, Rt Hon Sir Peter
|Rees, Peter (Dover & Deal)
|Rees-Davies, W. R.
|King, Evelyn (South Dorset)
|King, Tom (Bridgwater)
|Renton, Tim (Mid-Sussex)
|Rhys Williams, Sir Brandon
|Dean, Paul (N Somerset)
|Ridley, Hon Nicholas
|Roberts, Wyn (Conway)
|Lester, Jim (Beeston)
|Rossi, Hugh (Hornsey)
|Lewis, Kenneth (Rutland)
|Rost, Peter (SE Derbyshire)
|Eden, Rt Hon Sir John
|Edwards, Nicholas (Pembroke)
|Shaw, Giles (Pudsey)
|Elliott, Sir William
|Shaw, Michael (Scarborough)
|Evans, Gwynfor (Carmarthen)
|Macmillan, Rt Hon M. (Farnham)
|Sinclair, Sir George
|Fisher, Sir Nigel
|McNair-Wilson, M. (Newbury)
|Skeet, T. H. H.
|Fletcher, Alex (Edenburgh N)
|Marshall, Michael (Arundel)
|Fookes, Miss Janet
|Spicer, Jim (W Dorset)
|Fowler, Norman (Sutton C'f'd)
|Spicer, Michael (S Worcester)
|Maudling, Rt Hon Reginald
|Gardiner, George (Reigate)
|Stewart, Donald (Western Isles)
|Gardner, Edward (S Fylde)
|Stewart, Ian (Hitchin)
|Gilmour, Rt Hon Ian (Chesham)
|Meyer, Sir Anthony
|Gilmour, Sir John (East Fife)
|Miller, Hal (Bromsgrove)
|Stradling Thomas, J.
|Taylor, R. (Croydon NW)
|Thomas, Rt Hon P. (Hendon S)
|Gow, Ian (Eastbourne)
|Gower, Sir Raymond (Barry)
|Townsend, Cyril D.
|Moore, John (Croydon C)
|van Straubenzee, W. R.
|Walker, Rt Hon P. (Worcester)
|Hall-Davis, A. G. F.
|Hamilton, Michael (Salisbury)
|Morris, Michael (Northampton S)
|Hampson, Dr Keith
|Morrison, Charles (Devizes)
|Harrison, Col Sir Harwood (Eye)
|Morrison, Hon Peter (Chester)
|Whitelaw, Rt Hon William
|Wilson, Gordon (Dundee E)
|Wood, Rt Hon Richard
|Higgins, Terence L.
|Young, Sir G. (Ealing, Acton)
|Younger, Hon George
|Howe, Rt Hon Sir Geoffrey
|Howell, David (Guildford)
|TELLERS FOR THE AYES:
|Oppenheim, Mrs Sally
|Mr. Spencer Le Marchant and
|Page, John (Harrow West)
|Mr. Michael Roberts.
|Dunn, James A.
|Dunwoody, Mrs Gwyneth
|Cocks, Michael (Bristol S)
|Atkins, Ronald (Preston N)
|Edwards, Robert (Wolv SE)
|Ellis, John (Brigg & Scun)
|Bagier, Gordon A. T.
|Cook, Robin F. (Edin C)
|Evane, Ioan (Aberdare)
|Barnett, Guy (Greenwich)
|Evans, John (Newton)
|Barnett, Rt Hon Joel (Heywood)
|Ewing, Harry (Stirling)
|Bennett, Andrew (Stockport N)
|Crosland, Rt Hon Anthony
|Fernyhough, Rt Hon E.
|Cunningham, Dr J. (Whiteh)
|Fletcher, Ted (Darlington)
|Foot, Rt Hon Michael
|Davies, Bryan (Enfield N)
|Davies, Denzil (Llanelli)
|Garrett, W. E. (Wallsend)
|Davies, Ifor (Gower)
|Bray, Dr Jeremy
|Davis, Clinton (Hackney C)
|Gilbert, Dr John
|Brown, Hugh D. (Provan)
|Dean, Joseph (Leeds West)
|Brown, Robert C. (Newcastle W)
|Brown, Ronald (Hackney S)
|Callaghan, Jim (Middleton & P)
|Cant, R. B.
|Duffy, A. E. P.
|Grant, George (Morpeth)
|McGuire, Michael (Ince)
|Ross, Rt Hon W. (Kilmarnock)
|Mackintosh, John P.
|Harrison, Walter (Wakefield)
|Shaw, Arnold (Ilford South)
|Hayman, Mrs Helene
|Sheldon, Robert (Ashton-u-Lyne)
|Healey, Rt Hon Denis
|Short, Rt Hon E. (Newcastle C)
|Heffer, Eric S.
|Marshall, Dr Edmund (Goole)
|Silkin, Rt Hon S. C. (Dulwich)
|Marshall, Jim (Leicester S)
|Maynard, Miss Joan
|Howell, Denis (B'ham Sm H)
|Mellish, Rt Hon Robert
|Hughes, Rt Hon C (Anglesey)
|Smith, John (N Lanarkshire)
|Hughes, Mark (Durham)
|Hughes, Robert (Aberdeen N)
|Miller, Dr M. S. (E Kilbride)
|Hughes, Roy (Newport)
|Miller, Mrs. Millie (Ilford N)
|Mitchell, R. C. (Soton, Itchen)
|Irvine, Rt Hon Sir A. (Edge Hill)
|Jackson, Colin (Brighouse)
|Morris, Alfred (Wythenshawe)
|Jackson, Miss Margaret (Lincoln)
|Morris, Charles R. (Openshaw)
|Taylor, Mrs Ann (Bolton W)
|Jay, Rt Hon Douglas
|Thomas, Jeffrey (Abertillery)
|Jeger, Mrs Lena
|O'Malley, Rt Hon Brian
|Thomas, Ron (Bristol NW)
|Jenkins, Hugh (Putney)
|Jenkins, Rt Hon Roy (Stechford)
|Orme, Rt Hon Stanley
|Johnson, James (Hull West)
|Johnson, Walter (Derby S)
|Urwin, T. W.
|Jones, Alec (Rhondda)
|Wainwright, Edwin (Dearne V)
|Jones, Barry (East Flint)
|Walker, Terry (Kingswood)
|Jones, Dan (Burnley)
|White, Frank R. (Bury)
|Phipps, Dr Colin
|White, James (Pollok)
|Prentice, Rt Hon Reg
|Willey, Rt Hon Frederick
|Williams, Alan (Swansea W)
|Price, William (Rugby)
|Williams, Alan Lee (Hornch'ch)
|Lestor, Miss Joan (Eton & Slough)
|Williams, W. T. (Warrington)
|Lewis, Arthur (Newham H)
|Richardson, Miss Jo
|Wilson, Alexander (Hamilton)
|Lewis, Ron (Carlisle)
|Roberts, Albert (Normanton)
|Wilson, William (Coventry SE)
|Roberts, Gwilym (Cannock)
|Wise, Mrs Audrey
|Robertson, John (Paisley)
|Rodgers, George (Chorley)
|Young, David (Bolton E)
|Lyons, Edward (Bradford W)
|Rodgers, William (Stockton)
|Rooker, J. W.
|TELLERS FOR THE NOES:
|Mr. J. D. Dormand and
|Rose, Paul B.
|Mr. James Hamilton.
§ Question accordingly negatived.